Minority entrepreneurs, defined as those who identify as a racial or ethnic minority, continue to be underrepresented in the business world. According to the National Venture Capital Association, only 2.3% of venture-backed companies had a Black founder in 2020, while Latinx founders made up just 4.3%. This lack of representation is particularly evident in the early stages of funding, also known as the “friends and family round.” This phase of capital raising is crucial for startups, as it allows them to hire their first few employees and begin building their product or service. However, minority entrepreneurs often face disadvantages in accessing this round of funding due to a lack of social capital and access to networks of potential investors, racial wealth disparities, and implicit biases and discrimination within the investment community.
To address these challenges, a variety of programs have been developed to support minority entrepreneurs. These include intermediaries and pitch competitions that provide pre-seed capital and connect entrepreneurs to investors, mentorship and capacity building programs, and government initiatives aimed at increasing access to capital for minority-owned businesses. However, these programs alone are not sufficient to address the systemic disadvantages faced by minority entrepreneurs. Broader systemic solutions, such as increasing diversity within the investment community and reforming policies and regulations that disproportionately affect minority-owned businesses, are also necessary to level the playing field and promote the success of minority entrepreneurs.
Disadvantages faced by minority entrepreneurs in the friends and family round
One of the primary challenges faced by minority entrepreneurs in the friends and family round is a lack of social capital and access to networks of potential investors. Many angel investors, who are often the primary source of funding for early stage startups, tend to “invest in what they know” and prioritize companies that have been introduced to them through their own personal or professional networks. This preference for familiar companies can be particularly detrimental for minority entrepreneurs, who may not have the same level of access to these networks due to a lack of representation within the investment community.
Another significant disadvantage faced by minority entrepreneurs is the racial wealth disparities that exist in the United States. The median white household has 20 times as much wealth as the median Black household, according to the Pew Research Center. This lack of financial resources can make it difficult for minority entrepreneurs to secure funding from friends and family, as many may not have the necessary savings or assets to invest in a startup.
In addition to these structural barriers, minority entrepreneurs also face implicit biases and discrimination within the investment community. A study by the National Bureau of Economic Research found that investors are significantly less likely to fund startups with Black founders, even when controlling for the quality of the business idea and the entrepreneur’s background. These biases can make it harder for minority entrepreneurs to secure funding, even if they have a strong business concept and solid plans for growth.
Programs aimed at supporting minority entrepreneurs
To address the disadvantages faced by minority entrepreneurs in the friends and family round, a number of programs have been developed to provide support and increase access to capital. One such program is the Techstars Rising Stars Fund, which is a pre-seed fund specifically structured to invest in underrepresented founders of color in the U.S. The fund provides a financial boost of $100,000 to promising but overlooked startups that would otherwise be ignored by traditional venture capital, as well as access to Techstars’ worldwide network for mentorship, real-world startup know-how, and opportunities for growth.
Other examples of intermediaries and pitch competitions that provide pre-seed capital and connect entrepreneurs to investors include accelerators and incubators, such as Y Combinator and 500 Startups, as well as pitch competitions organized by organizations like the National Black MBA Association and the National Hispanic Business Group.
Mentorship and capacity building programs specifically geared towards minority entrepreneurs can also provide valuable support and resources for these founders. Examples of these programs include the National Minority Supplier Development Council’s Minority Business Executive Program, which offers leadership training and mentorship to minority business owners, and the National Association of Minority Angel Investors’ Angel Capital Education Program, which provides education and training on angel investing for minority entrepreneurs.
In addition to these private sector initiatives, government policies and initiatives can also play a role in supporting minority entrepreneurs. One example is the U.S. Small Business Administration’s 8(a) Business Development Program, which helps small, disadvantaged businesses gain a foothold in the competitive business world through access to government contracts and business development assistance. Other initiatives aimed at increasing access to capital for minority-owned businesses include the Community Reinvestment Act, which promotes lending to underserved communities and minority-owned businesses, and the State Small Business Credit Initiative, which provides grants to states to support small business lending and investing.
Broader systemic solutions to address the disadvantages faced by minority entrepreneurs
While targeted programs and initiatives can provide valuable support to minority entrepreneurs, broader systemic changes are also needed to address the disadvantages faced by these founders in the friends and family round. Increasing diversity within the investment community, including the leadership of venture capital firms, can help to break down the barriers that prevent minority entrepreneurs from accessing networks and funding. This can be achieved through initiatives such as diversity and inclusion training, targeted recruiting efforts, and partnerships with organizations that support minority entrepreneurship.
Reforming policies and practices that contribute to racial wealth disparities, such as discriminatory lending practices and unequal access to education and job opportunities, can also help to level the playing field for minority entrepreneurs. This can include targeted investment in low-income and minority-majority communities, as well as policies that promote financial inclusion and asset building for these groups.
Finally, changes to policies and regulations that disproportionately affect minority-owned businesses, such as the tax code and access to credit, can help to remove barriers and create a more inclusive and supportive environment for these entrepreneurs. This can include initiatives such as tax incentives for businesses that hire and invest in underserved communities, as well as efforts to increase access to credit for minority-owned businesses.
Conclusion
Minority entrepreneurs face significant disadvantages in accessing the friends and family round of funding, including a lack of social capital and access to networks, racial wealth disparities, and discrimination within the investment community. Targeted programs and initiatives, such as intermediaries, pitch competitions, and mentorship and capacity building programs, can provide valuable support to these entrepreneurs. However, broader systemic changes are also needed to address the root causes of these disadvantages and create a more inclusive and supportive environment for minority entrepreneurship. By taking action to support and prioritize the growth and success of minority-owned businesses, investors, policymakers, and business leaders can help to create a more equitable and prosperous future for all.
There is a clear need for action to address the disadvantages faced by minority entrepreneurs in the friends and family round of funding. Investors and business leaders can take steps to increase diversity within their organizations and actively seek out and support minority-owned businesses. Policymakers can implement policies and regulations that support the growth and success of minority entrepreneurs, such as targeted investment in low-income and minority-majority communities and reforms to the tax code and access to credit. By taking these steps, we can create a more inclusive and equitable business landscape that allows all entrepreneurs to thrive and contribute to the prosperity of their communities.
