Diverse Suppliers: VCs Must Level the Alternative Finance Playing Field for MBEs

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Calvin Cooper

While working with Ohio Minority Supplier Development Corp. in 2014, Calvin Cooper, then director and venture partner at NCT Ventures, noticed a lack of recent or relevant studies on how much revenue local minority business enterprises (MBEs) generated or how they financed the growth of their businesses. This, despite the many anecdotal conversations around MBE growth and capital formation taking place. Curious, Cooper extracted information on MBE revenue and its impact from the state’s database of MBE certifications, and found that MBEs collectively generated a cool $5 billion a year. Why, then, he mused, weren’t venture capitalists investing in these businesses?

“The $5 billion in Ohio translates to $100 billion nationally. That’s a large number. It surprised us at the time. If we didn’t know that, I’m sure VC investors didn’t know either,” Cooper told The Network Journal in an exclusive interview. “In interacting with entrepreneurs who were raking in just $1 million a year, before I even began working at NCT, it became apparent there was a lack of understanding of alternative finance. So, when I became a VC, I thought it would be important to take a look at some of the barriers to capital among MBEs.”

When NCT began to work on VC initiatives, it found a huge gap in MBE access to capital and attempted to expand the conversation on that issue. Cooper, along with Ian Blount, Ph.D., co-founder of Coalescence LLC, and dt ogilvie, Ph.D., distinguished professor of urban entrepreneurship and founder of the Center for Urban Entrepreneurship in the Saunders College of Business at Rochester Institute of technology, authored and published in 2015 “National Survey: Access to Capital Among Minority Business Enterprises.” Issued by the National Minority Supplier Development Council, the survey revealed troubling facts about MBE funding methods.

The kind of businesses some minority entrepreneurs were launching contributed to the worrisome picture. “Seventy percent of the entrepreneurs surveyed were building legacy/lifestyle businesses,” Cooper said. He suspected that this stemmed from a lack of knowledge of the benefits of building high-growth businesses. “Those kinds of businesses are not usually aligned with VC,” he asserted.

Under their business model, VCs raise capital from limited partners — large family offices, banks, large endowments or foundations, and pension and retirement funds — and funds are set up to have a 10-year life and a four-year investment period. “The goal for a VC fund, in order to be able to raise the next fund, is to outperform the public market,” Cooper explained. “In order to do that, we need to hold the fund over a ten–year period, and investing in companies that are not high-growth kinds of companies won’t yield that result. It’s an economic adventure, and it requires a large return on a few deals each month.” More than half the business owners polled indicated they had little or no knowledge of the categories of alternative finance identified in the survey. Just 11 percent of the respondents had seriously explored alternative funding options compared to 59 percent who sought only traditional funding from banks.

There is a notable lack of engagement with VCs on the part of minority business owners. More than a quarter of those surveyed said they had a negative or extremely negative perception of VC fund managers, even though most of them had never met one. Said Cooper: “That shows a lack of network and an overall lack of trust, especially on the part of MBEs who are much older. And for all of the historical reasons, which are valid, I’ve seen that the market is changing and there has been a lot of progress in terms of reducing barriers to entry on the VC firms’ side. But that negative perception on the part of MBEs still creates a barrier for older MBEs reaching out for alternative financing.”

Taking action

The National Venture Capital Association has done much over the past few years to address the access gap. It created a diversity task force to evaluate access to capital among women and minority founders and devised strategies to improve the situation. Those strategies can be found in “Building a More Inclusive Entrepreneurial Ecosystem,” a 52-page review of the organizations and individuals leading the way, with actionable line items and insights. The association’s Diversity Task Force Workshop, its presence at the PUSH2020 Summit and the Annual Rainbow PUSH Wall Street Project Economic Summit are events where the issue is directly addressed.

“Continued efforts have been made among organizations like the NVCA,” Cooper acknowledged. “On the fund management level, one of the key things they’re improving is engagement with diverse founders. The presence of women and minority investment professionals who are partners at VC firms has proven to make an incredible impact for diversity. It’s important for the decision-makers to be a diverse set of individuals.”

He intimated that fund managers can and should conduct intentional outreach to diverse communities. The vast majority of investments fund managers make often are in  companies introduced to them through their networks, he said. “If a fund manager’s network isn’t diverse, it’s not likely that he or she will have any diverse candidates to fund. So this is a good starting point, along with joining the startup groups for women and minority entrepreneurs that are building incredible networks.”

Cooper advises MBEs to take their own action in the following ways:

Reach out to investors and make friends in the investment community. This adds diversity to their networks; Remember that the best time to build relationships is when you’re NOT looking to raise money. Building that network early is key; and Align your outreach with the kind of business you’re trying to build. “That last point might be the most significant,” he said. “If you’re seeking to grow a legacy/lifestyle business, then reaching out to VCs is not going to work. But if you’re building a high-growth business such as a technology company in a large growing market where there are no barriers to opportunity, then VCs and accelerator programs are the way to go. Understanding this can make all the difference.”

A Pledge to Do More

In 2015, leaders of the National Venture Capital Association (NVCA) Diversity Task Force committed to work together to advance opportunity for women and underrepresented minority entrepreneurs. The show of solidarity took place at “White House Demo Day,” hosted by then-President Barack Obama. “We’ve got more than 40 leading venture capital firms who are pledging to do more,” President Obama declared at the time.

Below are three of those VC firms and steps they have taken to advance opportunity for diverse business owners.

Intel Capital Diversity Fund

  • In 2015 allocated $125 million over five years to diverse entrepreneurs;
  • In 2018 surpassed that goal two and a half years ahead of schedule; expanded the initiative beyond its initial goals; and
  • Funded technology entrepreneur Rodney Williams, founder/CEO of LISNR.

JumpStart Inc.

  • Of its 80 portfolio companies, 24 are women and/or minority owned, led or controlled;
  • Invested $1.2 million into the Emerging Growth Fund for diverse entrepreneurs; and
  • Has partnered with United Negro College Fund and Historically Black Colleges and Universities.

500 Startups

  • Debuted a $25 million microfund, led by Monique Woodard, for Black and Latino

founders;

  • Funded top-performing Black companies Blavity and Walker & Company; and
  • This year, offered 10 new diversity scholarships for early stage investors.