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The barriers to funding equality persist for Black women

Thalia Cherry
Thalia Cherry, founder of Cherry Co., at her pop-up shop in Hy-Vee Arena in Kansas City.

To start and scale their businesses, four founders work to overcome significant barriers to funding for African American women.

Gwendolyn and Debra Washington are sisters turned business partners who set out to open a Daylight Donuts location in south Kansas City in 2014. It wouldn’t be just any doughnut shop, but one with board games offering customers an inexpensive way to socialize and a release from tech-based entertainment.

The two, who both have backgrounds in banking management, felt opening a business would lay a financial foundation for younger family members. Like 64.4% of entrepreneurs, the Washingtons used their own savings to fund their new business.

But before they knew it, Debra Washington said they’d exhausted that reserve and needed additional funding to continue.

Yet, for African American female founders, research shows that the racial and gender wealth gap, in addition to negative bias and a lack of access to networks, creates significant barriers to funding.

Melissa Bradley, managing partner at 1863 Ventures based in Washington, D.C., said that bias in pattern recognition plays a role not only in starting a business, but in getting loans for that business down the road. She said that too often success looks like Facebook founder Mark Zuckerberg, not entrepreneurs of color, which highlights the importance of setting a precedent for favorable business outcomes within African American families.

The myths and inequities of funding

Firms started by Black women received only .0006% of VC funding by startups between 2009 and 2017.

Kauffman’s State of Access to Capital report found that at least 83% of entrepreneurs do not access bank loans or venture capital (VC) when starting or acquiring a business. In fact, according to the 2016 Annual Survey of Entrepreneurs, only 0.5% of entrepreneurs reported receiving VC funding to start their business. African American females receive a slim fraction of this already small pie. According to a report by digitalundivided’s Project Diane, firms started by Black women received only .0006% of VC funding raised by startups between 2009 and 2017.

Atlanta-based tech entrepreneur Farah Allen left a corporate career in IT management and consulting and developed The Labz, a cloud-based blockchain music creation and real-time collaboration platform that automates business processes for musicians. Launched in July 2017, she completed beta testing in April.

At the time, she didn’t know that quitting her job to work on The Labz full time disqualified her from receiving a bank loan. The first money Allen raised was from her mother, a funding path of personal or family savings that many entrepreneurs take according to the 2016 Annual Survey of Entrepreneurs. This allowed her to develop a product she could show others who were not comfortable investing without first seeing a product – a request made more often to women.

Allen then turned to venture capitalists for more funding – an approach that is well-publicized but is found to be literally unattainable for 99.5% of entrepreneurs. Although she focused on funds that said they were pre-revenue and seed stage, she couldn’t break through. She’s pretty sure her White, often male, competitors are receiving funding in earlier stages of development.

Some research suggests that only 2.2% of VC funding goes to all-female founding teams. Part of the reason for this is bias. Studies have found when pitching to VCs, women are more likely to be questioned about preventing losses or protecting their potential businesses against competition, whereas men are more likely to be asked about the potential for their businesses to grow.

“They want to see me making between 10 and how-much-thousand-dollars-a-month already. So, in comparison to someone who hasn’t even started, me – who built a half a million-dollar product with $60,000 – I’m still on the lower end of receiving funding because of whatever reason … I can only assume the difference between me and them…” Allen said, trailing off.

She thinks her background in IT management and consulting should put her at an advantage over less experienced peers in the tech industry, as should the team of 14 professionals she’s assembled, among them a Grammy-nominated songwriter who knows the ins and outs of the music business The Labz serves.

Farrah Allen
Farah Allen, founder of The Labz

“The whole team looks pristine, and I made sure of that because of the disparities with funding. I made sure I’m walking in the most extraordinary way. We’ve built the product, we have a pipeline, all these things just don’t seem to equivalate to funding where half of those things would get our male counterparts funding right away,” Allen said.

It was her personal network that eventually helped her raise $30,000. Another $20,000 came The Farm, an Atlanta-based accelerator startup program sponsored by Comcast NBCUniversal. Now, she’s working with Quake Capital, a seed- and early-stage venture capital fund and accelerator program based in Los Angeles, Austin, Texas, New York, and Seattle.

Bradley said the differences in who receives what capital is a complex issue. “Too often we say it’s racism or sexism, and that’s too simplified. Even where there is capital designated for people of color, it certainly does not have parity with the amount of dollars available in the larger pool,” she said.

Bradley’s research shows that in order for an entrepreneur of color to start a business, “particularly for women because there’s kind of a double penalty, the cost is $250,000 more than a White male peer. That’s both direct and indirect cost.”

This cost manifests itself in banks charging minority women a higher interest rate, and in less access to team-based accelerators, which guarantees cohorts minimum funding amounts as well as access to free or subsidized professional services. She said people of color, women in particular, often aren’t able to assemble a team in order to apply.

Allen said she benefited tremendously from the accelerator programs she’s gained access to, and from digitalundvided, a source of information and education, but not capital.

Who you know

Thalia Cherry owner of Cherry Co. in Kansas City, Missouri, comes from a family of entrepreneurs, and she thinks that has contributed to her success. She knew what to do from the get-go. “I think the most impactful resources really just come from the people who have been successful in business,” she said.

Growing up as one of eight children, she and all of her siblings graduated from college on sports scholarships. Cherry went to Bethany College in Lindsborg, Kansas, on both a volleyball and a softball scholarship.

Thalia Cherry
Thalia Cherry, owner of Cherry Co.

The idea to start a company to sell sports gear in 2012 felt like a natural outgrowth of the culture she’d already been steeped in. “The business, for me, was really an avenue and outlet to not only still be in a space that I loved, but an opportunity to actually be philanthropic and give back to the community that had given so much to me,” Cherry said.

Initially, Cherry Co. was funded with Cherry and her husband’s personal savings. She said it took three years to see big growth, but when it happened the business jumped 200%. Suddenly she had more distribution, more college projects and gear, and she was garnering bigger and more contracts. Her client retention rate is 95%, so she said a lot of the growth was from referrals. But, as the company scaled, contracting with major retailers like Target, she found that she needed additional funding.

This is the point when many Black women, and women in general, are unable to get the funding they need to scale. Her advantage was knowing where to go in Kansas City’s local entrepreneurial ecosystem. AltCap, which exists to increase the flow of capital to communities and businesses not adequately served by mainstream financial institutions, helped with the additional funding she needed to scale, and ScaleUp gave her a leg-up with more information.

In addition to the business acumen her family modeled, she said: “I think for me I was able to break those barriers a little bit more, because I had a different experience and worked in a different capacity before I started the business. I worked in the city manager’s office in Kansas City, so I interfaced with all levels of stakeholders. I learned a lot in that capacity that helped me in this.”

Falling through the funding gap

Despite both having jobs in finance, the Washington sisters felt very much at a disadvantage not having come from a family or community of entrepreneurs. Debra Washington currently works for the Internal Revenue Service, and Gwendolyn Washington will soon assume the position of CEO from her current role as consultant for a credit union. Neither quit working in order to start their business.

Debra and Gwendolyn Washington
Debra (left) and Gwendolyn Washington.

Their setup had seemed perfect: Daylight Donuts wasn’t a franchise, so there’d be no fees to start one; the Cerner Corporation was about to open a new campus nearby the location they’d chosen, so traffic would be brisk; they’d created a business plan complete with sales projections; they’d hired an attorney, an architect, and were working with leasing agents; they’d even saved a little money. But it wasn’t enough – they needed a bank loan.

“Even being a banker, we only see it from one side,” Debra Washington said. “We see people come in with a business plan, they’ve got some money. And we did all that, we did our business plan, we did all of it.”

But none of it was enough.

“We had banks that wouldn’t even look at it, that wouldn’t respond, then finally we exhausted all of our savings,” Gwendolyn Washington said.

And that was the end of their attempt to open a business.

The Washingtons chalk up the banks’ unwillingness to loan to them to the fact that small businesses are risky investments. “Nobody wants to take a chance on a startup unless you have 70% already in your bank account. They want to take as little risk as they can,” Gwendolyn Washington said.

Bradley said this reasoning isn’t incorrect, but other factors are most likely at work when an African American woman’s loan application is ignored or denied. Statistically, Black entrepreneurs are three times as likely to be turned down as their White peers in the same sector.

Many African Americans don’t bother applying for a bank loan at all, according to Bradley. “The fear of rejection is oftentimes a self-fulfilling prophecy.” In fact, research shows that African American entrepreneurs are more than twice as likely as White entrepreneurs to report needing additional financing to grow or expand their businesses but choose not to apply for funding.

Neither Washington has given up on the dream of owning her own business. Although their first venture didn’t get off the ground, they learned a lot through the experience. “What you lack is in the community of people of color is having a line of people who you already know who can teach you and support you,” Gwendolyn Washington said.

For the Washingtons, owning a business isn’t just about their success but creating generational wealth.

“We have a lot of nieces and nephews, and so for me it’s also about leaving something for family and teaching our nieces and nephews,” Debra Washington said. “In the community, if you don’t have any examples of that, then you never understand what it could be like to be in business.”