Thought Leadership: For Black entrepreneurs, inequality starts with getting pre-seed capital

This piece was originally published by Fortune on Sept. 15.

By Lyneir Richardson

Keith Kirkland is a Black entrepreneur. He and a partner devised the wearable technology that enabled a blind man to run the New York City Marathon with no other navigation assistance. That exciting proof of concept opened doors to other “GPS you can feel” applications. Their company, WearWorks, has attracted investment capital to hire, scale, and solve more problems. 

It’s a great story of entrepreneurship, but here’s a question it raises: Why aren’t there more Keith Kirklands getting early-stage equity capital? Statistics show that while the rate of entrepreneurship has been higher among Black Americans than in the white population in recent years, their businesses on average stay smaller. The vast majority do not have even a single employee beyond the owner. What’s holding these entrepreneurs back is a puzzle that people committed to racial economic justice and city leaders striving to boost their economies have been trying to solve for years.

Most of their programs assume it’s a shortfall in personal capacities. Many urban areas have startup boot camps and technical assistance programs, for example, where local minority entrepreneurs participate in intensive programs, learning to pitch for funding, training in customer validation processes, and building leadership skills. All that is essential to the success equation. These programs alone are insufficient. 

The crucial missing element is phase 1 of capital raising—and unfortunately, it’s this first ladder rung providing access to the rest. It’s what venture capitalists call the friends and family round or “pre-seed” capital. More than any other investor money, it’s patient, optimistic, and non-extractive. Getting money at this stage requires knowing people with funds who understand business fundamentals and believe in you as an entrepreneur. They’d like their money back once the business is on firm footing but aren’t necessarily asking for an ownership stake.

In the context of a long history of racial discrimination and systemic inequality, most Black entrepreneurs still don’t have rich uncles and trust-fund friends. Banks generally don’t lend to startups, unless the loan is secured by an asset. The Pew Research Center reports that the median white household has 20 times as much wealth as the median Black household. Thus, capable Black people can’t get pre-seed capital and give up on promising startups before even getting a chance to succeed.

This is not a doom and gloom story, because there’s a solution—a movement to institutionalize the friends and family round for Black entrepreneurs. Financially savvy people are taking something once done informally, and structuring it, reducing risk, and making it an option for “philanthropically motivated impact investors.” 

The idea is getting traction because it responds to those individuals and corporations that want to fund Black businesses instead of only making donations to social justice initiatives. These impact investors believe that business owners will create jobs and strengthen communities. They are willing to help Black entrepreneurs get started and grow.

Institutionalizing the friends and family round means creating intermediaries that investors can trust to surface promising startup concepts and make connections. These go-between institutions see a lot of pitches, assess risk and potential, structure transactions, and monitor progress. Yes, they also build capacity and provide mentoring to make entrepreneurs more capable—but the focus is on managing money flows, addressing tax issues, and doing the impact reporting desired by the investor. 

Some intermediaries provide the pre-seed capital, often through awards at pitch competitions. In Keith Kirkland’s case, a $10,000 award from the Rutgers Center for Urban Entrepreneurship and Economic Development catalyzed a $25,000 investment from the Black and Latino Angel Investment Fund of New Jersey. This helped put WearWorks on the radar for an investment syndicate that collectively kicked in $115,000 more.

A whole range of vehicles are being deployed. In Newark, pitch contests and angel funds sit alongside other components in a larger Black and Latino Tech Initiative. Rutgers formed a flexible capital fund that makes 0% interest loans and offers an efficient process connecting Black entrepreneurs to Community Development Financial Institutions (CDFIs). 

Rutgers is hardly the only institution acting in this space. In Asheville, N.C., Black businesses can get revenue-based financing from the Community Equity Fund. In New York, Ascendus offers special-purpose-vehicle loan programs and grants. In Chicago, Greenwood Archer Capital recently rebranded itself, emphasizing its commitment to “funding equity” for Black entrepreneurs. 

In a society energized to address inequities, this is a front we can collectively make fast progress on. The key is to focus on building equity to help promising startups get early-stage capital. If we provide early money to help Black entrepreneurs innovate and grow businesses, we can close the racial wealth gap. To the extent that profitable businesses and appreciating property are passed along to a business owner’s heirs, intergenerational wealth will be a reality in Black families.

Lyneir Richardson is executive director of The Center for Urban Entrepreneurship and Economic Development and assistant professor of professional practice at Rutgers Business School-Newark.

Photo Credit: Getty Images.