Originally published on FastCompany.com May 5th, 2017
This is a tale of two tech startups.
The first is a messaging app that allows a user to send a one-word greeting to a friend and nothing more. There is no messaging functionality, filtering features, or ability to provide a longer message. In time, it will come to send notifications for followers, with the message, “Yo,” and a link.
The second startup is also a messaging app. It operates much like Gmail and Outlook’s “recall message” feature, but for text messages, and is well positioned for dating app expansion. All of the text messages a user has sent to exes, old friends, parents, and colleagues can be recalled by using this app as a primary messaging app.
The first app, Yo, received mainstream press attention and $1.5 million dollars in funding from a well-known VC firm with Facebook alum. Its founder is a white man.
The other app, On Second Thought, is available in almost 200 countries but has yet to have a major VC funding round. Its founder, Maci Peterson, is a black woman. “Some large VCs thought we were too early, some never responded, some we couldn’t get meetings with,” she explains. The company bootstrapped first, then raised money from a friends and family round, included angel investors, and won money from pitch competitions.
The different outcomes for these two startups highlights the hurdles that black women founders often face. Investors aren’t taking risks on startups run by the nation’s most credentialed, accomplished, and ambitious group. In an industry filled with tales of boys behaving badly, there is a growing group of women who are just looking for their break. The tech industry, one that thrives on creative solutions and innovation, is ignoring the opportunity for fresh ideas for new products, and improvements on existing ones.
THE LOST OPPORTUNITY OF BLACK WOMEN FOUNDERS
Black women are the most educated group in the nation, and black women are the highest percentage of any group enrolled in college, as per the 2011 U.S. Census Bureau. The U.S. Department of Labor reports that 60% of black women are active in the labor market, but are grossly underpaid (Black Women’s Equal Pay Day is on August 1 this year).
They are also the fastest-growing group of entrepreneurs in the country. According to data from the Institute for Women’s Policy Research, there was a 265% increase in black women-owned business between 1997 and 2014, outpacing growth among all women-owned firms, which grew in revenues by 72% during the same time period. Black women are responsible for over 1.5 million businesses and generating over $44 billion a year in revenue, while being responsible for the livelihood of roughly 400,000 workers.
UNDERSTANDING THE PROBLEM
Women start companies at twice the rate of men, yet women comprise only 16% of tech founders. According to a study by First Round Capital, founding teams including a woman outperform their all-male peers by 63%, but female CEOs get only 2.7% of all venture funding, while women of color get virtually none: 0.2%.
The fact that black women are educated and entrepreneurial yet so underfunded is a confluence of broadening thoughts of diversity, use of technology, and economic policy. The Small Business Jobs Act of 2010 increased limits for tax write-offs for startups, such as the ability to deduct cell phone bills and depreciation, and health care costs. This was great news for black women, who tend to be younger when they found their companies, have more debt, and less access to capital. Black women have greater difficulty receiving funding from investors and creditors, and difficulty securing lending due to racial bias.
But tax write-offs don’t make up for the funding gap. When black women are funded, they get the short end of the stick, with the average raise round totaling just $36,000. Compare that figure to the composite of the average white male startup founder, who banks an average of $1.3 million in funding. The secondary problem with not receiving mainstream large VC funding? Scaling.
There is a compounding problem with not receiving venture capital funding from heavy hitters. Certain venture capital firms can turn products, and their founders, into stars. Backing from a big VC firm can bring increased media attention. That creates a buzz that ensures any advertising generates more interest, as the public has heard of the product, founder, or both.
Without this “machine,” a founder has to work harder to get the word out about a product that hasn’t been adequately cosigned by the tech elite, which makes an already uphill climb even more difficult. According to digitalundivided’s Project Diane, more than 50% of black female founders received less than $100,000 in funding, which implies that these women are tapping resources outside of traditional venture networks such as loans from family and friends, retirement accounts, credit cards, and personal savings.
An example of this is Blavity, a website for black millennials that covers everything from music and movie reviews to how to organize with and for Black Lives Matter. The site was founded in summer 2014 by Morgan DeBaun, who bootstrapped her business for the first year. “Is it possible [VCs] may be biased and would fund the same thing if presented by someone else? Of course. My co-founders worked at Palantir, Bain, and LinkedIn, [and have] Stanford educations,” she explains.
The larger problem DeBaun faces is securing funding to expand and scale the business. Creating and curating content is expensive, particularly in the competitive tech entertainment industry. Still, DeBaun is hopeful; Blavity has held two successful conferences in the past year that have attached investor attention.
WORKING AROUND THE PROBLEM AND SOLVING IT FOR THE FUTURE
On the off chance a black woman founder is funded, the money comes from within her community. In recent years, several black-owned VC funds and firms have opened their doors, with a focus on funding black-owned businesses that wouldn’t find funding elsewhere. Some key funders include Magic Johnson Enterprises, with director of investment Ryan L. Smith heading up funding opportunities including Jopwell, ShotTracker, Walker & Co, and Uncharted Play; Erik Moore at Base Ventures; former Hollywood agent and entertainment VC Charles King at Macro Ventures; Monique Woodard at 500 Startups, focusing on black and brown founders; and Arlan Hamilton at Backstage Capital.
Having money to keep the lights on and grow the business has been key for the women running these companies. While having the support of one’s community is crucial, particularly for receiving initial support and feedback on the product offerings and positioning, without the backing and mainstream support provided by access to funding, these transformational companies won’t be sustained.
Considering that the nation will be majority minority by 2044, blacks are the largest and most engaged group of early tech adopters, black spending power is at $1.25 trillion, and Hispanic buying power is at $1.3 trillion (which includes those identifying as Afro-Latinos), it would be wise to invest in these businesses for the good probability of return on investment. This demographic determines the “cool” factor of a product once released, and provides access to influencers and a group that can determine the next “it” technology.
A possible solution is diversifying large VC firms. Associate and partner ranks are on par with tech company diversity employee numbers, and those sourcing investment opportunities for the large VC firms resemble the companies they tend to invest in.
While many firms support the efforts of their portfolio companies to diversify in terms of employees and c-suite, there is little being done in terms of their own firms. It takes those in touch with the community to spot talent, novel ideas, and the ability to scale and profit from those diverse perspectives. Employing and empowering more diverse VC associates and partners would be a viable start. It is also good business.
VC firms could also raise a fund or allocate a portion of their current fund to only investing in people of color. If paired with a diverse associate or partner devoted to sourcing founders of color to invest in, this strategy could bring us closer to parity.
Technology has the ability to change lives, not just for the founders but the consumers, creating access and opportunities to worlds and resources never seen before. To promote not just equity in the industry, but industry progress with new technology and audiences, venture capitalists will have to pay attention to these forces of nature: fund them, provide advice, media support, and watch them soar. The industry will be better for it.
Bärí A. Williams (@bariawilliams) is head of business operations, North America, at StubHub. She previously served as lead counsel for Facebook and created their supplier diversity program.