By Julia Casey, CED Entrepreneurship Specialist and
Mathieu LaVigne, Army All Source Military Intelligence Lieutenant
This content originally appeared in the Alaska Journal of Commerce
Throughout Alaska Startup Week, you have been reading about why startups are important. They are the source of job growth, contribute to new economic growth, and solve the problems of consumers.
Yet, only a small number of startups are funded, and those that are funded are not always the most impactful and viable businesses. Funded founders simply have more access to high wealth networks and subsequently are a very homogenous group. In particular, women and minorities receive much less funding than their male and majority counterparts.
Only 0.2 percent of venture capital funding goes to businesses owned by women of color, 1 percent to minority-owned businesses, and 2 percent to women-owned businesses. Of all businesses in the United States, 39 percent of businesses are owned by women and 29 percent owned by people in a minority group.
Business ownership for women and minorities has been on the rise, but venture capital to these groups has remained stagnant. Why?
The startup community at large has not intentionally addressed this issue and taken action to increase equitable funding. In order to combat this problem, we will explore the importance of meritocratic funding as well as the forefront issue preventing women and minority business owners from receiving venture capital, the wealth gap.
Knowledge is power, but action is all that really matters. We will outline action items for every community member. Now is the time to take action and address the funding gap.
To begin, we as humans tend to surround ourselves with people like us. This tendency, is also true when investors are selecting founders. Investors tend to fund people similar to themselves, missing high-value deals and excluding a large portion of entrepreneurs. Just to illustrate how pervasive this is: 75 percent of venture capital goes to three US metro areas.
According to the The Innovation Blind Spot by Ross Baird, only 15 percent of billion-dollar companies are in the industries with the highest market potential, and as we covered previously, women and minorities receive substantially less funding. Check out The Innovation Blind Spot for a more comprehensive look at the effects of funding based on network ties. Venture capitalists need to do better.
The lack of venture capital funding going to women and minorities stems from a variety of causes; the most pressing of which is the lack of women and minority business owners being ready for, seeking out, and pitching to get venture capital funding.
Often, funding a business happens in stages. Starting out, most businesses are self-funded. Then, they move to some version of bridge funding to grow. This funding largely comes from the affectionately dubbed family, friends, and fools round meaning receiving funding from an entrepreneur’s personal network.
Bridge funding may also include loans, grants, and on the rare occasion angel funding. After this stage, businesses may pitch for venture capital funding. Women and minority business owners rarely get to this stage and are even less likely to get funded after they reach this stage.
The wealth gap has the greatest impact on both the self-funding stage and the bridge funding stage. The wealth gap has stemmed from many discriminatory practices in housing, land acquisition, tax structures, business laws, etc. against particular groups most often women, people in a minority groups, and immigrants. While most of these discriminatory practices are illegal today, their use in the past has led to many groups having minimal access to asset ownership.
Therefore, they are unable to pass down as many assets to the next generation, thus creating a cycle leading to the substantial wealth gap. Without assets, it is difficult to receive bridge funding. More importantly, the wealth gap negatively impacts access to family, friends, and fools funding.
As we said before, people surround themselves with people like them. It is true of investors. It is also true of entrepreneurs. People with less net assets are more likely to have lower asset holding networks. Therefore, people most affected by the wealth gap are also less likely to have access to networks that are able to provide bridge funding. In turn, without access to bridge funding, these entrepreneurs will likely not get to the venture capital funding stage.
With a problem this substantial, what can you do?
We promised you action items and here you are:
Community members, BE the “fool”. Support founders that do not have access to bridge funding. Participate in their crowdfunding initiatives and/or become an accredited investor. Kiva Zip, Kickstarter, and Indiegogo are all prime platforms to do this as well as through intrastate crowdfunding. If you have a net worth of at least $1 million excluding your primary residence or you make $200,000 per year or more, become an accredited investor and invest in diverse businesses. Reach out to the Alaska Investor Network for more information on how to become an accredited investor.
Funders and entrepreneurs, expand your networks. Alaska Startup Week is a great starting point. Go to an event that you normally would not attend.
Fund managers, create diverse teams within your organization. While funds have generally looked at funding potential $1 billion unicorn companies, fund more zebra companies. Unlike unicorns, zebras are real and are focused on growth and social responsibility. They have less returns, but overall, they create more equitable and responsible communities and industries.
Go forth and fund!