Companies need capital to grow, and early-stage investors play an influential role in how companies are built. But as recognition increases that the VC system is largely neglecting entrepreneurs of color, a new generation of local funders are building programs and processes with an eye toward inclusion.
First, let’s step back: When it comes to funding diverse entrepreneurs, nationwide statistics show wide disparities: Only 1% of venture-backed founders are Black and only 1.8% are Latinx, according to a 2018 study conducted by RateMyInvestor and DiversityVC. (Local stats aren’t available.)
It’s also true that we frequently cover startups in Baltimore that are founded by people of color whose ideas are getting validation and support.
So, to change the numbers it’s necessary to consider both how entrepreneurs can continue to grow, and how funders are helping them get there. In speaking with several funders and experts around town, it’s clear there are efforts to build support resources in new ways — and progress to be made.
Before any checks are written, it’s important that investors are connecting with a diverse group of founders. Lolita Taub, who recently joined Catalyte as chief of staff in Baltimore and has previous experience investing in diverse founders as a principal with Backstage Capital, offered one change on the investment side that could ensure that’s happening: “Hire diverse investors.”
As with the percentages of technologists receiving funding, there’s also a lack of diversity among the people who make up venture capital firms. According to a 2018 analysis by Richard Kerby, 70% of the people that make up the industry are white, while 1% are Latinx and 3% are Black. He also points out that 40% went to Stanford and Harvard universities.
To create change, a different approach to forming a VC team is required, Taub said.
It’s the difference in background, perspective and thought that creates the most added value.
“Instead of centering on culture fit, focus on embracing culture add,” she said. “It’s the difference in background, perspective and thought that creates the most added value.” (Check out Taub’s recently published collection of resources for Black female founders here.)
But increasing support isn’t only about increasing dollars.
Leading Baltimore accelerator Conscious Venture Lab and working as a general partner for investment firm SHIFT Ventures, Jeff Cherry is facilitating a cohort of entrepreneurs that has five out of nine companies founded by women, and four founded by people of color.
“More than anything it’s about being intentional about outreach to those communities of business people and entrepreneurs,” Cherry said “We didn’t set up a quota. What we said is, if we do a better job of finding out where those entrepreneurs are, and we reach out to them through those networks, that we’ll find good businesses and we’ll find good entrepreneurs. I think that’s proven to be right.”
Networks like Baltimore Young Professionals are among those that have provided such connections. In the bigger picture, Cherry is working to change the idea that investing in companies run by people of color is “concessionary.”
To Cherry, people from underserved communities who are building businesses have a vantage point on the problems that need to be solved within those communities — and that gives them a unique vantage point that any business leader would want.
“We think that gives them a competitive advantage, and they’re looking at problems that generally have pretty good scale,” Cherry said.
There are diverse teams out there that we need to figure out, how do we get those people to find each other?
He also sees a shift, represented most prominently in an August letter from a group of CEOs that make up the Business Roundtable declaring that they would no longer put shareholders before anything else, to a way of thinking about business from a stakeholder model. It’s one where social, environmental and other interests would be treated equally — and not just the bottom line.
Getting venture capitalists and businesses led by diverse founders to lean into this model, Cherry believes, would ultimately build more diverse companies that are also mission-driven.
“There are diverse teams out there that we need to figure out, how do we get those people to find each other?” he said.
Intention in creating a new kind of program is also on display at TEDCO, the Maryland-backed agency that supports early-stage companies. The agency created a fund specifically for entrepreneurs at the earliest stages.
The Pre-Seed Builder Fund, which so far has supported nine companies over two years, is open to socially or economically disadvantaged entrepreneurs. It started as a pilot program with a focus on supporting African American entrepreneurs, and expanded last year to include all people of color or companies based in rural areas. In a move designed to be welcoming, entrepreneurs seeking investment are invited to self-identify as disadvantaged, and make the case for that status when they apply.
“We take all such considerations into account,” said TEDCO’s Builder Fund manager, Angela Singleton.
The fund is also taking a different approach than most when it comes to investing. Traditional investors are typically looking at risk, which could mean they come in at a later stage. To get off the ground toward creating a product, many entrepreneurs rely on their own money, or make the rounds to folks close to them — aka the friends and family round. But that approach doesn’t always translate across cultural lines, Singleton said.
With early-stage capital, the Builder Fund is working to fill the gap to help the company move forward, as well as prepare for a future round of funding.
“There’s a gap between where a company might need funding and where they might qualify funding with a professional investor,” Singleton said. With early-stage capital, the Builder Fund is working to fill the gap to help the company move forward, as well as prepare for a future round of funding.
That preparation for a future round also guides TEDCO in another area that’s key to investment: the team. As many early-stage companies don’t have a fully established executive team, TEDCO connects management talent to work with Builder Fund companies toward milestones that will help the company get to a follow-on investment more quickly.
“We’re facilitating a networking opportunity and we’re also facilitating a relationship-building opportunity,” Singleton said. “It enables a type of collaboration that simultaneously advances the development of the company.”
And it’s not always funds and venture firms that provide the support. One opportunity to connect into the resources available is coming up with Minority Innovation Weekend. Set for Oct. 12 to 13 at the University of Baltimore, the event is back for its third year, this time hosted at the Thumel Business Center.
“You get a chance to learn what types of funding are out there,” said Sir Walter Richardson, the MIW 2019 coordinator. “If an attendee was interested in learning what it takes to be an entrepreneur, that’d be good. If you don’t come with an idea, maybe you’ll leave with one.”
As part of an expansion this year, organizers with the National Society of Black Engineers — Baltimore Metropolitan Area Chapter are adding a pitch competition, where entrepreneurs will get to present in front of investors. Pitch competitions have proven a useful way to collect funding for many entrepreneurs, one big check at a time. Plus, Richardson said the group is growing the number investors at the event.
“We’ve been able to contact more individuals in the startup space,” Richardson said.
And there’s a chance for support to continue beyond the weekend, as two companies from the event’s showcase and pitch competition could get access to ETC’s Incubate Baltimore program for six months.
“That’s access to mentors and investors and advisors,” Richardson said.
Karuga Koinange contributed to this report.
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