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July 11, 2018 in United States

How to Support Diverse Founders in Your City: Focus on Social Capital as Well as Financial Capital

This week, hundreds of local leaders supporting entrepreneurship will come together in Kansas City to talk about the transformative power of entrepreneurship and how it can be used to address critical community challenges.

The Kauffman Foundation’s ESHIP Summit will help these leaders establish best practices in entrepreneur support, share unique insights into local communities, and bolster an active and engaged national entrepreneurial ecosystem.They’ll discuss and develop strategies for the entrepreneurs of the future—a future we believe will include companies founded  by a more diverse set of founders, who today are not represented in the allocation of early stage capital (something we’ve written about extensively). We’re certainly not the only ones who are betting on this futurean increasing number of capital and funds are focused on supporting companies founded by women, Latinx, and African Americans, including the most recent announcement from SheaMoisture CEO, Richelieu Dennis on the $100M New Voices Fund for women of color. And yet, we also know that significant barriers remain for founders from these underrepresented backgroundsstarting with access to social capital, or the networks that are needed at the earliest stages to help young businesses connect to critical mentorship, and ultimately sources of financial capital.  

Helping founders build social capital at the earliest stages of company development was the impetus for the creation of  VC Pathways, a pilot program we created in partnership with UBS to train and support African American, Latinx, and female founders starting in their own communities, the place where these important networks first take shape. Over the course of the first half of 2018 we ran three three-month initiatives in Philadelphia, Chicago, and Atlanta, partnering with local entrepreneur support organizations, to test the hypothesis that diverse founders will benefit from access to social networks and introductions to connected individuals in their hometowns that they likely otherwise would not have met.

Later this month, we’ll release a report with in depth insights and initial results based on our work with 30 startups and 202 mentors in all three cities. But as policymakers, economic development leaders, ecosystem quarterbacks, and business leaders gather in Kansas City this week, we wanted to share a preview of some of the key lessons we learned through VC Pathways, with the hopes that these leaders will be inspired to do more to support seed-stage, diverse founders in their city.

Lesson 1: Build social capital for entrepreneursearly and often.

“A lot of the problem for underrepresented founders starts with the fact that they’re not in the right social networks. If I played lacrosse with your son in college, then I have a way in. If not, then I’m just another stranger knocking on your door.” - Margaret Bradley, Director of Investment Partnerships, Ben Franklin Technology Partners

Angel investors—a common source of early stage financing—fund 70,000 companies a year and have higher “local loyalty” than other investors. This means they invest in the state where they are located 66% of the time. That’s great, if you know a wealthy angel.

But what if you don’t know someone who can invest? The origins of this issue can be found at the root of social divides within cities across America, such as Philadelphia. Entrepreneur Shantanu Sharma, co-founder of STEM Lending, who participated in the VC Pathways Philadelphia cohort, can speak to these dynamics:

“As a startup who’s not in Silicon Valley, one of the biggest challenges is connecting with the right people. At the dinner we were introduced to a mentor who worked literally one block from us—we’re at 1635 Market Street, he’s at 1735 Market Street, literally the next building. But just because he was one building over doesn’t mean we would have been able to get introduced to him without someone making the connection.”

VC Pathways made these two disparate networks collide. Local investors and mentors were individually matched with each company to track their progress and provide insight/connections. Additionally, we hosted a series of dinners, where founders and angel investors were able to connect in a personalized setting. This resulted in introductions and conversations that can pave the way for a stronger foundation of social capital.

Lesson 2: Create a common language for investors and entrepreneurs

“VIRAL reminds me of that Facebook meme from a few years backone panel shows how your friends see you, another panel shows how you see yourself, and they’re entirely different. You might think you’re a 5. But an investor who looks at deals every day will tell you to your face that you’re a 2.” - Joey Womack, Founder, Goodie Nation

The VC Pathways program, together with UBS, and local community partners, utilized Village Capital’s VIRAL Pathway to guide the conversations between entrepreneurs and investors.

VIRAL, short for “Venture Investment-Readiness and Awareness Levels,”  is a rubric to help entrepreneurs and investors use the same language when it comes to defining key milestones across a business that investors typically look for at various stages and sizes of investment. In addition to providing entrepreneurs with clarity on what they should do next, entrepreneurs found the tool useful as a way to quickly explain to investors what stage they think their business has reached.

As Joey Womack, told us: “The entrepreneurs had never seen things broken down like this. In the past, they never knew why they were getting turned down, and, more importantly how to correct it.”

We also learned that it is important to facilitate repeat interactions so that entrepreneurs can show how they respond to feedback. When an investor evaluates a company for Series B or Series C funding, they have pages of data on customers, traction, and overall progress. An early-stage investor, on the other hand, is essentially taking a bet on the founder and their ability to execute on their vision. We organized VC Pathways to feature multiple interactions between entrepreneurs and investors, over time. Founders met with investors and other mentors on the first night of the program, and then again several weeks later. This allows investors to track the progress companies make through the program, screening the startup’s ability to meet intended goals and rise to the occasion of challenges they experience early-on.

Lesson 3: Empower local entrepreneur support organizations to create meaningful connections for entrepreneurs in their communities.

“Local partners are the backbone of this initiative—their extensive local networks, and deep understanding of the pulse of their communities was critical to enabling these entrepreneurs to make meaningful connections with new mentors, and potential future investors.” - Ebony Pope

According to the Kauffman Enabling Entrepreneurial Ecosystems report, “The ecosystem metaphor helps remind those planning interventions that entrepreneurs and members of entrepreneurial communities are not potted plants: they do not conform to fixed categories, and they do not remain still.”

We intentionally structured the program to empower local entrepreneur support organizations (ESOs) in each city to play a key role in designing and structuring the workshops, and most importantly, activating their local networks, given their knowledge of the dynamic nature of these respective environments. These local partners were:

In each case, the organizations helped select entrepreneurs, gather mentors, and tailor engagements to the needs of the entrepreneurs who were selected. This resulted in more tailored and locally-suited programs than we could have created on our own—and also a more diverse cohort than we would have been able to find without the support of local leaders.

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