Black Women and the Self Funding Dilemma

This is a part of series of discussions around the release of the #ProjectDianereport, a report on digitalundivided’s proprietary research study about the state of Black women in tech entrepreneurship in the United States. The report will be released on Feb 9th, 2016.

The fact that only 11 startups led by Black women have raised more than $1MM in outside funding is striking for two reasons: (1)In tech, raising at least $1 million is an indicator that a company is at the later stages of seed funding and is moving from proving the market to growth, and (2) The average amount raised industry-wide by startups that ultimately fail is $1.3 million.

The takeaway is that Black women Founders are not raising nearly enough to even test their ideas in the market and even the best Black women led startups (as indicated by the amount raised) do not raise as much as failed startups led by others, namely white men.

Since traditional investment resources for Black women Founders are few, most turn toward self-funding. Self-funding adds significant personal financial risk to Black women Founders who may not have the personal safety net of other Founders. The median net worth of a single Black woman is just $100, and if she is raising minor children, it is zero or less. This is compared to single white women who have a median net worth of $41,000. The average white family had a net worth of $141,900 compared to a median Black household wealth of $11,000.

It’s Easy To Turn Down Venture Funding, When You Have Other Sources of Funding Available To You

Self-funding is less desirable and advantageous than equity-based investments. The benefits of equity-based investments like angel and venture capital extend beyond financial contributions. Investors who provide money in exchange for equity are incentivized to make sure their investments succeed in a way that a credit card company or a business plan competition do not. Venture investors often share their networks with companies they are investing in — thus increasing the Founders’ networks — which can lead to other investments. Also, many venture firms provide non-financial services like marketing, recruitment, and operations assistance to support their Founders. These in-kind services, which save the company money and time, are invaluable to the success of their Founders.

Founders who are forced to use their personal resources do not receive the social capital and business connections that are vital for young, unproven startups to succeed. Founders using personal sources of capital also do not receive the level of scrutiny and critical feedback inherent in the due diligence process. Nor do they receive term sheets, which sets a valuation for their companies.

Discussion: How Do We Get Capital to Investable Startups Led By Black Women?