The issues of income inequality, race, and poverty have recently risen to national consciousness, becoming a topic of conversation for 24/7 media outlets, presidential candidates, corporate board rooms and now the hallowed halls of America’s private equity networks.
For most, the world of finance, as it is played in the high stakes game of private equity and venture investing, is very foreign. The training needed to successfully swim in the entrepreneurial shark tank is given to very few. Successful entrepreneurs create ventures that impact markets, employ dedicated teams of people, create jobs, create tax revenue, create wealth for their employees and serve large growing markets.
Entrepreneurship as it is played out on a national level marries those with ideas that have national application to the investors that know they will get a good return if they provide the early “seed” funding to kick start a money making concept. These networks of investors connect entrepreneurs they select to both capital for growth and networks of expertise to help them build and grow quickly. If you are an entrepreneur, connect to the right investor or investor network and your business could go national overnight.
Finding funding is hard for most and nearly impossible for others
Finding a funding network is difficult for many budding entrepreneurs. For the Black and Latino entrepreneur, connections are nearly impossible. Private equity, as the name implies, comes from wealthy individuals looking for a better return on their wealth then a traditional investment would provide. These individuals are very sophisticated investors that may pool their funds together to increase their collective purchasing power. These pooled networks are a critical component of the new venture “eco-system.” Entrepreneurs unaware of the rules, protocols and expectations of these networks will be considered “risky” or not considered at all. Unfortunately Black/Latino entrepreneurs, with limited exposure, are rarely considered for investment or nearly always classified as too risky.
Entrepreneurs that attempt to take an idea from concept to market must build a team that can launch the company, product or service. The skills needed are broad, from finance to technology to marketing to service delivery. If a launch team for a new venture lacks these skills, these networked investors would think they are not ready and would simply not be interested. For the entrepreneur looking to go national, recruiting and funding the launch team generally requires investments of at least $1MM. Most in private equity funding know that an entrepreneur’s good idea or concept is probably worthless unless there is a skilled team ready to take it to market.
Sources of “seed” capital have many people with so-called great ideas calling on them constantly. Since these very new start-ups are some of the most risky investments, the investors can be and should be very selective as to which firms they support and which ones they pass by. But what has become apparent to many that follow the rise and fall of new ventures and the flow of seed capital is the apparent lack of funding available to entrepreneurs of color. Many of these entrepreneurs are un-aware of the process, protocols, and networks needed to find the capital required for growth and scale up beyond “a good idea” and a few customers.
Entrepreneurs create tax makers
Business schools provide students with a glance inside the world of new ventures. But too few students of color are sitting in on these classes. Even with this training, until you have been in a start-up or watched one go through its stages, it is difficult to gain the understanding needed to find capital. This lack of awareness, leading to this lack of capital for entrepreneurs of color, is contributing to the perpetuation of poverty and lack of opportunity for so many. Entrepreneurs are needed in every community if the US is to rebound and create more tax makers than tax takers.
Private equity practitioners have to manage their risk carefully. For them it is easiest and safest to find new ventures within their known networks, among those that are familiar or those that have been already exposed to raising capital. Successful and prominent Blacks and Latinos have not organized their collective wealth so as to serve as a source of capital for budding entrepreneurs of color. And few private equity firms actually employ people of color and fewer are managed by people of color.
Find ways to enhance entrepreneurship in communities
But there is a new buzz among some private equity groups – as they are becoming aware of the growing lack of demographic diversity in their portfolios. CB Insights reported on the disparity in founding teams with a tragic statistic. Of those receiving venture funding only 1% are African American. Forbes reports that only 8.5% of those pitching their ventures to angels are minority entrepreneurs. Large tech companies like Intel are taking on the lack of diversity in the entrepreneurial ranks head on. Intel announced that it has formed its own venture firm with $125M invested to fund minority tech entrepreneurs. We should all hope, for the benefit of our collective economic futures, that the best and brightest entrepreneurs from communities that desperately need transformation and revitalization will be supported, bringing their businesses to market and creating jobs and economic wealth where it did not exist prior. The old ways that have led to yet another example of income inequality have to be updated – allowing new seats at a table that has been both exclusive and illusive.
Entrepreneurship, if channeled correctly, can help to bring communities out of poverty. Minority entrepreneurs are more likely to hire from their communities providing opportunities for other young entrepreneurs of color to learn by watching and participating in a start – up. We have many historical examples like Arthur G. Gaston, Madam C.J. Walker, Maggie L. Walker, Annie Malone, that clearly demonstrated how economic wealth from entrepreneurs can be used to enhance the lives of many from local communities.
Entrepreneurship is a calling for some people. Many will start their firms and struggle through the cycles of growth and scale. But when they are poised to become national, they need capital to hire the start – up team, to develop their products, to organize their companies and to legitimize themselves in the eyes of their future prospects. There are few networks of wealth that Black and Latino entrepreneurs can call on. Few places where they can get the experience and exposure they need to swim in the shark tank. Until that changes, these communities, that are desperate for economic revitalization, will always be beholding to those from outside. It is time for private equity to catch on and catch up to the need to make more tax makers than tax takers and take the risk to aggressively recruit, train and fund ventures from qualified entrepreneurs of color.