💰 Why Black Founders Shouldn’t Raise VC

Toby Egbuna
April 18th, 2024

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I think 99% of Black and underrepresented founders should avoid venture capital entirely.

I know, I know. I wrote a book (coming soon!) on how to get venture capital specifically for this audience, but I don’t actually believe that Black founders should chase VC. Let me explain.

3 Reasons Why VC Isn’t Good for Black Founders

As I mentioned in the Consider section of CREAM, venture capital is a fantastic source of funding for a very specific type of founder and company. But for other founders, especially diverse founders, it doesn’t work for a 3 big reasons.

1. Misaligned desired outcomes

Imagine this - you start a tech company. You work hard, recruit a team, and build a product that customers love. You raise a small Seed round of $1M, and you grow consistently and steadily without any additional outside capital. Within 5 years, your company is making $6M in annual revenue and throwing off $2M in profits that are distributed amongst you and your team. Since you only raised one round of funding, you and your team own 90% of the company. You decide to sell the company for $30M, netting $15M for yourself.

Almost every founder I know would be ecstatic with this outcome. This is life-changing money that allows a founder to provide for her family and begin to create the generational wealth that’s eluded her.

You know who wouldn’t be happy with this outcome? A venture capitalist.

You can boil down desired outcomes into four pillars: timeline, growth, revenue, and impact. For each pillar, there’s a mismatch between what most founders want and what VCs want.

1. Timeline

   • VCs want an exit within 7-10 years but ideally in 5-7.

   • Founders want to move quickly, but they’re more focused on building something that lasts than on following a set timeline.

2. Growth

   • VCs want growth at all costs, even if it means doing so unsustainably.

   • Founders want to grow, but not at the risk of their company’s future.

3. Revenue

   • VCs want $100M/year in revenue.

   • Founders are obviously okay with building a company that does $100M a year, but they’re also fine with something that does

4. Impact

   • (Most) VCs look at impact as a bonus. Their priority is profits.

   • Founders, often building businesses to address their problems, prioritize impact and profits.

2. VC is extremely difficult to obtain for underrepresented founders

Black founders received just 0.5% of venture capital funding last year. Female founders received less than 2%. Latinx founders receive less than 2%.

This isn’t news. Underrepresented founders struggle to obtain VC funding because, in many ways, venture capital wasn’t set up for us.

Warm introductions

I will die on this hill. Warm intros are the biggest thing preventing Black founders from accessing VC.

Here’s how I recommend getting warm intros if you’re raising VC:

1. Build your investor pipeline

2. For each fund, go to the fund’s website and see who is on the team

3. Find at least 2 people from the Team on LinkedIn

4. See what mutual connections you have with that person

5. Put the name of the mutual connections in the “Who can intro?” field for that fund

6. Repeat steps 1-5 for the other funds in your list

This entire process is predicated on you having mutual connections with that investor. And not just mutual connections, but ideally people that can speak about you favorably and have enough clout with the investor that they’re willing to accept the introduction.

We know that people’s networks generally are made up of people who identify similarly and/or come from the same background as them.

58% of VCs are white men, so we can safely assume that most of their networks are made up of other white men. For underrepresented founders, whose networks are likely comprised of people from identifies and backgrounds similar to their own, they’re immediately at a disadvantage.

The decision-makers don’t see our problems

Let’s stay with this stat → 58% of investors are white men.

Founders usually start businesses to solve problems that they themselves have faced. Sometimes those problems are racially agnostic (like a project management software) but sometimes those problems are identity-specific.

Case in point, imagine you’re building an app to make it easy for Black women to find high-quality, vetted braiders.

There are 65 million braid appointments in the US every year. Black women spend $20B a year on these appointments. If you know Black women, then you know how hard it is to find a quality braider that provides even a decent experience. You immediately understand that this app is solving a real pain point for a lot of people.

However, if you’re a white man who doesn’t interact with Black women regularly, you understandably wouldn’t realize the scale of the problem. It doesn’t matter what’s on the founder’s market size slide, you resonate most with what you're already familiar with or what's hot (e.g. AI right now).

I spoke to a VC once who very candidly shared that most investors pass on deals because they "simply don't understand." The problem for Black founders is that since most VCs don't share our identify or background, they won't understand our problems, and they'll pass.

More VC means less ownership

The racial wealth gap is a real thing. I used to live in Boston where, in 2018), the Boston Globe did a study and found that the median net worth for non-immigrant Black families in the city was $8.

Not $80,000 or $8,000. $8.

A very big key to reducing the wealth gap is ownership for Black people. The higher the percentage of our businesses we own, the more wealth we generate.

Venture capital involves selling meaningful pieces of your business with plans to increase the valuation at each subsequent round of funding. A founder who raises only 3 rounds of funding before a $100M exit could own as little as 15% of his company by the time that exit happens. That doesn't even factor in companies with multiple founders 😟.

More funding means less ownership. Sure, maybe you don't get to that $100M exit without the VC funding, but you probably could have exited for $20M with only one round of funding that let you keep 75% of your company. Same outcome (both net the founder $15M), but the latter option doesn't involve any of the hardships that come with VC money - board seats, growth pressure, etc.

The hard truth

I'm going to contradict myself here, but this is the truth: in many cases, VC is the only option to the funding that a Black or underrepresented founder needs to build  company.

We can boil the funding options down to the following

1. Personal money

2. Grants

3. Loans

4. Friends and family

5. Angel investors

Let's say you're a founder who’s done the work to build a product, found 5 initial customers that are paying you $10k/month ($120k ARR), and you have an idea of how you'll get the next 15 customers and what improvements need to be made to the product. You've been working on your company for 6 months and you haven't paid yourself at all yet. You do the math, and you need $1M to build this into a profitable business, pay yourself, and hire a team.

How will you get that $1M? Lees revisit the funding options above:

1. Personal money - if you have $1M of personal money to put into your business, you're probably not reading this.

2. Grants - great for $10-20k here and there, but they're not dependable nor will they give you the capital you need.

3. Loans - no banks will loan you $1M based on your business's traction to date. They tell you to come back when you've got multiple millions in revenue.

4. Friends and family - you might have friends and family who can invest smaller $1-5k checks, but the most you can get from this group is $100k total

5. Angel investors - while a great option, you don't have connections to angels and they're hard to find.

Where does that leave us? With venture capital.

VC is the only funding path that gives founders all of the money that they need to build their businesses. Even though it's statistically almost impossible to obtain, investors probably won't understand your solution, and it will cost you more of your company than other funding options would, at the end of the day, it's the most straightforward path to the $1M you need to build your company.

Summary

In an ideal world, there would be other sources of funding that give underrepresented founders access to big enough amounts of funding to get companies off the ground and then grow sustainably from there. But this isn't an ideal world, so we have to roll with what we have.

Questions? Thoughts? Disagree completely? Respond to this email. Let's talk!

Funding Opportunities Closing Soon

1. Peerless Pitch - Peerless is a pitch competition designed to help Black, Latine, Native American and female founders scale their vision from an early stage.

   Apply for a $1M investment: https://www.peerlesspitch.com/#criteria.

2. Corporate Contracts Connect: Salesforce Supplier Diversity Academy - The Salesforce Supplier Diversity Academy is a 6-month virtual accelerator designed to help small, diverse businesses prepare for contracting opportunities with this billion-dollar tech company.

   Apply here: https://thesystemstosuccess.com/corporatecontracts/