From The Line at Techstars.com: Want a More Diverse Startup Portfolio? Be a More Empathic Investor

First published on the Techstars blog, the Line.

‍

When I went to graduate school at George Washington University, I studied the intersection of developmental economics, international education, and marginalized populations around the world, with an emphasis on startup ecosystems.

Fast forward several years and here I am at Techstars, reflecting on a concept from graduate school that is as relevant today as when it was first conceived by John Stuart Mill, a philosopher from the 19th century: opportunity cost.

The Opportunity Cost of Not Investing in Underrepresented Founders

What value do we give up when we choose one alternative over another? In the context of investment, what future value do we give up when we invest in one founder over another? Or, more specifically, for the purpose of this article, what is the opportunity cost of not investing in underrepresented founders who consistently face systemic barriers to starting up?

Let’s examine this in more detail, particularly the role accelerators play as investors.

Talk to any of the 6000+ founders at Techstars and they will tell you how close they were to giving up, closing their doors, not making payroll, or not winning a big client or investment deal. The list goes on. Many of them are repeat founders who have already experienced a failed venture before making it into Techstars. Their anguish is palpable.

However, when you hear the same stories from underrepresented founders, particularly those willing to be open about their journey, the narrative swiftly changes to one of larger systemic challenges not everyone has faced such as institutional racism in banking, economic barriers preventing generational wealth and ultimately access to early startup capital, and sociocultural barriers caused by exclusionary business networks. I’ve heard enough of these stories to force me to pause and ponder, how did this founder even make it this far when the basic survival of their startup was often at stake?

The Rise of the Empathic Investor

Even before the Black Lives Matter protests and MeToo movement shined a light on the racial and gender imbalances in tech and beyond, people knew there was an elephant in the room that wasn’t being addressed in tech, startup, and investment communities. However, the public discourse around accessibility to entrepreneurship for underrepresented founders that identify as Black, Latinx, LGBTQ+, disabled, or any number of identities is steadily shifting and there is reason to be optimistic.

For one, we’re seeing the rapid birth of more funds and support programs aimed directly at serving underrepresented founders. One of the loudest, but certainly not the biggest news to recently hit newsstands was Apple’s $10M investment into Harlem Capital as a part of a broader $100M commitment to address racial equity and justice through Historically Black Colleges and Universities (HBCUs). Many similar announcements have been made in the past couple years in support of underrepresented founders, such as the Black Ambition Prize recently launched by Pharrell Williams with partners including Adidas, Chanel, the Chan Zuckerberg Initiative, The Rockefeller Foundation, and others. Another was the first-ever Founders with Disabilities PitchFest organized by the National Center for Disability Entrepreneurship (NCDE) at The Viscardi Center, where Backstage Capital’s Arlan Hamilton gave the opening address.

The common thread in these successful initiatives is that they are true collaborations with the communities they serve. They begin with listening to the needs of the community and they aren’t prescriptive with their solutions based on unfounded stereotypes. They didn’t begin by making assumptions, but listened intently and emphatically. Only after patiently listening to the needs of the community did they begin to create a strategy for approaching the larger systemic barriers faced by underrepresented founders. In other words, when facing systemic challenges and the system was too slow to fix the systemic challenges these founders face, people rose to the occasion and built the beginnings of a new system that works for everyone.

The Startup Leaders We Never Knew

While these recent trends are undeniably pointing in the right direction, much more effort is needed on a macro scale to provide access to entrepreneurship for underrepresented founders if we are to see true equality happen in our lifetime. The simple reality is that many underrepresented founders don’t even make it to the starting line because the stubborn systemic challenges are simply insurmountable. For each underrepresented founder we read about or accept into an accelerator, I can only imagine how many founders there are with an untold story. Some of these people had the ability to become world-impacting startup leaders. This cannot continue as our status quo.

Expecting underrepresented founders who face unimaginable barriers to entry to simply “level up” without taking the bigger picture into view fails to take into account the centuries-old systemic barriers they and generations before them have faced. And no, this certainly doesn’t mean lowering standards. But it does require a shift in empathic thinking, investment strategy, and operations.

Find & Fund Founders Where They Are

For example, how do you find the next brilliant and determined founder if that person can’t afford to go to college — 64% of Americans don’t have a bachelor’s degree — and thus isn’t likely to be connected to anyone within your network or the local startup ecosystem? I like the approach of Yohei Nakajima, General Partner of newly minted venture capital firm Untapped Capital: find founders almost exclusively through outbound contact that are completely off the beaten path. Instead of planting a flag and waiting for founders to come to you, be intentional and find them where they are. And remember, finding great founders to invest in should be hard work. What is obvious won’t always be right in front of you. I’ve witnessed this through Techstars.

Then there is venture capital. Statistics on the low percentage of venture capital made available to Black (1%), Latinx (2.6%), and women (2.8%) founders have become more and more commonly reported in mainstream media. When you aren’t fortunate enough to be born into generational wealth, starting a company means the early (and quite important) stage of “family and friends funding” can be little to nonexistent, forcing a founder to either bootstrap for much longer or braving the world of venture capital where the odds are statistically not in their favor. As Candice Matthews Brackeen, Founder of Hillman, stated, “We are all over-mentored and under-funded.”

When a founder hasn’t had the luxury of early-stage capital, they often bootstrap their startup for much longer periods of time while working side jobs, which ultimately works against them when approaching investors later on, not to mention validating their product as quickly as possible. Investors often ask why they haven’t reached a certain level of traction compared to their competitors. One way to address this at the investment level is to consciously take into consideration the barriers the individual founder has faced and not judge their company according to where we think they should be, but what milestones the founder has achieved given their funding constraints, and what potential the founder actually has with additional funding. Consider this being a conscious investor.

Earlier-Stage Funding To Replace “Family and Friends”

Another obvious approach that many new venture funds are targeting is to provide earlier-stage funding to underrepresented founders who don’t have access to family and friends capital. Many funds are offering low equity, no-equity, or alternative funding to underrepresented founders as they consider company ownership and the creation of longer-term generational wealth. Again, the connection of funding to accessibility of entrepreneurship should be to have fewer strings attached that help eliminate barriers for underrepresented founders, not expect founders to “level up” to meet the demands of what has always been done. What has always been done has obviously not been working.

As accelerators like Techstars make the transition to virtual programming in the wake of COVID-19, it’s a step in the right direction for making entrepreneurship more accessible for underrepresented founders with family and work obligations who can’t simply uproot their lives for three months. I would also expect to see more accelerators offering in-house child care for “parentpreneurs,” much in the same way many larger employers have moved in this direction over the past several years. The list of opportunities for accelerators and investors could go on and on. But creating more equitable pathways to entrepreneurship begins with empathy. And empathy starts with listening.

Entrepreneurs Change the World

The big picture is that there are many more people in our communities who would pursue the founder path if they knew someone was looking out for them, not just their company. The opportunity cost of not listening to the needs of underrepresented founders is too great to ignore. Our future depends on it.