Being the only woman or person of color in a business meeting no longer rattles Kellee James, but her presence sometimes surprises potential investors.
Over the course of her career, James, founder of the organic agricultural commodities trading platform Mercaris, has become accustomed to seeing the shock or disheartened expressions on people’s faces when entering business meetings, but today it doesn’t happen as often now that she’s more known in the agricultural commodities sector.
James recalled the second of two business calls with one White male individual five or six years ago. During the call, he casually remarked “I bet you have gorgeous red hair” because of James’ European-sounding name. At the time, she didn’t correct his comment, but upon meeting the man in-person later on, James said the man did not apologize for his mistake. It took him a moment to grasp the fact that James was Black.
“Clearly, he had some expectations about me,” James said. “He didn’t say, ‘Oh, and I don’t like Black people.’ He just had not expected to meet one."
It’s rare to see women of color raising large amounts of outside capital for their companies, as was pointed out in a recent Vanity Fair article featuring just 26 women of color who had raised more than $1 million. Since starting Mercaris in Chicago in 2012, the now Silver Spring, Maryland-based company, has secured $3.9 million from venture capital firms like Kapor Capital and Closed Loop Capital and is in the middle of raising more capital.
However, many Black founders find venture capital fundraising to be a nearly impossible task. Black startup founders received just 1 percent of the U.S. venture capital funding in 2015 despite making up 11 percent of the population, according to a 2015 CB Insights analysis.
From the outside, it may seem relatively easy for White startup founders to secure early-stage venture capital funding as they turn to sources such as collegiate, friend or familial connections. But Black entrepreneurs say they have to learn the rules of venture capital as they go. Despite these hurdles, Black entrepreneurs press on, entering venture capital meeting rooms with warm intros and rock-solid pitches or finding funding alternatives to keep their companies going.
Change Begins with Venture Capitalists
At business events, it’s not uncommon for James Robinson to be one of few, if not the only, venture capitalist of color in the room. Robinson, who’s based in New York, and his Chicago-based partner Aaron Gillum, run Caerus Investment Partners, a micro-venture capital firm providing seed funding to early-stage startups.
Typical investors or even their staff members may not have spent much time consistently interacting with people of color, Robinson said. At venture capital firms, only 22 percent of employees are nonwhite, according to a 2016 survey conducted by Deloitte and the National Venture Capital Association (NCVA).
“Investment, raising capital is just another type of selling. You never walk into a sales meeting wearing your insecurities on your sleeve”
Despite the sector’s glaring diversity issue, few venture capital firms have established mentorship programs to recruit employees of different backgrounds into their ranks. The 2016 Deloitte and NVCA survey also found that only 5 percent of VC firms have formal mentorship programs, only 8 percent have formal leadership development programs, and only 10 percent have formal hiring and retention programs to cultivate diverse talent.
A majority White VC space means that venture firms largely aren’t communicating with or investing in companies run by founders of color. VC firms, Robinson said, may be more comfortable with investing in founders with an Ivy-league educational background, startups that have received previous venture capital funding, and companies that are run by serial entrepreneurs. They are also more open to investing in or receiving referrals from entrepreneurs they’ve worked with in the past.
But by doing so, investors are cutting themselves off from entrepreneurs of color by not actively seeking founders of different backgrounds.
When looking for new founders of color to invest in, VCs must remember the financial barriers that Black entrepreneurs face.
Some Silicon Valley investors won’t invest in a startup with founders who aren’t working on their companies full-time, but that’s a luxury that bootstrapping entrepreneurs often can’t afford, said Ablorde Ashigbi, a former senior associate at the Pritzker Group Venture Capital and founder and CEO of 4Degrees, a platform which helps users manage important contacts within their network. 4Degrees recently raised $1 million in venture funding.
Plus, due to the generational racial wealth gap, not all founders of color can turn to family members or close friends for the seed funding they need to get their business off the ground, he said. The median net worth of Black families stands at about $11,000, but the median White family is worth $134,000, according to a 2017 report by the Institute of Policy Studies.
Without family money to draw from, black entrepreneurs find other financing roadblocks as they attempt to grow their companies.
"What motivated me was telling myself that I deserve to be where I am"
Though White entrepreneurs rely primarily on bank business loans to help make ends meet, Black entrepreneurs rely more on personal credit cards, according to a 2016 Kauffman survey titled “Startup Financing Trends by Race: How Access to Capital Impacts Profitability.” Why? Because Black business owners believed lenders would reject their businesses, the survey found.
As it turns out, those fears have merit. About 17.7 percent of business loan applicants are Black, but 53.4 percent of those applications were turned down, a 2017 Federal Reserve analysis of 2014 Census Bureau data shows. In comparison, 13.1 of White business owners applied for loans, and only 24.7 of those applications were turned down.
During his time at Pritzker Group Venture Capital, a VC firm founded by Illinois gubernatorial nominee J.B. Pritzker, the founders of color Ashigbi saw were equally as interesting as other entrepreneurs in terms of business model, possible traction and other criteria that VCs use to evaluate startups.
“It’s somewhat incumbent upon VCs … to spend time outside of their standard networking events to try to diversify the set of founders you get a chance to meet,” Ashigbi said. “Part of it is just being intentional about that kind of outreach. Proactively saying that’s what you’re looking for, spending time with community groups or going to an ImBlackInTech event.”
Black Founders Learn VC Rules as They Go
Starting a company is a learning process for any startup, but for black founders who are typically cut out of the venture capital scene, the learning curve is steeper.
Patrice Darby has experience running a business, but she never pitched a startup to venture capitalists before launching GoNanny, a mobile and in-home childcare startup, in July 2017. Her naivete became apparent during an awkward conversation with an investor at an event in 2016.
"There is stereotyping ... a lot of doubt of minorities being able to deliver and execute on the same level"
After telling an investor about her company—she admittedly couldn’t answer all his questions—he at one point asked her if her team was all African-American.
“There is stereotyping ... a lot of doubt of minorities being able to deliver and execute on the same level,” Darby said. “I do think that there are a couple of VCs in Chicago that are trying to do VC funding differently.”
Despite that uncomfortable conversation, she took a meeting with a VC firm that expressed interest in GoNanny. Given that the opportunity to pitch venture capital firms for sizable investments doesn’t come around often, she gave it her best shot. Soon after Darby pitched the venture capital firm, the name of which she declined to disclose, in mid-March, the firm began vetting her startup for possible investment, which she thinks is a good sign.
Examining a VC firm’s investment portfolio can give founders of color an idea of what kinds of investments they’re interested in, but investors may also be open to a new kind of venture. It wasn’t so clear that the firm Darby met with would be interested in her startup when she reviewed its portfolio, which was filled with companies led by non-minority founders who graduated from prestigious universities and had tech backgrounds. But she went for it anyway.
“What motivated me was telling myself that I deserve to be where I am,” Darby said. “I have worked hard to get here. And if they’re not excited to come to the table then I’ll go on to the next person.”
Before pitching her startup to a VC firm, she had already invested $20,000 of her own funds, some of which came from selling personal items like her TV, iPad and her Gamecube, and she landed $125,000 from Pipeline Angels, an investment firm for women and gender non-binary femme entrepreneurs.
Of course, pitching her startup to a VC firm was different than pitching in a competition, so Darby had to restructure her pitch with information that VCs needed to know, including market size, internal company metrics and the potential return on investment. They’re not so interested in the company’s backstory and potential impact, she said.
In addition to emphasizing the potential investment returns, Marcus Cobb, CEO and co-founder of Chicago-based Jammber, said the more familiar an investor is with your field, the faster and easier it is to close the deal. It’s also difficult but necessary for black founders to put aside any anxiety about pitching to investors, Cobb said. If one investor isn’t interested, go on to the next.
“If you go in looking for help in desperation, they’re going to sense that,” Cobb said. “Investment, raising capital is just another type of selling. You never walk into a sales meeting wearing your insecurities on your sleeve.”
After researching investor portfolios and crafting a solid pitch, getting into the room to pitch investors is often the first hurdle for entrepreneurs. A warm introduction from a former investment partner or colleague of the desired investor and an investor deck outlining company specifics can help land entrepreneurs of color a pitch meeting.
James, a University of Kentucky alumna, didn’t have Ivy-league alumni connections or friends and family with deep pockets, but her former colleagues and other contacts introduced her to investors as well as invested in the company, joined its staff and answered her questions. She met her Chicago-based co-founder and CTO Chris Duesing while working at the Chicago Climate Exchange, an emissions trading platform; his expertise in building trading platforms was critical to starting Mercaris.
Once she spoke with investors, she found that her background in niche commodities markets as well as her prior experience at the Chicago Climate Exchange, which was acquired by the Intercontinental Exchange for $600 million in 2010, made investors take her seriously when she decided to start a business in the same field, she said.
Still, racism and sexism are so prevalent in and out of the boardroom that James regards it as part of the job, not only in the tech world but throughout the workforce. To prevent biases against her from wearing her down, she prays and surrounds herself with positive people.
“A stray comment or a look at a meeting—it’s not something I’ll probably do much about other than take a note and incorporate it into the way I deal with that person and keep going,” James said. “A startup is a full-time job that takes all my energy. Plus you have the other burden of racism, sexism, [and] bias in general. It’s exhausting, and as I get older I try to guard my energy.”
Are VCs the Best Option for Black Founders?
While black entrepreneurs may see venture capital funding as the key to kickstart their company’s growth, VCs, for better or for worse, will also influence how their company operates.
For James, the funding she received for Mercaris enabled her to hire a team, focus on the company full-time, build products, and market its services. But that funding comes with strings attached, she said.
Before approaching VCs, James said founders should determine whether their companies can actually generate a return for the investors and if their revenue indicates rapid growth potential. Cobb said entrepreneurs should raise funding if the return is seven to 20 times the initial seed investment.
With such high expectations, good VC firms will help out companies by introducing founders to other potential investors, finding potential employees, fostering partnerships with their other portfolio companies and pointing out different market trends relevant to their startup, but entrepreneurs will have to answer to the board when making company decisions, James said.
Investors ultimately want their portfolio companies to succeed, but, as Cobb experienced firsthand, they may disagree with founders on how to get there. Cobb originally intended for Jammber to be a social networking site for the music industry, but one key investor was skeptical of his decision to turn the platform into a payments and project management hub for creatives. This shift presented a clearer path to monetization, in Cobb’s opinion, but the investor felt the move was “completely wrong.”
When Cobb received letters of intent from multiple companies interested in the new platform, which at the time was just a prototype built on a limited budget, the once critical investor was among the first to write a check for the startup and later became one of Jammber’s biggest funders.
“If you make money a prerequisite for momentum, you’re never going to get it. You have to generate momentum or buzz out of nothing … It’s one of the litmus tests that investors use at the angel seed level to decide if they’re going to write a check,” Cobb said.
It’s critical for black founders to know if and when their company is ready for venture capital investments. If they don’t anticipate getting high company valuations, black founders could bootstrap their company with their own cash in the beginning, try crowdfunding or apply for business loans—though business loans are tough to obtain.
Even though other entrepreneurs can get funding based on concepts, the reality for entrepreneurs of color is that they will need to create a solid business plan showing that their companies will break even or reach profitability within their first or second rounds of funding, Robinson said.
Robinson doesn’t foresee venture capital’s diversity problem changing overnight, so for now, black entrepreneurs have to continue being resourceful.
“If you’re an entrepreneur ... and you have a successful exit, you put a portion of those proceeds back into the community—whether that’s being an angel investor or mentor,” Robinson said. “Entrepreneurs are going to have to solve the problems themselves. If we sit around and wait for VCs to solve the problem, the problem will never get solved."
