How Some Black Startup Founders Are Thriving in a Pandemic Year

 

An unexpected side-effect of lockdowns: It can be easier to get a meeting with a venture capitalist. For minority founders in tech, that’s made a big difference as Silicon Valley reckons with race issues.

The world of venture capital is notoriously insular. For tech startups hoping to attract millions of dollars from private investors, having the right connections is often key to getting a meeting—and persuading investors to take a chance on an unproven idea. The result: getting seed funding has always been harder for Silicon Valley outsiders, including startups from outside New York City and the Bay Area, and founders from minority backgrounds. The numbers are particularly stark for Black founders: Between 2013 and 2017, 77% of founders of active U.S. startups that had received venture capital were white. Only 1% were Black.

But something unexpected is happening during this chaotic year: Owing to a convergence of factors, some Black founders of tech startups are finding that it’s easier to attract investment.

For starters, pandemic lockdowns have made investors easier to reach. Many are now more accessible through Zoom and social media. This has eliminated not just physical barriers but also psychological barriers to funding companies outside of startup hubs like New York City and the Bay Area.

Black founders also say that the killing of George Floyd, subsequent protests and the broader cultural movement that has ensued have caused the VC industry to reckon with its track record of funding minority founders. Many companies and investors—including SoftBank, Google, PayPal, and Andreessen Horowitz—have announced diversity-focused funds and started cutting checks from them.

“Never did we think 2020 would be a tipping point for ShearShare,” says Courtney Caldwell, co-founder of the company sometimes known as “Hairbnb,” which uses a marketplace approach to match hairstylists with salon owners.

Courtney and Tye Caldwell, co-founders of ShearShare, photographed in Frisco, Texas, in June.

PHOTO: DYLAN HOLLINGSWORTH/BLOOMBERG NEWS

Ms. Caldwell and her co-founder husband struggled when raising their $1.1 million pre-seed round of funding in 2018. At the time, Dallas-based ShearShare had 500 stylists and 450 hosts in 283 cities. “There were hundreds of meetings we had to go through to get our first yes, which is a story many Black founders could tell,” she says.

The company’s latest funding, an additional $2.3 million seed round, just closed, and it came together much more quickly than their first. Ms. Caldwell attributes this to the growth of her company—it’s now in 625 cities, with tens of thousands of registered stylists—but also to a changed investment climate. Firms that gave ShearShare money in this round include the Google for Startups Black Founders Fund, which the tech giant announced in June.

“Diversity funds are the reason we are still around, and believed in us when others didn’t,” says Reham Fagiri, chief executive and co-founder of New York City-based AptDeco, which matches buyers and sellers of used furniture. AptDeco launched in 2014, a graduate of the prestigious Silicon Valley startup accelerator Y Combinator.

Ms. Fagiri, born and raised in Sudan, is a graduate of Wharton and was an engineering manager at Goldman Sachs. The team had plenty of introductions from the Y Combinator network. And yet in the early days of their startup, she and her African-American co-founder struggled to get investment from anyone aside from partners at Y Combinator. This led the founders to fundraise continuously through 2015, and then again from 2016 through 2018.

The nonprofit Transparent Collective coaches underrepresented founders on their pitches and business models, introduces them to founders with similar backgrounds, and helps them to connect with potential investors. The program has graduated 52 founders since its first batch in 2016, and they have gone on to raise more than $42 million. Transparent co-founder James Norman says that for the first time, one of its graduates is receiving substantial investment for a product that is not yet available to the public. (The startup is called Realtime, and its CEO is Vernon Coleman.) In the past, Black founders have typically succeeded in getting funding for products and services only with proven track records and revenues.

Mr. Norman—who is also CEO of Pilotly, a startup that helps content creators at consumer-goods companies and in Hollywood capture audience insights—maintains a public database of Black-founded startups. It’s grown in the past few months, and now includes 386 founders with 342 startups.

ProjectDiane, a biennial survey of female Black and Latina founders, reports that as of this year, these entrepreneurs have raised a cumulative $3.1 billion—more than triple the $1 billion they had raised as of 2018. In 2018, only 34 Black women founders had raised at least $1 million. As of 2020, that number has grown to 93.

Lauren Maillian, CEO of the nonprofit DigitalUndivided, photographed in New York in 2018.

PHOTO: PATRICK MCMULLAN/GETTY IMAGES

These totals are still tiny compared with the rest of the startup ecosystem, says Lauren Maillian, CEO of DigitalUndivided, the nonprofit that publishes the report. Plus, more checks written don’t always mean more money disbursed. According to ProjectDiane, the median seed round of funding for Black women founders is only 5% of the median seed round for all startups in the U.S.: just $125,000, compared with $2.5 million.

Interest around investing in entrepreneurs and fund managers of color is higher than ever, says Nasir Qadree, founder and managing partner of the recently launched Washington-based Zeal Capital Partners, which focuses on what the firm calls “inclusive investing.”

The venture-capital industry itself is overwhelmingly white. Of the $69 trillion under management in private equity in the U.S., of which venture capital is a subset, only 1.3% is managed by funds majority-owned by women and minorities, according to a 2019 survey, and only 8.6% is managed by firms with more than 25% minority ownership. Overall, only 3% of venture capitalists are Black.

Black founders frequently lack the “friends and family” networks who make initial investments in white founders’ companies, or help support them when the going gets rough. In April, serial entrepreneur and investor Kathryn Finney launched the Doonie Fund, named for her enterprising grandmother. This experimental nonprofit fund gives no-strings “micro investments”—technically, grants—under $1,000 to Black women who work full time on their own businesses.

“In communities that don’t usually have support, sometimes it’s not just the money, it’s the money and the encouragement,” says Ms. Finney. The fund has so far reached more than 1,600 women entrepreneurs in 2020, and Ms. Finney plans to continue it.

One founder who used Doonie Fund money to set up a website to sell masks said it allowed her to make $75,000 on her new venture. She returned 10% to the Doonie Fund to help others like her.

Many Black founders, and those who fund them, cite the untapped opportunity their companies represent as reason enough for investors to get on board. After all, if an asset class, in this case businesses launched by underrepresented founders, is undervalued, pouring money into it is potentially an opportunity for outsize returns.

Joseph Heller, founder of The/Studio, which connects custom-merchandise businesses with manufacturers in China, near his home in Marina del Rey, Calif.

PHOTO: NOLWEN CIFUENTES FOR THE WALL STREET JOURNAL

There is also a larger sense of mission for both founders and funders, many of whom see themselves as pioneers and mentors. For many in the U.S. Black community, which has historically faced obstacles to building wealth, breaking down barriers to accessing capital is a mission of historic significance.

“I think access to capital and entrepreneurship is the next civil-rights movement,” says Joseph Heller, founder and CEO of The/Studio, a startup that connects custom-merchandise businesses with manufacturers in China. “If you think about every issue of inequality today, it all stems from economic inequality,” he adds. “You could talk about policing and things like that, but really that’s an economic issue too. And so the only way you’re really going to address that is through entrepreneurship.”

Mr. Heller’s own experience galvanized his belief. After spending a decade living in China and bootstrapping a manufacturing business there with nearly 100 employees, he returned to the U.S. and decided to try building a venture-backed company. Despite his experience and personal connections in the Bay Area, it took him 18 months and 150 investor meetings to close a Series A round. None of the white investors he pitched offered him a term sheet; of 30 nonwhite investors he pitched, five offered him one.

Experiences like Mr. Heller’s can drive Black founders crazy, if they let them, says Craig J. Lewis, founder of Gig Wage, a company that helps businesses pay freelancers and gig workers. In his own long journey to getting funding, he says, “You could either tie race to every single part of it, or decouple race from every part of it.”

“Change is more than just a conversation,” says Ms. Maillian, CEO of DigitalUndivided. “I want to see change in action that is sustained until we get to what I’m calling ‘professional parity.’ Parity is how we are seen and how our credentials are recognized and valued or devalued because of the color of our skin or our ethnicity,” she adds.

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