By Dr. Courtney L. McCluney, Assistant Professor, Cornell University
Diversifying entrepreneurial ecosystems requires the presence of people from different backgrounds and equitable access to resources. I have found in my research that this latter component is often taken for granted: VCs often think that if they have enough non-White men in the startup pool, then there will be more dispersion of capital. However, diversity alone will not resolve structural issues that generate less capital for White women and people of color. VCs must intentionally invest in these firms in order for systemic change to occur.
The adage “it takes money to make money,” is especially true in the startup world. Founders are often advised to start with family and friends or tap into their networks for investors, which assumes that most founders have connections to individuals with disposable income. Yet, the wealth gap between races and genders are persistent and growing; the net worth of a typical White family is ten times greater than that of a Black family, and women own only $0.32 on the dollar compared to men. Examining the intersecting racial and gender wealth gaps create a gloomier outlook for women of color. The median wealth for Black and Latina women is $200 and $100 respectively, where White women’s median wealth is $15,640. Coupled with their work in low-wage occupations, women of color are less likely to have the capital needed to invest in their entrepreneurial ventures.
My research has taken me to Detroit, Michigan’s entrepreneurial ecosystem as a space to understand the distinctions between diversity, inclusion, and equity in organizational contexts. As the country’s largest Black-majority city, Detroit has the diversity that other entrepreneurial ecosystems lack. Yet, the ecosystem also has concomitant rates of poverty and resource constraints due to compounded and systemic racial discrimination present in the city. My ongoing study seeks to uncover how ecosystem builders—including venture capitalists—seek to include Black residents in Detroit’s revitalization and build equity in their deployment of resources for small business owners.
Backstage Capital, the brainchild of Arlan Hamilton, selected Detroit as one of its target cities during my research, and aimed to disrupt the VC world. Backstage Capital notes on their website, “Less than 10% of all venture capital deals go to women, People of Color, and LGBTQ founders. Other VCs see this as a pipeline problem. We see it as the biggest opportunity in investment.” Since its launch in 2015, Backstage has invested seven million dollars in over 130 companies. Arlan, herself, has been featured on the cover of Fast Company, is the protagonist of a popular Harvard Business Review case, and published her book It’s About Damn Time: How to Turn Being Underestimated into Your Greatest Asset. Arlan and Backstage’s approach to investing offers some important lessons for promoting inclusion in VC.
First, the Backstage website mentions that other VCs see the lack of atypical founders as a “pipeline” problem, citing the lack of available diverse talent in the pool of VC-eligible startups. Yet, Backstage Capital has and continues to invest in firms with non-White, heterosexual, and/or male founders, which demonstrates the intention needed for VCs to create equity for entrepreneurs who do not fit this mold. This approach demonstrates that the “pipeline” problem (i.e., lack of representation in VC-eligible firms) is not a natural or immutable, but instead, a byproduct of structural discrimination.
Second, Backstage sees the low amount of capital going towards these founders as “the biggest opportunity,” to reach an untapped group of innovators. Arlan often refers to women, people of color, and LGBTQ as ‘underestimated’, instead of merely underrepresented founders. To underestimate means to estimate something to be less important than it actually is, which is certainly the case for founders in the Backstage portfolio. This reframe situates the problem of underrepresentation in VCs within the control of venture capitalists; namely, by indicating that VCs are underestimating these founders, instead of the founders being naturally underrepresented.
Third, Backstage Capital reserves their investment for three specific groups, women, people of color and LGBTQ, pushing back against meritocratic beliefs as the reason for their underfunding. Innovative ideas are widespread, but opportunity is not, which requires VCs to intentionally focus on getting capital into the hands of marginalized founders. Since its inception, Arlan also developed an exclusive fund for Black women founders, recognizing the unique impact of racial and gender inequity on this particular group.
Drawing on the Backstage Capital model for building equity for entrepreneurs, I advise VCs to approach their investment opportunities with intentionality. Instead of assuming that the lack of women, people of color, and LGBTQ is a pipeline issue, reconsider your network as an area to diversify. Further, question the ways in which you are underestimating non-White male founders and/or their business ventures. Finally, create goals to invest in a variety of people, but be intentional about the intersecting identities of marginalized entrepreneurs and how to reach them. Until we have systemic interventions that address intersecting systems of racial, gender, and other forms of oppression, existing VC funding practices will reproduce inequity in entrepreneurial ecosystems–something that can be changed with intentionality on the part of VCs.