Feature Story

Filling the funding gap for minority founders

by Anne Field

Filling the funding gap for founders of color

A growing universe of VCs, angels, incubators, accelerators and others want to address the lack of funding for minority founders.

Stephanie Lampkin launched her startup two years ago with a mission in mind: address the unconscious bias frequently displayed by hiring managers in tech firms. Called Blendoor, the San Francisco-based business has a platform allowing companies to vet job seekers— at least initially—without being privy to any information about race, gender, age and other factors. Lampkin, who has degrees from Stanford University and MIT and is African American, developed the idea thanks to her own experiences encountering unconscious bias while job hunting.

Unfortunately, Lampkin has also faced a healthy amount of such bias trying to fund the company.

"At the end of the day, VCs invest in people," she says. "And I don't fit the pattern of what has been successful before," she says.

The $500,000 or so she's raised has come from a mix of pitch competitions, accelerators, angels and venture capital firms, many of them focused on increasing diversity in tech.

Lampkin's experience is hardly unique. People of color have a hard time raising money for tech startups, especially from venture capital firms, which are staffed mostly by white men. Consider this statistic: Less than .2 percent of all early-stage venture funding goes to black women. At the same time, however, as Lampkin has discovered, there is a small but growing universe of VCs, angel investors, incubators and others trying to address the funding gap for founders of color.

"The problem is the result of systemic issues in our society," says Christie Pitts, general manager of West Hollywood, Cal-based Backstage Capital. "And we're trying to change that story."

A new breed of VCs

One burgeoning area is in new VC funds, like Backstage Capital.  Specifically, the three-year-old firm invests in startups founded by women, people of color and LGBT—a population Pitts describes as "underestimated founders".

"We feel that's a better acknowledgment of how they're being overlooked by traditional venture capital," she says.

See also: Diversity and broader skills mark the future of work

CEO Arlan Hamilton, a former production coordinator in the music industry, launched the firm after noticing that many artists and music executives were investing in tech. As she looked into it more, she realized all that money was mostly going to white male founders.  Eventually, she started her own VC firm to fill the gap.  Often the first institutional capital in a company, Backstage has thus far invested about $4 million in around 100 companies with investments that range from $25,000 to $100,000.

According to Pitts, the firm's mission isn't just about addressing inequities. It's also focused on the business opportunity these startups offer. That's in large part because economic growth is expected to come from more diverse customers and, as a result, successful enterprises will be those that understand the needs of such consumers.

"We think the best performing companies in the next five years will be led by underestimated founders," says Pitts.

Incubators and accelerators

Incubators and accelerators are another important part of the equation. They tend not to focus on funding, per se, but rather in getting founders ready to ask for financing. While that's true for any program, it's especially crucial for those aimed at people of color who may not have access to a network of well-off friends and family who can provide initial financing. At the same time, they also often provide financing themselves.

"I see a lot of people jumping from accelerator to accelerator to fund funding," says Candice Matthews, founder of the Hillman Accelerator, which gives $100,000 to each startup it enrolls and takes an equity stake.

See also: Ocean's 8 and Cisco's own ensemble of women leaders

Still, for the 16 week-long Hillman Accelerator, which opened last year to target founders of color and women, providing access to corporate connections and mentoring is as important as the money. A particularly crucial part of the program is connecting startups to corporate partners; in fact, companies are selected with potential partnerships in mind. Also important is maintaining a connection with startups after the program is over.

"We want to make sure they don't fall off the cliff," says Matthews.

So far, three companies have raised around $1 million.

Take Travis Holoway, co-founder of SoLo Funds, which has a platform linking up people seeking $50 to $1,000 loans for everyday needs, like paying the rent, with lenders. It allows them to avoid taking out payday loans, which charge exorbitant interest rates. According to Holoway, the program imparted invaluable lessons. These include seemingly minor points like where to incorporate the business or create the appropriate documents essential to raising money.

"If you don't know that, you're going in there blind," he says. "You look unprepared to be funded." He's raised a total of about $1.2 million.

Two-year-old Project 500 in Washington, DC is another program for diverse founders. It runs two efforts, one for companies with $250,000 in revenues and another for those with over $1 million.

"The technical assistance for a $250,000 a year company in an unproven market is very different from what you need if you're larger," says Adeleke Omitowoju, venture advisor. "They have to make very different types of decisions."

But there's no pitch day. That's partly because the emphasis is on building a sustainable business model that doesn't need outside funding to survive, as well as getting in shape to be of interest to investors after the session is over. "It's more, now that you've finished you have a way forward in which you can engage with the capital community," says Omitowoju.

For many people involved in these efforts, their eyes are on a long-term prize. As more companies founded by people of color thrive, goes the thinking, it's likely their teams will be more diverse than usual. And as the businesses grow, they will build more wealth for founders and employees, thereby creating a new pool of potential investors interested in supporting enterprises run by people of color.

"Investing in founders solves multiple problems at one time," says Pitts.

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