Diversity Series: Founders Of Color Face Extra Hurdles In Raising Capital

GrepBeat graphic by Ximena Colopy

[Editor’s Note: This is the first part of a four-part series on diversity in the Triangle’s tech ecosystem. You can find the roadmap to the series here.]

Entrepreneurs know that it often takes money to make money, but all too frequently the playing field is not level for people of color.

Whether no one else in the room looks like them, or because unconscious bias comes into play, founders of color face various extra challenges accessing capital, which feeds into a lack of representation in the tech and entrepreneurial fields.

Typical funding categories for startups include debt, equity and self-financing, with debt often being a less viable route for entrepreneurial startups because early on they are often running at a cash deficit and thus would struggle to make loan payments, making banks and other lenders shy away. Meanwhile raising equity from a venture capital firm or angel group is difficult in the best of circumstances.

Overall, data show that the cards are stacked against people who lack individual or family capital to fund an idea.

 

A study last year by the Kauffman Foundation, a entrepreneurial-focused nonprofit that offers grants and industry research, shows that personal and family savings make up over two-thirds of overall startup capital sources, with personal credit cards consisting of under 10% and bank loans making up over 16%.

That means the majority of startups that make it off the ground are able to do so because of pre-existing wealth belonging to the founder and/or their family and friends. Oftentimes, a gap in generational wealth prevents people of color from being able to bootstrap a startup.

Equity is likewise skewed against people of color.

It’s often who you know, not what you know

In the almost 20 years that Lister Delgado has been involved in investing in startups—he is currently the Managing Partner of Durham’s IDEA Fund Partners— he says he has not seen much change in the diversity of people running the portfolio companies.

“Investors invest in people that they know,” said Delgado. “When you are an immigrant, when you are a person of color, when you are someone who looks different, you tend to not have those networks and connections. I can guarantee you that going to a top school, on the business side, the value of that is not always what you learn, but who you meet.”

IDEA Fund Partners is a venture capital firm with offices in Durham and Charlotte. Since it was established in 2007, it has invested in 42 portfolio companies.

Delgado is an immigrant himself. He says he has experienced discrimination “all over the place.” While he says the discrimination wasn’t always overt, he faced challenges coming to the United States at age 17, not being able to speak English, with a family tree that is half-Peruvian, half-Cuban.

Lister Delgado, Managing Partner, IDEA Fund Partners

He ended up going to Brown University at age 20 on scholarships, followed by grad school at the University of Texas at Austin and business school at UNC’s Kenan-Flagler, with intervening careers in electrical and software engineering.

While in business school, he became interested in venture capital. Now, he’s on that side of the table.

Delgado says his job consists of three things: fundraising, brokering new deals and supporting portfolio companies.

As a VC firm, IDEA Fund Partners offers equity in exchange for a percentage of ownership of the company. IDEA Fund Partners is now working on launching diversity and inclusion efforts, Delgado said, stemming from how they source deals.

“Basically, when we look at all the things we can do,” Delgado said, “there’s one key goal that will be the driving force behind every initiative, and that is to invest in a more diverse group of entrepreneurs, and a group of entrepreneurs that hopefully reflects the population of entrepreneurs.”

Delgado says the company “is not doing this to be nice,” although he does personally believe it’s the right thing to do, but it is a business opportunity to invest in people who are overlooked.

“We are called IDEA Fund Partners, but we don’t invest in ideas,” Delgado said. “We invest in people.”

While IDEA Fund Partners has become more conscious of efforts to invest in people of color, another investment firm in the Triangle was founded based on that very mission.

Resilient Ventures

Durham-based Resilient Ventures intentionally pursues founders of color with high-growth potential. As a committed capital fund, a group of angels individually contributed to the fund. The fund managers, Co-Founders Tom Droege and Keith Daniel, make decisions about how to use the money.

GrepBeat last wrote about Resilient Ventures in June 2019, after it had raised $1.1M for its fund. Now, they have closed three deals and are currently finalizing their fourth, with an average check size of $75K.

One challenge African Americans are working against, Daniel says, is historic notions of what kind of businesses they lead, compounded by a lack of representation of high-net-worth people of color in the entrepreneurial sphere.

Keith Daniel, General Partner, Resilient Ventures

“The space is so violently segregated,” Daniel said. “It’s like, ‘We’re fine with you having a barber shop or beauty salon and maybe a service business,’ but the minute you now start to need capital so you can bring to market an ingenious solution, then we don’t have friends and family to turn to to say, ‘Here’s multiple thousands to get you that runway.’”

Many founders credit the “friends and family” round, the top source of funding found in the study cited above, for getting their business off the ground. Daniels says that money is not always available to people of color who lack generational wealth.

Daniel says that as an African American General Partner of a fund, a lot of people tell him he’s an anomaly.

“It does feel that way to a certain degree,” he said, “but at the same time, I’m like, that really is problematic, because there are a good deal of high-net-worth African Americans that this hasn’t necessarily been a lane for them to see that this is a way to infuse capital and maybe change the narrative around the wealth gap.”

Daniel says there aren’t many funds like theirs, which explicitly targets underrepresented groups and is led by one white businessman and one Black businessman. Part of the challenge, he says, is breaking into a space that excluded people of color from the start.

“How do we integrate into a venture system that was explicitly not built for us?” Daniel said. “You’re grinding against both, ‘We didn’t build the system, so if we get in now and participate in it and realize it’s still built against us, it just keeps it kind of as a segregated space.’ Part of our vision is to be a little bit of a unicorn.”

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About Elizabeth Moore 38 Articles
Elizabeth Moore tells the stories of the Triangle's tech startups as GrepBeat's summer intern. She is a rising junior at UNC Chapel Hill majoring in journalism and Spanish. You can contact Elizabeth on Twitter (@elizltmoore) and LinkedIn.