This piece originally appeared in Tech Crunch.
I learned a shocking statistic recently: less than 1% of venture capital funding goes to black founders. This must change. Minority founders are, in general, more in need of outside financial support. For many people of color, the “friends and family” plan for raising seed money, which so many founders rely on - asking parents, aunts, uncles and grandparents for support to get their ideas off the ground - isn’t an option because their family members don’t have the resources to offer such funds. While white families in the U.S. have on average $100,000 in net worth, African American families, for example, have on average just $7,500. When funders fail to give entrepreneurs of color a fair chance, it’s everyone’s loss.
The exclusion of minority entrepreneurs from funding streams was discussed in panel after panel at last week’s Social Capital Markets (SOCAP) conference, which brings together thousands of impact investors and social entrepreneurs to discuss their approaches to solving the world’s toughest challenges. New research presented shows that even the high-tech accelerators and incubators whose mission is to increase funding for underrepresented groups often have recruitment and selection biases that prevent diverse entrepreneurs from having access and exclusive programs that don’t feel inviting to women and minority entrepreneurs.
The reasons for the funding gap are multiple. First, bias is without question at play. Much of this may be implicit rather than explicit. While explicit bias is conscious discrimination, implicit bias is unconscious, largely the result of cultural messages, such as stereotypes. For example, studies have shown that even managers who do not believe they are biased tend to hire people like themselves. When 76% of the partners of venture capital firms are white and nearly 85% of foundation board members are white, we must expect that unconscious bias skews funding decisions.
Second, many minorities do not have access to the education about the informal “rules of the game” of seeking funding that so many of those who are awarded funds receive, whether by upbringing or by attending an elite school, or both. In his 2010 book Invisible Capital, Charles Rabb describes these rules, which provide a powerful advantage in networking and in the fierce competition of pitching to funders.
Another reason for the gap is that venture capitalists or philanthropists often are unaware of the importance of the problems that minority founders are seeking to tackle. For example, the Co-Founder of Groundwork.VC, an accelerator for entrepreneurs of color, Marcus Carey offered the case at the SOCAP conference of a black entrepreneur, Diishan Imira, pitching a business model for creating a supply chain for hairdressers in communities of color. The problem is that young women of color seeking hair extensions regularly confront poor consumer experiences, an issue that a white man who doesn’t know about the culture of these communities would not immediately relate to.
On the positive side, presenters at SOCAP offered a wealth of solutions that funders can easily implement to begin leveling the playing field. Here are just a few:
According to Ross Baird of Village Capital, which trains startups entrepreneurs focused on real-world problems, Kapor’s $500,000 investment in African American entrepreneur Jerry Nemorin, CEO of Lendstreet, a company creating financial instruments for the poor, has grown to administer $40 million in funds to help poor Americans get out of debt. This proves that inclusive funding can lead to large payoffs, for funders, for the funded, and for us all.