Founders of color can pay over $250,000 more than white ones to found a startup. Here’s why

Anyone who works in business can tell you that an item’s sticker price is nowhere near its true cost.

The same is true for founders seeking venture capital, according to the new annual Impact Report from local investment firm 1863 Ventures. Experts found that to successfully execute a startup or business, it costs so-called “new majority” founders at least $250,000 more than their white peers. And when it comes to venture capital and other funding, founder Melissa Bradley told Technical.ly that investors (and others) need to look at the whole picture of the funding journey.

1863 publishes its report annually, both to be transparent about its methods and progress and to track its goal of building $100 billion in new wealth by and for new majority entrepreneurs by 2030 (1863 defines the new majority as people of color, women, immigrants, LGBTQ people, veterans and those with physical disabilities).

Through the report, 1863 also conducts research and surveys to better understand the current entrepreneurship playing field. The aforementioned $250,000 payment gap, Bradley said, breaks down into both direct and indirect costs for a few different reasons. For one, directly, these founders experience higher interest rates, at anywhere from 3 to 13% more based on perceived risk.

Indirectly, the higher interest costs and other systematic barriers that make it riskier for these founders also mean that there are a lot more solo entrepreneurs. And that can leave them out of several grants, accelerators or other programs’ eligibility requirements.

“When I started my first company, I said to my friends: ‘Do you want to start a business?’ And they were like, ‘No somebody’s got to have a job in case this doesn’t work,’ and so we have a lot of solopreneurs,'” Bradley said. “And because they don’t into get those programs, there’s a ripple effect.”

As a result, Bradley said, many turn to consultants about seven times more frequently than white founders, which comes at an extra cost. All in all, $250,000 is the floor, and she thinks many end up spending even more.

Acknowledging this is crucial for the overall venture capital scene, too. With all of these prior expenses, she said, investors need to understand that when a founder of color or other new majority entrepreneur pursues new funding for a company that’s made strides — like over $1 million in revenue — their journey to that point was likely not the same as their white peers’ paths.

“You cannot make these investment decisions or acceptance decisions by using the same criteria — not because they’re Black or Brown and they’re different, but it’s because their pathways were different,” Bradley said. “They’ve actually already invested a significant amount of capital that cannot be said for some other entrepreneurs, and that should be taken into consideration.”

With the additional cost, Bradley said that these founders are also often creating greater financial risks for themselves, often emptying pension funds or leveraging homes. She added that these risks can be especially scary for founders of color, and Black founders in particular, since many are also taking care of family members financially.

Despite the larger financial and emotional toll, they’re still either getting less venture capital or capital whose payback terms end up being more expensive.

“Those things are important to recognize that the journey is much more difficult and much more costly for entrepreneurs of color,” Bradley said.

To take on this inequity, Bradley has a few ideas. For one, she’d like to see more people become mindful of how capital is accessed within communities of color. This includes large institutions being a part of the conversation around where federal dollars can flow to encourage and support these founders. She’d also like to see more of a push for grant programs, accelerators and other entities like 1863 that are specifically designed to help founders overcome these financial hurdles. At the policy level, she’d also like programs such as the Community Reinvestment Act (which recently had its 2020 ruling rescinded) to push more for increased local investment.

This, she thinks, will be a huge asset to a community that is already growing strong, as well as boost the domestic entrepreneurial economy at large.

“I do this work not because I’m Black and an entrepreneur, but I do it because the data says that we are the fastest-growing segment of entrepreneurs after a 40-year decline,” Bradley said. “If we are not being competitively invested in, then that’s not just a problem for our community, it’s a problem for the country because small businesses drive the economy. And so, there’s the real missed opportunity there.”