How Black and Latinx Investors Can Step Up Their Game
I recently had the privilege to attend a special event at the Rutgers Business School, a demo day for Black and Latinx founders that had completed a pre-accelerator program. From The Black and Latino Tech Initiative(BLT) and CUEED Pipeline to Inclusive Innovation, there were a total of 26 graduates. By the end of the event, I was left with two conflicting feelings – a sense of empowerment and disappointment.
Empowerment: In the technology and investment world, we’ve been made well aware through many sources about the diversity problem. You can Google it and up will come pages of results. One of the arguments often made is that there is no pipeline of black entrepreneurs or technologist. Being at the event proved that notion wrong.
Years ago when I was a young Entrepreneur starting out, I remember there was an event with David Rose of the NY Angels for black entrepreneurs hosted at the NY Times building. Just like back then, it was inspiring to be in a room full of intelligent underrepresented founders. My point is that even though Black and Latinx founders only get 1% of venture funding, there is an apparently overlooked pipeline.
My Disappointment: There were a few investors and venture capitalist that came to this event to show their support and act as judges for the demos. Some flew in from around the country from areas such as Cincinnati.
What concerns me and why I was disappointed was not seeing some key investors whose thesis is to support underrepresented founders not present at the event, especially when they were only 20 minutes away in NYC. Their absence from events like these has a greater impact beyond what money can provide, and this is what we will discuss below.
Understanding Black and Latinx Investors and Venture Capitalist
Before I go into expressing any disappointment, there should be a moment to understand the challenges Black, and Latinx investors or venture capital have to overcome.
Just as Entrepreneurs face many struggles starting a company, minority investors have obstacles getting into venture capital and being able to fund companies of their choice. They have their hearts and minds in the right place but face the challenges below.
Managing Partners: When someone is a managing partner in a VC Firm, that means they are one of the individuals who is calling the shots. Marlon Nichols of Cross Culture Ventures published a great spreadsheet that shows the structure and responsibilities of VC firms. After looking at the spreadsheet:
- Do you understand the difference between a managing partner and venture partner?
- How many Black or Latinx people can you name who are venture partners?
- How many Black or Latinx can you name who are managing partners?
The results you find may come at no surprise. As a managing partner, you can set the direction of the firm, the criteria for investment and have the authority that venture partner and others roles do not have. Until more Black and Latinx investors become managing partners with that kind of power, they are limited on what they can do.
Hard Time Raising Funds: Just as Entrepreneurs have a hard time raising funds, minority investors have their obstacles raising capital to fund your business. When an Entrepreneur is raising money, they go through the rounds of Seed, Series A, B, C and so forth. Each round has a vast increase of capital that is injected into the company.
Normally, managing partners of VC firms assume minimal risk as they are only required to put 1% of their own money into investments. 99% of the funds VCs can come from outside organizations which are called Limited Partners or LPs for short. LPs are comprised of pension funds, insurance companies, wealthy individuals and organizations that are looking for alternative investments. In other words, VCs invest someone else’s money in your business and very little of their own.
There are several funds at the Seed round such as Backstage Capital, Pipeline Angels, 500 minority fund and others. The pipeline then narrows at Series A with famous firms such as Kapor Capital. How many Black or Latinx VC firms can you name that are Series B and onward? Minority VCs have trouble raising large sums of capital from LPs for later stage investment rounds which causes fewer minority founders to be funded as their companies grow. This makes it harder to produce a minority led ‘unicorn.’
What is unique and commendable is that many minority investors have to put their capital into companies because of the lack of LP funding. This shows how deeply they believe in their mission. Minority investors that want change have the challenge of not always having the funds or decision-making power to execute, but they can support Entrepreneurs in other ways.
How Black and Latinx Investors Can Add Value Without Money
Coming back around to my feeling of disappointment. From the perspective of an Entrepreneur, I feel Black, and Latinx investors underestimate that their value is worth more than just funds. Highly successful businesses have five characteristics:
- Compelling product or service
- Scalable business operations
- A secure network to open doors
- A great team to execute
- Capital to grow
While creating a compelling product or service is the job of Entrepreneur, a connected network and team are areas investors can assist that does not require capital. Investors can be pro-active with:
- Giving honest and candid feedback
- Advising on who the next key hires should be
- Making pivotal business connections
- Advising on business processes
Investors are busy and spend a lot of time managing their current portfolio. But for a one-day event that may require 2 hours of your day, that feedback and insight you can provide these companies can be invaluable, even if you choose not invest. For change to take place, it is imperative that investors be active in developing and leading the community.
Changing The Way We Think and Operate
As it stands, only about 1% of venture capital funding goes to underrepresented founders. The technology industry also lacks diversity in jobs with only 1% – 2% of Silicon Valley top companies hiring minorities. How are these two related? The decision-making process on how people are selected creates exclusiveness:
- Only accepting warm introductions
- Making decisions based on pedigree (i.e., what school you went too)
- Relying on homogeneous networks(friends, family, college acquaintances) to create diversity
- Problems with ‘unconscious bias.’
- Selecting based on ‘hype’ over real ‘merit.’
The problem is when we operate the same exact way when deciding who to help and then expect there to be change or improvement. Example, when minority investors only source deals from Y-Combinator and Techstars, it has the same result as Google only sourcing engineers from Stanford. The problem extends beyond just investors; it applies to anyone that wants to create more diversity and inclusion in the industry. Every good deed that you do in helping someone within the community impacts us as a whole.
Entrepreneurship is not how much money you can raise; it’s about building viable businesses and creating a return on investment for stakeholders, yourself and your employees. Just like it takes a village to raise a child, its take a community of people to help start successful companies. Resources like VC Sheet Cheats is an excellent way to start learning, but personalized assessments are needed because every business is unique.
I encourage everyone that genuinely wants more diversity, inclusion and successful Black and Latinx entrepreneurs to be pro-active about the small steps. Make a warm intro, listen to a ‘pitch’ and give feedback, be open to going outside of your network. Entrepreneurs think about the big picture, and in the big picture all of the small things add up – never underestimate how the little part you play contributes to that big picture.