How Black Women-Led VC Firms Are Still Securing Millions

Key Concepts

• Venture Capital (VC): A form of private equity financing that is provided by venture capital firms or funds to startups and small businesses with perceived long-term growth potential.
• Scalability: The ability of a business to grow and handle an increasing amount of work or customers without a proportional increase in resources.
• Revenue: The income generated from normal business operations, usually from the sale of goods and services to customers.
• Series A, B, C Funding: Stages of venture capital funding, typically following pre-seed and seed rounds, indicating increasing maturity and growth of a company.
• Exit Strategy: A plan for how investors will realize a return on their investment, such as through an Initial Public Offering (IPO) or acquisition.
• Social Impact Investing: Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
• Financial Inclusion: The provision of affordable and useful financial products and services to all individuals and businesses, especially those underserved or excluded.
• Systems Change: Efforts to address the root causes of social and environmental problems by transforming underlying structures, policies, and norms.
• Sustainable Communities: Communities that are environmentally, economically, and socially healthy and resilient.
• Non-dilutive Capital: Funding that does not require giving up equity in the company.
• Dilutive Capital: Funding that requires giving up equity in the company.
• CDFI (Community Development Financial Institution): A private financial institution with a primary mission to promote community development.
• Entrepreneurship Through Acquisition (ETA): A model where individuals acquire existing businesses rather than starting new ones from scratch.
• ESOP (Employee Stock Ownership Plan): A retirement plan that allows employees to own shares in the company they work for.
• TAM (Total Addressable Market): The total market demand for a product or service.
• LPs (Limited Partners): Investors in a private equity or venture capital fund.

Venture Capital: When, Why, and How to Seek It

This panel discussion, featuring Melissa Bradley (GP of BEA Venture Fund, visionary behind 1863 and New Majority Ventures) and Hannah Bronman (creator, investor, activist), moderated by Leanne Jackson (Senior Law Editor, Forbes), delves into the intricacies of venture capital funding for businesses.

Understanding Venture Capital and Investor Expectations

• VC is Not for Everyone: Both panelists emphasize that venture capital is not a suitable funding source for all businesses. It is specifically for companies with high growth potential and the capacity for significant returns.
• Scalability is Key: Venture capitalists seek businesses that are "highly scalable" and can achieve "7 to 10x or more" returns. This means the business must be able to grow rapidly and capture significant market share.
• Strategic Partnership, Not Just Capital: VCs aim to be "strategic partners," actively involved in aggressively scaling growth. They are more than just a "check" and offer expertise, operational support, access to distribution channels, and cultural fluency.
• The "On Your Ass" Factor: Melissa Bradley humorously but pointedly states that if a founder doesn't want to be held accountable and questioned quarterly about progress, VC funding is not for them. VC is "not patient capital."
• The Billion-Dollar Company Goal: Founders seeking VC must aspire to build "billion-dollar companies" to provide the necessary returns for investors within a 3-5 year timeframe. Businesses aiming for a more modest $7 million in annual revenue are better suited for debt financing or self-financing.
• Coachability and Board Seats: BEA Venture Fund, for instance, "does not invest without a board seat," highlighting the importance of founders being "coachable and want advice."

What VCs Look For in Businesses

• Financials and Books:
  • Revenue Thresholds: Contour Capital focuses on Series A level companies with revenues between $5 million and $20 million.
  • Profitability and Margins: Founders need to understand their "margins and the road to profitability" and whether their business model is viable.
  • Projections and Exit Strategies: VCs require founders to have clear 5-7 year projections and a defined understanding of "exit strategies" to ensure a return on investment.
• Founder Qualities and Preparation:
  • Deep Business Knowledge: Founders must "know the damn business you want to build" and the sector.
  • Customer Understanding: It's crucial to understand customers beyond just those who "look like us" to ensure broader market appeal and scalability.
  • Data-Driven Decisions: Founders need to be able to make decisions based on presented information and demonstrate readiness, rather than requiring multiple follow-up conversations.
  • Confidence and Courage: A level of confidence and courage is essential.
  • Financial Acumen: Strong financial understanding is a must.
  • Scale Strategy: A clear strategy for customer acquisition and business viability is required.
  • Fund Research: Founders must research the specific niche and investment focus of the funds they approach.
  • AI Business Plans: Melissa Bradley expressed a strong aversion to AI-generated business plans, stating she would "throw it away."

Social Impact Investing and Minority/Women-Owned Funds

• Closing the Wealth Gap: BEA Venture Fund's vision is to "close the wealth gap" by investing in financial inclusion, health and wellness, systems change, and sustainable communities.
• Broader Impact: Many minority and women-owned funds look at the "broader way that they can impact the communities and help society."
• POV as an Edge: Hannah Bronman highlights that her perspective as an investor focused on consumer wellness and digital health, particularly women's health (a "massively underfunded" area), is her "edge."
• Underrepresentation in VC: Less than 3% of venture funds are run by women, and less than 1% by women of color. This underrepresentation means VCs may miss opportunities to invest in solutions that impact specific communities.
• Research on Women Investors: Research suggests women are "better investors than men" due to a "different risk profile" and a "broader spectrum" in comparative analysis.
• Challenges for Black Businesses: It costs a black founder at least $4 million more to start the same business as their white peer. Despite this, research indicates black businesses can have "outsized returns" when valuations are recalibrated.
• Investor Backlash: Funds focused on specific communities, like black businesses, can face backlash from their own investors, being asked to "find somebody else."
• The "New Majority": Melissa Bradley asserts that black people, particularly black women, are the "fastest growing segments of founders" and the "new majority," a fact that can be unsettling to some in the industry.

Alternative Financing Options and Funding Stages

• What to Avoid: Panelists strongly advise against borrowing against homes or pulling out 401(k)s, emphasizing that "there is no nobility in losing the time value of that money."
• Recommended Alternatives:
  • Savings: Maintaining personal savings is crucial.
  • Friends and Family: Demonstrating community support through initial funding.
  • Crowdfunding: Utilizing platforms for non-dilutive or dilutive capital.
  • Financial Institutions: Exploring options with banks and CDFIs.
• VC Funding Stages:
  • Pre-Seed: Beyond a napkin idea, requiring market validation but no revenue generation.
  • Seed: Some work done, with initial revenue demonstrating a "proof point" and a "signal effect" that customers are willing to pay.
  • Series A: Early growth capital, with product-market fit, potential retail presence, distribution, and revenue generation, aiming for the next stage of growth.
  • Series B: Further growth and scaling.
  • Extensions/Bridge Rounds: Capital to reach metrics for the next funding round.
  • Series C and Beyond: Leading towards exits.

Exit Strategies and Wealth Creation

• Traditional Exits: IPOs and acquisitions are common.
• Entrepreneurship Through Acquisition (ETA): A growing model where individuals acquire existing businesses, particularly relevant for those with backgrounds that may not lend themselves to traditional startup creation. Resources like Duke University's center on ETA are mentioned.
• Apis and Heritage: A model focused on acquiring businesses run by white individuals with predominantly black employee bases and converting them into ESOPs to build community wealth.
• Joint Ventures: Collaborating with others who have similar ideas can be a powerful strategy, especially in saturated markets like beauty products. Entrepreneurship is viewed as a "team sport."

Navigating the VC Landscape and Final Thoughts

• Opaqueness of the Industry: The VC industry is described as "probably the most opaque industry I've ever come across."
• Hurdles and Resilience: Despite the challenges, the panelists acknowledge the resilience and ability of Black founders to overcome hurdles.
• Positive Outlook: The discussion concludes with an emphasis on the growing influence and potential of Black founders as the "new majority."

Notable Quotes:

• "If you want me on your ass, then you can come get venture capital. If you don't want me on your ass asking you every quarter, what have you done and why have you not? Then don't come talk to me." - Melissa Bradley
• "Venture capital is not patient capital." - Melissa Bradley
• "We are way more than a check. You were talking to serial founders. I've had two exits. I'm building another tech company. I actually am more valuable than the check because I understand how to get you where you want to be." - Melissa Bradley
• "Know the damn business you want to build. Um, and not via AI. If I see one more AI business plan, I'm going to throw it away." - Melissa Bradley
• "I am not the minority. I am the new majority and that scares the out of people." - Melissa Bradley

Resources Mentioned:

• Contour Capital: Focuses on consumer wellness and digital health, investing at Series A.
• BEA Venture Fund: Invests in financial inclusion, health and wellness, systems change, and sustainable communities, aiming to close the wealth gap.
• 1863 and New Majority Ventures: Initiatives by Melissa Bradley.
• Duke University Center on Entrepreneurship Through Acquisition: A resource for ETA.
• Apis and Heritage (Phil Reeves): Focuses on acquiring businesses and turning them into ESOPs.

Synthesis/Conclusion

The panel effectively demystifies venture capital, highlighting that it is a high-stakes, high-growth financing tool best suited for businesses with significant scalability and a clear path to substantial returns. Founders must be prepared, data-driven, and willing to accept rigorous oversight. The discussion also sheds light on the unique challenges and opportunities faced by minority and women-owned funds and founders, emphasizing the importance of diverse perspectives in driving innovation and addressing societal needs. While acknowledging the systemic hurdles, the overarching message is one of resilience, strategic thinking, and the growing power of underrepresented founders in shaping the future of business. Alternative financing options are presented as viable and often preferable for businesses not aligned with the VC model.