One Of The Biggest Challenges Of Getting Funding For Minority-Owned Business

When Natasia Malaihollo and her cofounder raised $1.5 million for their startup Wyzerr, she became part of a very small group. As a woman of color, Malaihollo was one of only a dozen who’ve raised over $100,000 in outside investments for their businesses, according to early data from Digital Undivided’s Project Diane.

Statistics compiled from CB Insights reports by Project Diane indicate that between 2012-2014, startups led by African-American women comprised less than 0.2% of all the venture deals in that time period.

Wyzerr’s funding was led by Connetic Ventures, which Malaihollo points out has Meena Maddali, a woman of color as partner and chief operating officer. “The reason a lot of us [women and minorities] don’t get funded is because a lot of investors don’t look like us,” Malaihollo contends.

Maddali tells Fast Company that although Connetic is barely a year old, “As of today, we’ve made investments into 20 companies, 55% of which have either a woman and/or minority cofounder, and 80% of which have a woman and/or minority in a leadership position.” But Maddali is quick to point out Connetic didn’t start investing in women- and minority- led companies consciously. “It’s more of a happy coincidence,” she says.

The same is true for FAN Fund, which focuses on investing in early stage companies in the state of Florida. The organization, which took part in a funding round of $1.4 million in Fattmerchant (a fintech company founded by a woman named Suneera Madhani) was launched at the end of 2015. At that time, founding partner Kathy Chiu says they “simply focused on picking the most promising investments with the most capable and passionate founding teams.”

Six months later, she reports that FAN Fund’s first two investments were founded by women, and two of the founders in our first five deals were of minority background.  “With this experience, it’s clear to us that companies led by women and minority entrepreneurs will be a substantial part of our investments, as both groups bring the ideas, passion, and capabilities to thrive in our local community as well as nationally,” says Chiu.

This accidental approach seems surprising given the growing business case for diversity. Recent research from McKinsey indicates that companies that have racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians. A McKinsey study from 2012 found that ethnic and racially diverse executive boards delivered returns on equity that were 53% higher. In April, the Center for Global Policy Solutions found that the racial gap between white entrepreneurs and those of color is costing the U.S. economy an estimated $300 billion.

But Chike Ukaegbu, the founder of Startup52 Accelerator, which he touts as the first and only diversity-focused accelerator in New York City, says “Diversity is the one thing that will help disrupt the venture capital industry.” And that disruption will help get more minority founders the capital they need to grow their businesses.

Ukaegbu is quick to point out that for its part, Startup52 isn’t only looking for under-represented founders. He says the one year-old accelerator is looking for everything from functional teams to scalability, and passion in the startups who apply to become a part of a class. One of the four businesses that completed the inaugural program last year was founded by two white men. The others were started by people of color. Sixty percent of this year’s group of 16 startups which will start on June 6, have a female cofounder and 65% have a person of color on the founding team.

However, Ukaegbu says he champions diversity because it is both profitable and has social impact. He believes some investors hedge rather than declare a focus on funding under-represented minority entrepreneurs, partly due to a lack of understanding of potential markets as well as a conditioning to what (or who) has been successful in the past.

To illustrate this, Ukaegbu recalls a demo day he went to recently that had two white men and one black woman as judges for a $25,000 capital infusion. One of the companies was pitching a platform that would connect hairstylists with women of color and the other was for a medical device. Although Ukaegbu is a biomedical engineer by training, he says the hairstylists platform founders “killed it” in their presentation. “But they lost to the other group,” he says, “Part of the reason was that the two white men didn’t understand that market. For them it is more of a small business.”

Why The Pipeline Isn’t The Problem

The persistent problem, according to Project Diane’s founder Kathryn Finney is this: The larger investment community cites the lack of investment in black and Latino-led startups on a pipeline that is more of a intermittent “drip” when it comes to diverse founders, versus the massive “drop” of the “young-white-guy-from-insert-big-name-school” founders,” she wrote in a Medium post. But Finney asserts that those founders are out there, they just don’t have access to traditional networks.

Even though Malaihollo is a UC Berkeley graduate who studied computer science, she points to the lack of access to certain funding networks as a challenge when she started the business that preceded Wyzerr. Moving around the country to pitch competitions, sometimes with less than $20 in her pocket, Malaihollo understands the importance of operating capital. However, she says, being funded gives a founder the confidence that they have a network of advisors and investors.

“It’s a safety net of people who really believe in us,” she says. Malaihollo says that having Maddali as a resource has been just as valuable as the actual funds. “She is really great helping us understand how to keep them in constant conversation,” Malaihollo explains, “Because as founders, we have this mentality that we have to do everything ourselves.”

A growing coterie of diverse investors like Chiu and Maddali should help balance the inequity. A brand new investor network started by Jenny Q. Ta and Shinta Dhanuwardoyo could also help with access. Ta tells Fast Company that she and Dhanuwardoyo have been recruiting a number of VCs worldwide for the three month-old VCNetwork who will create a vast virtual marketplace for entrepreneurs to tap for funding.

Ta says lack of capital is a big barrier to startups, but not always the biggest. “The biggest is actually lack of access to VCs who can give the capital needed and lack of education as to what these VCs are looking for,” she explains.

Founders aren’t the only ones who need to do their homework. Maddali says that as managers of a fund, it’s no secret that one of their main goals is to provide excellent returns for investors. However, she says, getting to know each business takes a lot of time, so Connectic’s partners lean heavily on their own networks for their insights and industry experience to help vet companies. 

“People only invest in things they know and people they trust,” she says, “so creating a strong, diverse network of good, smart people is a key to our potential success.”