Editor’s Note: This piece is part of an ongoing series on female entrepreneurs of color. Read more here.
In our society, there are countless expressions about that which we may not all love, but surely all need: money. It has been described as the root of all evil, the force that makes the world go ’round, and a resource that doesn’t grow on trees.
We’ll leave it to our more philosophically minded readers to debate the first two idioms — we’re here to talk about the third, specifically as it pertains to entrepreneurs trying to start and grow ventures.
Accessing money is a concern for all business owners. In fact, some 41 percent consider funding to be their biggest challenge, according to a survey conducted by small business software maker Palo Alto Software.
For women, it’s even tougher to access money, particularly through traditional routes — only 2.7 percent of companies that received VC funding between 2011 and 2013 in the United States had a female CEO, according to a Babson College study.
And entrepreneurs of color often face another layer of difficulty. Minority-owned firms are less likely to receive loans than their white-owned counterparts, according to a 2010 Minority Business Development Administration a report. When they do, those loans are for smaller amounts, and carry higher interest rates.
Combine “female” and “minority,” and the result can be a uniquely problematic path to funding a business. And especially considering how fast that subset of the entrepreneurial world is starting up — black women are launching ventures at particularly high rates, according to Census data — it’s a problem worth looking into.
One Entrepreneur’s Struggle
Hewette Moore was the marketing third of the entrepreneurial trio behind Serving While Achieving Greatness (or SWAG, for short), a 501(c)(3) nonprofit that exposed students from communities in need to more affluent neighborhoods in New York City before helping them plan and execute localized projects based on the differences they observed.
But as of now, the organization is on hiatus. The big issue holding SWAG back? Money.
Moore and her cofounders — a multiracial team comprised of two women and one man — attempted to lock down loans and investors, but ultimately weren’t able to get funding through either route. That outcome contributed to a halt in operations for SWAG. Moore hopes to restart it again one day, though. “If we could have focused on it, we could have made something beautiful,” she says. “But, not a lot of people of color can focus on a dream and just not work full time.”
Some may assume that Moore and her cofounders simply weren’t ideal loan candidates or investment prospects. But the success and failure rates for women and minorities who try traditional funding routes — such as personal savings, small business loans and venture capital — combine to indicate real barriers that affect many minority entrepreneurs.
The Problems with Traditional Routes
Let’s begin with bootstrapping, a very common method of starting up. As Moore observed, it is often more difficult for minority entrepreneurs to fund their ventures this way due to wealth inequalities. Household incomes for white families were 10 times greater than those of Latino households, and 13 times greater than black households in 2014, according to a Pew Research study.
With less money to put aside, it’s harder for many women of color to use personal savings to get their businesses moving. And with less money in their communities, it can be harder to raise funds from friends and families as well.
Women and minorities also have less success getting loans. A 2014 study conducted at Brigham Young University found that minorities are subjected to noticeably different treatment than white customers while seeking loans — even when candidates boast identical credentials.
And the Senate Small Business & Entrepreneurship Committee found that businesses run by women only got 4.4 percent of all money doled out though conventional small business loans, the Associated Press reported just last year.
Bonika Wilson of Wilson Capital Management Inc., a banker-turned-consultant who was recognized in our Power List, discussed one possible reason. “In loan committees, what I saw oftentimes was that women and minority small business owners were frowned upon, because their presentations were incomplete. As a woman and a minority, I was very frustrated.”
It’s important to step up, and to be well prepared, Wilson noted. “Women and minorities must do a better job advocating for themselves, researching their specific industries, preparing good financial statements with the help of their CPAs and believing in themselves so that others will too.”
Meanwhile, venture capitalism has been — and continues to be — a problematic world for women in particular to navigate. A team of researchers from the MIT Sloan School, Harvard Business School and the University of Pennsylvania’s Wharton School found that VCs are more inclined to fund white men than representatives of any other gender or race group.
Entrepreneur and investment pro Sarah Kunst says a lack of diversity within the VC community is part of the problem. “The issues are at times systemic, and more often are oversights and lack of bias awareness on the part of the group of historically white men who fund startups. Everyone has a hard time raising money, but when bias is not in your favor, it can be even harder.”
Signs of Hope and Change
While traditional funding routes can be challenging for female minority entrepreneurs to pursue, more accessible options do exist. For example, angel investing is a viable option that has yielded more positive results for underrepresented and marginalized groups within the entrepreneurial world. Another Minority Business Development Administration report backs the notion that angel investing is a more even playing field for minority business owners in particular.
Take Latina serial entrepreneur Tina Aldatz, who is presently building up a new venture in lifestyle business Savvy Traveler, and previously founded beauty business Foot Petals. Aldatz says her lack of formal education and overall ignorance on proper business plans turned her very first meetings with VCs into disasters. Initially, she had to empty out her 401(k) in order to develop Foot Petals and get a prototype of the eponymous product made.
It took an angel investor who worked exclusively with Latino-run businesses — a connection she made through a friend — to get the first $10,000 she needed to get Foot Petals moving forward. Over the next two and a half years, the investor contributed $250,000, helping Foot Petals to grow into a business that pulled in $1.6 million in annual sales.
Additionally, technology’s ubiquity has turned crowdfunding into an interactive, accessible, easy-to-use option for business owners hoping to leverage their personal networks for startup funding. In addition to the big players — Kickstarter and Indiegogo — there are sites like Plum Alley that promote women business owners.
Brenda Beener, owner of Seasoned Vegan, is a prime example of how powerful crowdfunding can be. Her successfully funded Kickstarter campaign netted more than $22,000 — $2,000 above her goal amount — and gave her the opportunity to bring healthy soul food to Harlem.
She’s not alone. Indeed, crowdfunding was named as “a key resource in advancing women’s access to capital” by the National Women’s Business Council in their most recent report on female entrepreneurship.
In another positive trend for women business owners, government contracts will soon be easier for them to win. A December, 2014 amendment to the National Defense Authorization Act will allow women business owners to receive government contracting money through no-bid contracts, which could significantly expedite the federal contracting process for them.
Kristie Arslan, the executive director of Women Impacting Public Policy, told us “it typically was not the contracting officers doing the work [to find other bids], but rather, the business owner herself,” resulting in a more difficult, less successful process overall.
And encouragingly, growing awareness of systemic biases and barriers appears to be leading to improved access to conventional means of funding as well for women and minorities. For example, an analysis from Biz2Credit shows a narrowing gender gap in small business loan approval rates.
Acknowledging a Complex Issue
There is no simple explanation for the difficulties that women and minorities face when accessing funding. Blame cannot be assigned in broad strokes. While there are systemic biases, personal responsibility and accountability also matter.
“The economic challenges we have faced make it more so the business owner’s responsibility to own the [funding] process. Small business owners, especially women and minorities must be prepared,” Wilson says.
Added Kunst, “Combating [bias] by being well prepared with a great product … and team helps. So does going into it knowing that you need to meet with 100 or more investors before getting a ‘yes.’ Build a wide network, and don’t get discouraged early.”
But in order to foster true parity, we must also acknowledge the documented hurdles that often hold women and minorities back from finding funding.
After all, many women- and minority-owned businesses are sound investments that turn profits and boast some of the highest growth rates in the nation. American Express OPEN says that women-owned businesses in particular are on the rise, surpassing 9.4 million enterprises that generate nearly $1.5 trillion in revenue.
That’s why this issue isn’t just about equality, important though equality may be. Simply put, it’s in our best interest to encourage diversity in the world of business ownership because diversity supports a healthy, growing economy. As Kunst points out, increased variety in business owners means increased variety of business ideas and increased economic activity. “There’s great power in solving a huge range of problems.”