Less Talk, More Walk: The Need for Proactive Inclusion in Entrepreneurship

While the number of businesses owned by people of color in Michigan has increased over the last six years, large disparities in resources and representation still exist and the COVID-19 pandemic has exacerbated many of these obstacles. Systemic inequalities that affect minority-owned businesses cause operational challenges that are evident across all aspects of the small business and startup community. EntryPoint partners with organizations to deliver comprehensive research insights and implement effective data-driven programs that promote entrepreneurship across the Midwest. A large part of this research is analyzing gaps, obstacles and barriers to entry within the small business and startup community.

According to the 2020 MVCA Research Report EntryPoint developed for the Michigan Venture Capital Association, there are currently 144 venture-backed startup companies across Michigan. 13% of these startups are led by a CEO who is a person of color, compared to 5.6% of CEOs of Fortune 500 companies nationally. However, 39% of the U.S. population are people of color, showing that Michigan’s startup community still has large strides to make in order to become truly representative. Despite research that shows a significant correlation between a more diverse team and higher financial performance, startups led by people of color receive less venture capital funding on average than White-led startups. In 2019, 71 Michigan startups received over $2.1 billion from venture capital firms. Of that, $109.2 million was invested in 19 Michigan startup companies led by a CEO of color. This is just 5.2% of the total venture capital funding obtained by Michigan startups in last year. Given that 13% of Michigan startups are led by people of color, there is a clear disparity in venture capital funding for these individuals.

In Detroit, Michigan’s largest city, high school graduation rates and average household income have increased over the last six years while the number of people living in poverty has decreased. 79% of the residents of Detroit are Black, while across Michigan, the startup and venture capital communities are comprised of approximately 70% White men. Detroit is faced with the opportunity to take a proactive approach to maintaining its existing community as its high-tech economy grows. This is a challenge that many mature high-tech entrepreneurial ecosystems have failed to achieve and are now struggling to remediate. Over the last six years, Detroit has seen nearly a 5% decline in the Black population, while the White population has increased by 15%.

According to EntryPoint’s 2020 Detroit Entrepreneurial Ecosystem Report, there are currently 38 active venture-backed startups in Wayne County, and eight of them (21%) are led by someone who is a person of color. These companies have raised just 8% of the total venture capital raised by startups in the region in the last year. In order to preserve racial diversity within the city of Detroit, community leaders must ensure that existing residents are gaining access to the funding and economic opportunities of the emerging high-tech economy. In addition, the startup community needs to commit more strongly to inclusion by investing in a diverse range of businesses and providing the resources necessary to bring as many different voices to the table as possible.

Not only is there a lack of diversity and representation in the small business and startup community, but businesses owned by people of color have also been disproportionately affected by the current pandemic. For example, as explained in the Washtenaw County COVID-19 Business Impact Report, EntryPoint asked businesses to report how prepared they felt to operate during shelter-in-place guidelines. Businesses owned by people of color reported feeling lower levels of preparedness than did White-owned businesses. Correspondingly, 67% of businesses owned by people of color lost more than half of their revenue since February, compared to 59% of White-owned businesses. In addition, only 5% of businesses owned by people of color have seen their revenue stay the same or increase during the pandemic, compared to 12% of White-owned businesses.

Of the companies in Washtenaw County that applied for a loan (SBA or other source), those owned by people of color were denied at higher rates than any other segment of business analyzed. In addition, according to our research, White-owned businesses were approved for the Paycheck Protection Program Loan at higher rates than businesses owned by people of color. Of the companies that applied for a loan (SBA or other source), businesses owned by people of color were denied at higher rates than any other segment of business analyzed. As a result of loss in revenue and inability to obtain outside funding, many business owners of color in Washtenaw County have needed to reduce their spending, close their businesses, and reduce hours or lay off employees.

It is evident that now, more than ever, the nation must commit to building an equitable society that increases wealth and opportunity for people of color and other underrepresented communities. The small business and startup community must work towards building an equitable society in order to see growth.  Here are a few recommendations EntryPoint has received over the years that might be helpful:

1. Let’s all stop talking about “lowering the bar” as a method for building a more diverse team or investment portfolio. Focus on strategies to widen that homogenous pool so it can accommodate more business owners and talent rather than just lazily throwing up our hands and saying, “Well, I guess there’s no one out there, so the only way I can attract a broader network of people is by lowering the bar.”
2. Partner with organizations that support talent and businesses from underrepresented groups, such as Access, Build Institute, 4Degrees, Management Leadership Tomorrow, Jopwell, Code 2040, National Society of Black Engineers, Lesbians Who Tech, WeSolv, Noirefy, and Grace Hopper Conference, io, Out & Equal, PowerToFly,Basta, and Black Girl Group.
3. Increase the diversity of your referral pool by explicitly encouraging people in your current network to refer companies led by someone from an underrepresented group or people from an underrepresented group. Referral hiring can lead to a homogenous candidate pool, but encouraging your network to refer amazing founders from underrepresented groups can help. Someone who is similar to you might be the first person that pops into your mind, but if you ask your network if they know of any promising companies with diverse founders that are looking for investment, top-tier talent that are looking for a position, places you can support that are owned by people who are underrepresented, etc., then chances are, most people in your network could quickly think of at least one person or business.
4. Businesses can perform an audit of their digital presence to ensure they are communicating an inclusive culture. Yes, you do have to navigate this one authentically, but inclusive language and photos say a lot about your organization. Attracting interest from companies led by an underrepresented group is easier when you are an organization that looks like one they could see themselves working with. If your website showcases your all-White, all-male team and your all-White, male-led portfolio companies, then you most likely won’t appear like a firm that would be a good partner to women or people of color.
5. You absolutely need to have diverse leadership and a diverse board.

Grow your inclusion skills and ability to work through differences. Let’s say you follow all of the steps above and identify some great founders who belong to underrepresented groups. The diversity part is done, but now the inclusion part begins. EntryPoint board members, Trey Boynton, Global Lead, Inclusion & Collaboration Strategy & Alignment at Cisco, offered EntryPoint these sage words of advice years ago:

Read, attend conferences, talk with diversity and inclusion leaders, and talk with colleagues who do it well. Then, apply your own spin on inclusion that will help you grow authentic supportive relationships with folks who are different than you. Investors partner with startup companies to grow something profitable and awesome, but inclusive investors just happen to change the system while doing it.

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About EntryPoint
EntryPoint is a nonprofit research institution that aims to promote entrepreneurship across the Midwest. The organization believes that the best research takes a holistic approach to data acquisition and analysis, and as such, seeks to build meaningful partnerships with corporations, community foundations, entrepreneurial support organizations, and other groups. Working in tandem with these partners, EntryPoint develops comprehensive research reports that deliver insights on strengths and challenges facing companies, communities, and the broader region. Research findings are used to design and implement effective programs to promote entrepreneurship by fostering an inclusive culture, expanding networks, and facilitating education and advocacy. EntryPoint is a registered 501(c)(3) organization. To learn more, visit www.entrypointmi.com.