The racial wealth gap in the US is immense, and despite recent increased patronage of Black-owned businesses, that gap has actually expanded in recent years. There are many factors that have gone into creating this gap, and many issues that exist because of it, but it is critical to the economic future of the US that we work together to close it.
Wealth is typically accumulated over generations, which makes that accumulation incredibly difficult for the group of people in this country whose ancestors were enslaved for hundreds of years and are now plagued by mass incarceration and systemic racism. The lack of generational wealth has stymied growth that would fairly even the playing field.
The quickest way to generate wealth and close the racial wealth gap is through business creation and liquidity events. However, there are systemic barriers that exist today that hinder Black business creation. Most businesses require a level of initial wealth that is not often seen in communities of color, with 57% of businesses relying on savings, and 38% receiving friends and family funding. Due to a devastating lack of access to critical initial capital, the entrepreneurial space is far more risky for entrepreneurs of color, and many would-be entrepreneurs never get their chance to launch their venture.
VCs continue to deny educated Black builders access to seed capital and funding; they lack the representation in their partners, investment managers, and associates; and they propagate a perceived lack of success stories of Black entrepreneurs when evaluating new investments. Firms must get past those biases and invest not only because it’s the right thing to do from a social equity standpoint, but because it will also improve their pipeline and make them more money down the line. The major barriers for Black entrepreneurs are access to networks and capital — both of which the VC community can help solve.
Investing in an untapped pipeline
In the VC world, one of the main principles of continued success is investing in your pipeline so you can continue to source future leads for investment. There is an underrepresented group of highly talented entrepreneurs in this country who would benefit greatly from having an equitable base to start from. By passing over this community for investments, the VC community may well forgo the next potential unicorn company.
For Black- and minority-owned businesses the risks of failing when attempting to launch a business without outside investment are so great that many never even take the first step. The average $171,000 net worth of a typical white family is nearly 10 times greater than the average $17,150 of a Black family. And considering that most businesses require around $10,000 to get started, to think that someone should risk over half of their personal net worth on their startup idea is, quite frankly, unrealistic.
Even if they do take the leap, fundraising is so intensive that by the time a Black founder does raise capital, they have completely shifted focus away from their traction-building business. Early-stage investment is about people, not just the ideas. Great entrepreneurs will pivot through challenges, but they need resources to do that. Black entrepreneurs are not currently given access to the resources and financial padding to fail, whereas most successful businesses fail in the market in their first iteration and succeed after pivoting to market fit.
To tap the innovative ideas coming from Black entrepreneurs, VCs need to focus on creating and providing resources and support for them in the early-stage ecosystem of entrepreneurship. These resources should be designed specifically to fit the needs of Black founders. VCs need to provide Black-owned businesses with enough capital not just to launch, but also to grow. Follow-on capital is often too limited when directed toward Black founders and does not make up for the deficit Black entrepreneurs typically find themselves in before reaching the next levels of investment.
VCs that don’t invest in this community in these early stages are missing out on a massive, lucrative opportunity. Simply put: It’s good business to invest now.
Minorities, as a consumer group, represent nearly $4 trillion in buying power and consistently influence the mainstream more than other demographics. Further evidence shows that diverse companies are more profitable, have stronger innovation revenue, and attract better talent.
In today’s landscape, Millennial and Gen-Z talent are looking at diversity as a deciding factor. This is particularly meaningful to companies like Facebook and other Silicon Valley giants that are constantly in the battle for top talent.
By creating a healthier base to support more seasoned and larger-scale Black-owned companies, VCs can organically develop a continual pipeline. The creation of more Black businesses provides new job opportunities and a more diverse employee pool. It also empowers Black founders with the ability to understand their next capital barrier, because Black entrepreneurs typically lack access to the social networks and bridges to wealthy investors. Success breeds success.
VCs need to develop programs and resources to offset the socio-economic issues that undermine Black innovation and business creation. Such programs will fuel this demographic of builders and create stronger and more lucrative companies in the long run. I believe that Black culture is the incubator for the world, but there has yet to be an incubator of Black culture.
Infusing time and dollars into underrepresented groups within the community creates jobs, grows resource platforms, and subsequently creates a shared resource ecosystem to power a cycle of success.
Change is certainly here, with enough data to support that diverse businesses are more successful and lucrative. VCs who act now will reap the best opportunities.
Keenan Beasley is the founder of Venture Noire, a non-profit group which acts as a diversity, equity, and inclusion partner helping entrepreneurs of color to launch and scale successful businesses.