Wednesday, November 12, 2014

Risk and Race: A Modest Proposal To Encourage Investing In Minority Entrepreneurs

Fast Company put out a fantastic package of stories covering the role of race in Silicon Valley.  The centerpiece is a deservedly glowing profile of Tristan Walker, but my favorite was an interview with a group of African American startup folks titled "An Honest Discussion of Race in Silicon Valley."

One thing that I failed to appreciate before, and that this story made clear, is the interaction of risk and race:
In many African-American households—since we don't descend from centuries of wealth in this country—parents want their kids to be a lawyer or a doctor, or go to Wall Street to make a lot of money so they can come back and take care of the family. Is the African-American community too cautious for tech and its "fail fast" mantra?

Erwin: Black folks like me have to take care of family members at home, so jumping into a startup is very risky when you can make it either on Wall Street or do something more stable in finance. If my company fails, the people who are counting on me also fail.

T. Gauda: You have to have a very high risk tolerance, and we are traditionally risk averse. As it is, just being who we are is extremely risky.
The two key points are that a) simply being African American increases the level of risk in your life.  Logically, the principle of risk compensation would call for African Americans to take on less personal risk.  Layer in the socioeconomic effects of historical discrimination, and the magnitude of the effect would grow further.  B) Coming from a less-advantaged background, a potential African American entrepreneur might feel compelled to "play it safe," so that he or she would be in a better position to help the rest of the community.  The cost of failure is far higher for such an entrepreneur than for a wealthy Caucasian male.

Given these headwinds, it is all the more important that we encourage the minority entrepreneurs who take on these increased risks.

Another key passage tackles the issue of networks:
"I hear about bootstrapped rounds and angel rounds and friends-and-family rounds, and I just think to myself, Man! There are people who just know and are related to folks who can write $50,000 checks all around them! It's in their ecosystem."
As an investor, I take the stance that an entrepreneur ought to be able to be able to bring a product to market before raising money from professional investors, either by bootstrapping, or by raising a friends and family round.

But I'm guilty of unconscious bias in that filter--how can an entrepreneur bootstrap a company or raise money from friends and family if she comes from poverty and doesn't have any friends and family who can write a $50,000 check?

That being said, investing in pre-product startups tends to be a bad bet; I'd be hard-pressed to make money with that investment strategy.

Encouraging Investing In Minority Entrepreneurs: "Greed Is Good."

I believe the answer is to set up some kind of matching fund to encourage investing in underserved minority entrepreneurs; if my check were doubled or tripled by a foundation (and I got the equivalent equity to compensate for the increased risk), the financial incentives would encourage, rather than discourage investing in those entrepreneurs.  Investors would see investing in minority entrepreneurs as *less* risky, and minority entrepreneurs would see starting companies as *less* risky.

When it comes to getting people to change, I always bet on appealing to their sense of self-interest, not their sense of responsibility.  And the idea of using risk manipulation to solve a problem that's created by risk has a certain ironic appeal!

Now we just need someone to reach out to the appropriate funders to create this program....

3 comments:

ranndino said...

Very good points and a good idea how to fix this, but it shouldn't be limited by race. I'm as white as it gets, but my parents immigrated to this country in their 40s with about $600, so I'm in the same boat.

I've got a couple of interesting ideas & even the skills to design them myself, but taking the plunge is very scary because if it fails I & my family would be screwed. So for now I choose to work for other startups rather than start my own.

Chris said...

Great point on the challenges faced by the socioeconomically challenged, regardless of race. There should be programs to help those groups as well.

Foobarista said...

If you're from that sort of background (not necessarily minority, but lower middle class/blue collar), the consequences and work of recovery from failure are terrifying. You wonder if you'll be homeless, how you'll help your own family with their issues (they aren't rich and often need money themselves), and far from being supportive, they'll wonder why you're doing something stupid when you could just get a good job at Google or Facebook and get a big paycheck, which would put you in the family pantheon by itself.

Also, trying to raise money from them won't work since they either have none or have bad memories of Cousin X who invested in Crazy Idea Y and blew their money years ago.

If you're in this financial world, you're far more terrified with failure and further economic ruination than you are eager for success.

I learned early on the advantages of an upper-class upbringing by watching various founders and such around me. In addition to a better environment generally, there's a sense of "just do it" that is very in tune with Silicon Valley success, but is opposite to the way people on the economic margin approach life.