How we got here and how we get out: A Q&A with venture capitalist Melissa Bradley on the Black funding gap
Last week I sat down with Melissa Bradley, managing partner at 1863 Ventures, to discuss the funding gap that exists between Black and white entrepreneurs.
The data isn’t very encouraging. Only about 1.3% of U.S. venture capital money went to Black-founded businesses in 2021, according to Crunchbase data. While Black entrepreneurs raised $4.2 billion in venture funding last year—a 281% increase from the year prior—people of color are still only getting a tiny fraction of the funding available to their white peers. And they’re not alone, as there are wide imbalances for Latino and women-founded businesses, too, but each group faces unique challenges.
Bradley is one of the better-suited individuals to discuss why these numbers are so low for Black-led startups, and what can be done to lift them. She’s spent much of her career researching this disparity as an adjunct professor at Georgetown University’s business school and within her roles as a former appointee within the Clinton and Obama administrations, which included acting director of the White House Social Innovation Fund as well as research positions within the Treasury Department and Department of Education. Her day-to-day is spent in the trenches with Black startups at 1863 Ventures, which is an accelerator and venture capital firm focused on underrepresented founders, where she has recently been focused on helping them navigate the COVID pandemic.
Bradley and I discussed what sectors Black entrepreneurs are most active in, why Black founders struggle to secure loans, and some of the most exciting innovation happening within the Black community. I hope you get as much out of this conversation as I did. (Some portions of this Q&A have been edited or shortened for clarity and/or brevity.)
Term Sheet: You spend a lot of time in your career researching the data and history of funding going towards, and being taken away from, the Black community. Looking at it through that lens, why are we seeing such wide disparities of funding going towards to white founders versus Black founders?
Bradley: Until recently—really until the death of George Floyd—the predominant archetype of a venture capital investor was an older, white man who would come out of corporate America and/or founded their own business. The nature of venture capital—it is totally driven by perception of profitability and social capital. And so we don’t have a lot of people, and there’s certainly not been a lot of women in venture capital. And so I think we’re just not known and not on the radar screen because… you’re hard pressed to find a person of color. And so, therefore, the networks are limited and we’re often times shut out.
When we are able to have access to venture capitalists, based on research I did as a Georgetown professor, it costs at least a quarter of a million dollars more for a Black or Brown entrepreneur to start the same, exact business as their white peer, because of direct costs, where it is legal to charge us more in a debt instrument where you have to pay a higher interest rate, to indirect costs of being locked out of some of these accelerators where legal costs and accounting costs and access to software is free, because we can’t afford teams, because we have no money and most of our friends can’t afford not to have a job. And so, because of those reasons, when we show up to a venture capitalist, and they say, wow, you’ve been doing this for three years, but where’s your traction? Where’s your profitability? It just doesn’t happen.
While 50% of businesses in the United States fail before five years, we’re administering a research study now called Beyond Five, and we found that the average age of a Black business is 8.7 years. The challenge right now is that the revenue and investment capital doesn’t correlate. They’re lasting longer, but they’re deprived of capital. And so, when we show up to get investments, we do not present as our white peers in terms of what a business should look like after one year or what a business should look like after you go to friends and family, because we don’t have access to the same amount of capital.
What are some of the sectors that you see Black entrepreneurs most active in?
It’s important to note that less than 20% of all Black entrepreneurs are in the tech space. And so oftentimes, when we do start our businesses, we’re starting businesses that we know: We’re starting beauty businesses, we’re starting health businesses, we’re starting food businesses, and oftentimes we’re starting businesses in the community that we know, which is a Black community.
Because of all the statistical data on the racial wealth gap, I have had venture capitalists say to me: I don’t understand why anybody would start a business focused on Black people, because y’all ain’t got no money—straight up. And so when these businesses do show up, and they do have traction, the traction is discounted, because their primary audience at the onset—like anybody—is people that they know. And there’s a perception that the Black community has no money, despite the $16 trillion in purchasing power.
Can you talk more about debt? What are some of the difficulties you’ve seen Black entrepreneurs face in securing loans?
Credit score is one. Most entrepreneurs of color, in particular, are starting their businesses with a prior job and then, of course, when they leave, there may be ebbs and flows with cash flow, and their credit scores are not typically the same. We know that people of color are saddled with more student loan debt, so we have higher fixed costs on a monthly basis, so there is less discretionary income to invest in our businesses. From a banking perspective, again, because it is legal, based on perception of risk to charge higher interest rates, we find that we usually suffer from predatory lending rates compared to white peers and entrepreneurs in the space.
In the focus group I did as part of Beyond Five, we found that during [the Paycheck Protection Program], over 80% of the participants accessed PPP through a fintech platform like PayPal or Square versus a traditional banking institution. And so when it comes time to get a loan, many of them are accessing smaller loans, but not from a traditional banking institution, which clearly has pros and cons.
What progress are you seeing, if any, in terms of funding going to businesses run by people of color?
I would say, post-Georg Floyd and certainly coupled with COVID, there’s been a plethora of non-dilutive grant programs that are being offered from various large companies to be able to support Black entrepreneurs, which is great. It’s unclear how long they last, but they’re still out there. I would say over $300 billion was allocated in 2022 to Black [general partners]. It suffices to say not every Black general partner is investing in Black businesses, but enough, and so you do have more venture capital available. The challenge, of course, is that most of that venture capital is early stage seed. So it’s great for businesses just getting started, but not for many businesses who have already been invested in or have been up and running for a long time. There’s still a gap when you start to get to series A and beyond, or lack of Black GPs in that space.
What success rates are you seeing for Black-led businesses that you work with?
We did a survey when COVID set in, and we had a 95% survival rate compared to a 50% failure rate of Black businesses during the COVID pandemic, and that was completely due to the fact that, in our training programs and our advice to entrepreneurs, we talk about cash flow reserves all the time. Most of our entrepreneurs had anywhere between three to six months in reserves and so when the PPP program was a complete disaster, they were able to still sustain their business and come around and catch them in round two of financing once it became much more distributed and readily accessible.
We have started to see more robust datasets in terms of how much capital is going to startups run by Black founders. What about on the private equity side of things? What data do we have there?
I would say it gets less and less. You know, I know quite a few Black leaders in the private equity space, but they struggle to find deals for Black companies. You think about some of the largest newly formed supply chain or supplier diversity programs: They have these opportunities, but they’re struggling to find businesses of that size. And so I would say for the subset of Black businesses that qualify for private equity, it is readily available. The challenge is, to get private equity, a lot of our folks struggle to be able to get that growth.
What is exciting you most about the innovation happening within the Black community right now?
The Great Resignation has allowed us to have a level of freedom and risk tolerance to go out and start our businesses. And so when you look at the over 4 million businesses that have been started since COVID, almost 20 to 30% of them have been Black women in particular, so I’m thrilled that there’s a space for us to go out and be creative.
I am excited and somewhat optimistic about the continued creation of Black GPs, thinking that there would be more dollars available for businesses if they so choose to go the venture route. I’m excited that there’s more focus and interest in revenue-based financing and other no-diluted types of financing because I think those serve our entrepreneurs better. No one wants to build a company of which you own almost nothing by the time you get to round two or three.
I would say that there’s a lot more communities and programs and places for entrepreneurs to find their peers and to find coaches and mentors so they’re getting quality advice moving forward.
How should private market investors be thinking about all this, and what should they be considering with their investment decisions?
I think one is that they should spend time researching and understanding the sectors and the struggles of Black entrepreneurs, so that they understand how to compare because most of these folks have portfolio approaches, and we want to make sure they’re comparing apples to apples and not apples to oranges.
I think the second thing is that they should revisit and determine if there is a way to have a carve-out or allocation that can have slightly more risk tolerance. It’s not because I believe Black businesses are riskier, but based on the historical, structural racism, with all the challenges that we just encountered, it is unrealistic to expect a Black company to have the same trajectory and growth in a 12 month period as their white peers. And so how do you think about and kind of amortize your risks and expectations over that five years knowing that the first year or two may be slow for a company to grow or scale?
And then the other last piece I would say is to find and socialize and meet with folks who’ve been doing this a long time. Meet with folks, irrespective of their gender and race, who have been investing in Black and Brown entrepreneurs, who can speak to historical changes and where there’s moments of optimism, and where there’s possibility for course correction.
See you tomorrow,
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FUNDS + FUNDS OF FUNDS
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