Media Miss Coverage of Lagging Diversity in Risk Capital Industry

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Author: 
Mike Green
March 9, 2012

VC Media Diversity Bubbles

Media coverage of hot-button issues on jobs and the U.S. economy inextricably links African-Americans and Hispanic-Americans to financial misery and economic despair. Although both groups suffer disproportionately high chronic unemployment rates and financial distress, such a consistent, unbalanced media narrative illuminates minorities under the single spotlight of economic misfortune.

On the other side of the economic equation, nearly all net new jobs in America since 1980 are due to fast-growing young companies, according to a report in July 2010 by the Kauffman Foundation in Kansas City, Mo.

President Barack Obama’s Council on Jobs and Competitiveness is investing heavily in fostering innovation and startup companies, many of which are fueled by the risk capital industry of angel investors and venture capitalists. In 2011, for example venture capitalists, apart from angels, invested more than $30 billion in 3,051 companies, according to a report by CBInsights, based in New York.

The reports don’t include diversity data, and journalists often fail to inquire about it. Because of this lapse, determining whether people of color are participating in these job-producing economic processes is difficult.

“If media don’t talk about X, then X doesn’t exist, does it?” Harry Lin, an executive-in-residence at Idealab in Pasadena, Calif., said via e-mail. “So if media don’t cover diversity issues in venture capital, then it must not be an issue or a problem or a challenge. But that’s not the reality on the ground.”

What people in the industry say, and media fail to report, is that black and Hispanic-Americans are seldom portrayed in media as private-sector job creators, high-growth entrepreneurs, investors and contributors to the nation’s economic vitality and global competitiveness.

Minorities are actually a very small part of the risk capital space, but they are making an impact. Growth of diversity in the space, however, is difficult when media fail to inform their audiences regularly of challenges faced by minorities competing in the space and of opportunities available to attract more to participate.

A census report released in November 2011 by the National Venture Capital Association in Arlington, Va., offers a telling statistic: Blacks and Hispanics represent 2 percent of the venture capital landscape. The NVCA touts an increase in ethnic diversity in its press release, stating that 87 percent of respondents in 2011 were “Caucasian,” compared with 88 percent in 2008.

Several media outlets robotically published short articles based on data in the report. In a 356-word article, The New York Times included this quote from Emily Mendell, NVCA’s vice president of communications: “There is no real structure in place to promote diversity programs.”

Brandon Sawyer, a research editor for OregonBusiness magazine in Portland believes that media should play a role in highlighting lack of diversity in the industry, which is key to fairness in funding distribution.

“Pressure from media exposing a lack of diversity, if there is one, would be a good influence,” he said via email. “It would help if there was a study conducted by a media group or respected organization that media could report on. I feel it is important that risk capital firms and lenders are diverse, so there is less bias in the way they allocate funds.”

DiversityInc magazine lists links to media that published stories on the NVCA census. No media reports delved into the issue comprehensively. Given disparities of power and wealth nationally along racial fault lines, media must shed light on lack of diversity in risk capital, a principal power behind job growth and direction and geography of that growth.

In an email response, Lin offered a strategic approach:

“I think there should be two kinds of ongoing coverage: ‘example stories’ and ‘issue stories.’ Example stories are examples of diversity . . . people of color at venture capital firms, high-risk entrepreneurs who are members of minority groups, etc. These stories shouldn't be held up as ‘model minority’ success stories, but rather dimensional accounts of challenges, obstacles, successes and strategies. The issue stories should directly address the issue of diversity in this space. It’s a real issue, it’s not going away tomorrow, and so it warrants direct topic coverage.”

CNN’s controversial documentary, “Black in America: New Promised Land, Silicon Valley,” unleashed a flood of discussion and debate in November 2011 on underrepresentation of black Americans in high-tech entrepreneurship in a region famous worldwide for its culture of innovation.

At the core of the controversy was this quote from Michael Arrington, TechCrunch founder and startup investor who left the company in September 2011: “I don’t know a single black CEO or entrepreneur.”

Although Arrington later revised his on-camera comment to CNN’s Soledad O’Brien, his point echoed across America. It is a point made by thousands of investors, CEOs and corporate executives. The dearth of black and Hispanic Americans in Silicon Valley, the nation’s leading innovation hub, has long been a virtual secret.

Arrington’s perch atop a media platform well known for covering technology startups and investments provided him a far better vision than that of his investor peers. His public declaration ignited a firestorm and focused a media spotlight on high-tech entrepreneurship and risk capital investing — areas critical to job growth, wealth creation and the nation’s economic health.

Jaymes Winters is CEO of Blue Leopard Capital LLC in Portland, Ore. He was founder and CEO of United Energy, the largest African American-owned business on the West Coast, with nearly $100 million in revenue and 1,000 employees. Winters is adamant about the need for media to spotlight the industry, but he sees a systemic silence.

“It’s definitely something the mainstream media is uncomfortable talking about,” Winters wrote in an email. “But we can't just leave the blame there. Elected officials and pension fund managers are all uncomfortable talking about it. It’s not the risk, per se, because businesses owned and controlled by diverse groups succeed just as well as the majority when adequately capitalized.

“It’s the perception of control. For whatever reason, it’s tough for all those concerned to come to grips with one of us making large investment decisions, even when we provide a substantial amount of that money through contributions to pension funds and insurance annuities.”

Rod Robinson is founder and CEO of ConnXus.com, the venture-backed company in Mason, Ohio. As an African-American entrepreneur in the Internet software space, which received the largest amount of venture capital investments in 2011 among all sectors, he is concerned about the dearth of diversity.

“In my experience as a minority tech entrepreneur, the risk capital space is not very diverse at all,” Robinson wrote in an email. “I recently launched a revolutionary new online service/software venture, and 0 percent of my angel investments came from minority individuals.”

Robinson says the CNN program was the first major media focus he has seen on lack of diversity among tech entrepreneurs.

“The CNN documentary was a great first step, but it would also be great to highlight minority startup ventures that are successfully securing capital and the sources of that funding,” he wrote. “While I am pleased that I am succeeding in my quest for funding my new venture, I would love to see more diversity among my investor group. I feel that it’s important to highlight the issue, but I also think it’s important to present potential solutions.”

Marc C. Mathis is founder and managing director of Mataron Development LLC in Wilmington, Del., and partners with Angel Venture Forum in Baltimore, which describes itself as a group of angel investors, mentors, entrepreneurs and professionals with a shared vision to encourage the growth of emerging business. He sees a seismic shift on the horizon that requires media attention.

“Diversity in risk capital is definitely an essential topic [on] which mainstream media need to have more of a direct focus due to the shifting demographics in minority entrepreneurship,” Mathis wrote in an email. “Minority groups have been growing for some time as a percentage of Americans and are on the verge of becoming the majority of the population.

“Major ethnic minority groups, such as African Americans, Hispanic Americans, Asian Americans and Native Americans will account for 40 percent of the U.S. population by 2050, according to projections provided by the U.S. Census Bureau. This demographic shift gives full warning to the business sector that both its future customer base, as well as its future employee base, will increasingly come from ethnic minority groups.”

Without greater media attention, that warning will come in tiny waves rather than a tsunami of stories. Mathis sees specific ways in which media can highlight diversity issues in the risk capital realm.

“Very limited mainstream media exists on the diversity of risk capital,” he wrote via email. “Kauffman has produced a series of studies by Timothy Bates and William Bradford on Minorities and Venture capital, but this obviously is not enough. Mainstream media can provide more in-depth articles, studies and literature which focuses on diversity issues in risk capital and solutions to these issues mainly via educational resources (access to angel and venture capital resources).

“Lack of media coverage on the diversity of venture capital resources will continue to limit minority entrepreneurs’ access to risk capital, hence continuing to contribute to the stagnant growth of MBEs in comparison to non-minority entrepreneurs in key high growth spaces such as tech and social media.”

Media seeking opportunities to offer fresh, relevant and important content that attracts a growing audience should consider partnering with organizations dedicated to compiling research data and providing direct resources needed to empower minorities toward economic solutions. Fortune magazine partnered with the Initiative for a Competitive Inner City (ICIC), a nonprofit research and strategy organization in Boston, to publish Fortune’s list of the 100 Fastest Growing Inner City Businesses in 2011 and related material on the CNNMoney website.

Mary Kay Leonard is president and CEO of ICIC, founded in 1994 by Michael Porter, a Harvard Business School professor. ICIC is the leading authority on U.S. inner-city economies and thriving businesses.

“It is important to talk about both the need for risk capital to help growing urban businesses and also the opportunity market that these businesses offer to capital providers,” Leonard wrote via email. “Oftentimes, risk equity providers aren’t aware of many of the growing minority-owned urban businesses, which could grow at a faster rate if they were matched with risk equity.

“Matching up these two groups is a win-win situation all around. Spreading these businesses’ success stories through media could help facilitate that.”

Newsrooms might consider incorporating a beat reporter in addition to establishing partnerships with organizations like ICIC to produce stories of a dynamic economic landscape to which minorities contribute strongly. Organizations like ICIC thrive in virtual obscurity. Yet their research is informative and empowering.

“Private equity firms own companies employing approximately one out of every 10 Americans and are hugely important as America’s biggest employers,” Leonard wrote. “In addition, companies that receive investment backing achieve 12 to 16 percent higher growth rates per year.”

 “There is a lack of capital availability in America’s inner cities,” she wrote. “In fact, 71 percent of inner city businesses are dramatically undercapitalized, having only a quarter of the capital needed to compete in their industries. These undercapitalized firms are 50 percent more likely to be headed by a minority business owner.

“To address this capital gap, ICIC partnered with Bank of America to create the Inner City Capital Connections (ICCC) program. The ICCC program brings entrepreneurs and capital providers together, helping inner city companies raise money and create jobs.

“Since 2005, the ICCC participating companies (76 percent minority-owned) have raised $406 million in capital, and of that $154 million has been private equity.

“These participating ICCC companies have gone on to create or help create 2,790 jobs. This number means an amazing impact on their local communities and the economy. These success stories prove that growing inner city businesses, if given access to capital, can generate jobs and wealth to transform America’s urban cores.”

In coverage of jobs and the economy, media reports highlighting minorities in the high-growth entrepreneurship space can help portray them fairly as disproportionate sufferers in an economic recession and underrepresented contributors to its recovery.

Media can help to empower the public with knowledge of how to foster greater diversity in the risk capital space, increased investing in minority entrepreneurs and creation of jobs by a more diverse private sector that helps to strengthen the overall economy. Without adequate media coverage of diversity issues, the risk capital industry may remain silently ignorant of the problem.

Mike Green is an award-winning journalist, media innovator, public speaker, entrepreneur and co-founder of The America21 Project. Reach him at mike@blackinnovation.org.

Comments

An Entrepreneurs view from inside...

 

I recently attended a large venture capital conference in New York to pitch my clean tech startup (gravitational systems engineering), and I was as usual the only, or at least one of the few, black presenters.  This was not shocking because as a veteran of these conferences this was not unusual, albeit discouraging.  I say discouraging because of the commentary at the venture capital forums after the pitches.   Over a dozen to VC executives took questions from a very competent facilitator. What interested me the most was the question, "of the hundreds of business plans that are presented to you each week, how do you decide who actually gets even a preliminary interview, and therefore serious consideration?"   

The answers varied but one fundamental feature of each was that those entrepreneurs who get serious consideration, which means that their business plan was even read, was based upon an "old boy network"! This network consists of referrals from old college friends, lawyers, one VC said they took meetings with "someone my dentist asked me to speak with".   

This is discouraging because all too often African American entrepreneurs are and have traditionally been frozen out of these old boy networks.  We have been frozen out by historic policies at the major educational institutions, large law firms, and numerous pillars of American society.  Frozen out by not having access to legacy admissions at the schools like Harvard and Yale.  Frozen out by having families who were prevented from thriving by decades of explicit and implicit discrimination, so that our families don't have the resources to either afford "old boy network" tuition, or to invest in our businesses.

I realize a couple of things, first I should not complain for myself or my company, because we are regularly asked to participate in these conferences, and we have been able to interest, although not yet secure, venture capital.  Yet, I feel that entrepreneurs should be aware that most of what you believe about the better mousetrap is a lie.  You can send out a thousand copies of your business plan, to VCs who claim to be interested specifically in your industry, and literally none of them may actually be read by a VC. 

One of the VCs on the panel suggested that you hire a well connected lawyer to pitch your program.  Another, said you should get members of the old boy network to push your project.  The problem is that if you are a serious scientist, no matter what your ethnic background, you have most likely spent your time and money building, testing and perfecting your idea.

I knew that the startup industry was corrupt on its face, with countless scammers wasting people’s time with phony debt, and pre-qualifications schemes.  As well as countless groups who invite you to pay often significant fees to present your ideas to groups of other hopeful entrepreneurs, or to a group of superior VC's who will only listen to you if you have been recommended by a member of their Old Boy Network.

In short the startup industry in America is leaving a lot of good ideas on the table, and in many cases wasting their investors trust.  Serious people with good ideas are being drained by the startup vampires, and ignored by the VC royalty.   

Perhaps they could take a page from the Canadian football teams, who because they could not compete for players economically, started haunting NFL training camps, and picking up the last few players who were cut from the roster.  As well those with investment capital might make note of the fact that many of the most famous athletes were not selected until well beyond round 50 of the industry drafts.

Just as the landed aristocracy stifled and misdirect the growth of European societies, into slavery and war instead of human dignity and innovation.  The modern Ivy League Old Boy Networks are allowing the developing economies to slowly overtake America through hubris.

Gare Henderson,

Director of Applied R&D

Gravitational Systems Engineering, Inc.

 

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