You may have heard the shocking statistics about venture capital investments in businesses founded by Blacks and Latinos. “Less than 1% [of venture-backed companies] have a black founder; same for Latinx. A mere 0.2 percent of venture deals go to black female founders; in fact, only 26 black female founders have raised over $1 million in outside capital…ever. The average amount of venture capital to black female founders is only $36,000 compared to the overall average of $1.3 million invested.” (Herrling, S., “Women-Led Startups Aren’t Getting Funded, and There’s a Very Simple Reason Why” Inc. Magazine, June 2018)
Undercapitalization of businesses owned by people of color exacerbates the racial wealth gap. While a small group of venture capitalists and venture-backed founders—a huge percentage of whom are white, male, and privileged—become increasingly wealthy, the vast majority of small business owners struggle to keep their doors open and deplete their personal savings (if any) in the process. Some will make it, but many will fail due to the lack of sufficient capital.
The median net worth of Black and Latino families stands at just $11,000 and $14,000, respectively—a fraction of the $134,000 owned by the median White family. Even more disturbing is that when consumer durable goods such as automobiles, electronics and furniture are subtracted, median wealth for Black and Latino families drops to $1,700 and $2,000, respectively, compared to $116,800 for White households. (Asante-Muhammad, Collins, Hoxie, & Nieves, “The Road to Zero Wealth” Prosperity Now, September 2017)
What is the best way to solve this problem? Many suggest that we just need to diversify the venture capital industry. Add people of color, stir, and somehow inequality will start to disappear.
But what if the venture capital model itself is all about perpetuating inequality, regardless of the race of the participants in it? The venture capital model provides investment opportunities only to the very wealthy. Once a company receives venture investment, it is expected to grow as fast as possible so that it can have an “exit” (i.e. get bought by a larger company). The vast majority of venture-backed companies don’t make it to an exit and they go out of business, often leaving employees and suppliers in the lurch. (Estrada, L, “Munchery: How a venture-backed startup swindled a group of women and minority owned companies out of over $50,000 and is getting away with it” Medium, January 2019)
If there is a “successful” exit, it makes the wealthy investors even wealthier, and the benefits don’t trickle down to the lower paid employees, much less to the customers or communities that supported the business in its early days.
Rather than try to diversify a system that by its very design concentrates wealth in fewer and fewer hands, why not focus our energy on alternatives that have the potential to bring greater wealth to the many and not just the few?
Let’s focus on strategies that make it possible for EVERYONE to invest in the businesses they believe in and care about. And let’s design those investments so that investors can get paid without there having to be a unicorn-style exit.
If you would like to join the movement to democratize small business investing, please join us at www.AngelsofMainStreet.com. If you’re an entrepreneur who would like to raise capital outside of the venture capital model, please sign up for a strategy session to learn about how this type of funding could fit your business.
Here is an exercise we recommend in order to make sure you get your fundraising done within a reasonable amount of time.
1. Imagine you have reached your fundraising goal. You are looking at the list of all your investors and how much each one invested. What is the lowest amount that someone invested and what is the highest amount? Try to create a clear picture in your mind of your investor list and the amounts invested.
2. In your imagination, scan the list and estimate what the average investment size per investor is. For example, you may picture that you’ll have some people come in at $5,000, some at $10,000, a few at $25,000, maybe one or two at $50,000, and one at $100,000. In that case, you may estimate the average per investor to be $20,000. You can use this tool to decide how much you’ll ask for from each potential investor: http://www.jennykassan.com/blog/7-steps-for-making-the-big-ask/
3. Now, take the total amount you want to raise and divide it by the average per investor. That will tell you the approximate number of investors you’ll have when you reach your goal. So, if you want to raise $400,000, you’ll end up with around 20 investors.
4. Multiply that number by 10. That is the approximate number of potential investors you’ll need to talk to about your offering. (This assumes that an average of one out of ten people you talk to will say yes—you may do much better than that, but it’s best to be conservative). In our example, this would be 200.
5. Divide that number by the number of weeks you would like to devote to reaching your funding goal. This is the number of people you will contact per week about investing. So, if you’d like to reach your goal within six months, divide 200 by 26 weeks—you need to contact 7-8 people per week.
6. Assume that for each contact you’ll need to spend 30-60 minutes on average. Multiply the number of people you’ll talk to per week by the average number of minutes you think each contact will take. That is the total number of hours you should schedule into your calendar for contacting potential investors. Add at least half that many hours to give yourself time to follow up with people who haven’t yet given you a definitive answer. In the example above, I would assume eight hours per week plus another four for follow up—so a total of 12 hours per week should be spent contacting potential investors.
7. Now block out that time in your calendar for the number of weeks you gave yourself to reach your goal.
If you use this method, you’ll keep your momentum going and get that fundraising done before you know it!
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