Recently early-stage venture capital (VC) has been showering down on Black VCs and on Black entrepreneurs. The investor and corporate community cannot seem to get enough of the black VC funds starting up. Is the corporate interest a token, temporary, response to the demands for accountability? Or are the corporations expecting financial returns from funding these new VC funds, and will they succeed?
The key question for the Black VCs is whether they will suffer the same fate as the MESBICs.
The fate of the MESBICs
MESBICs were a group of VCs offering VC to minority entrepreneurs. Contrary to the myth about the shortage of VC, MESBICs actually failed.
After the federal government institutionalized VC by starting the Small Business Investment Company (SBIC) program, many realized that the program was not working for minority entrepreneurs. The Minority Enterprise Small Business Investment Corporation (MESBIC) program was subsequently started with hopes of offering VC to minority ventures. 4 MESBICs (out of more than 150) had a good track record. The rest did not and the program was terminated.
What can we learn from MESBICs to avoid repeating the mistakes of the past? Here’s an important lesson: The best ventures have options. Due to the relative inexperience and lack of an attractive track record of most MESBICs, high-potential minority ventures often sought funding from the highest-ranked VC funds that were “white” and not from MESBICs.
In another program, the Department of Health and Human Services offered capital to community development corporations (CDCs) for minority venture development starting in the 1970s. Many of the ventures failed because the CDCs did not have the right skills.
Will this group of Black VCs suffer the same fate?
There is one key reason why this program may not suffer the same fate that befell MESBICs. The new funding structure seems to borrow from the successful VC limited partnership model rather than the failed MESBIC model. MESBICs had to live with government regulations. The new funds only need to satisfy private investors, and the hope is that these private investors are doing their due diligence to pick the right funds.
A key reason why this group may suffer the same fate, and I would like to be proven wrong, is that this model seems to be hoping that the best Black entrepreneurs with potential home runs will seek funding from these new VCs. And that these new VCs know how to identify potential home runs and successfully build them. And have profitable exits. Is this a reasonable hope?
Early-stage VCs funds need home runs. VCs fund 100 out of 100,000 ventures, 80 fail, and only one is a home run. Early-stage VC funds are mediocre or fail if they don’t have home runs. Since the Black VCs are financing from a smaller, more narrowly defined population, will they have as many home runs, or will they have more failures (at least in the early years)?
Before Aha, no one can see potential. That is why more than 10 VCs rejected Steve Jobs and Google. VCs fund ventures after Aha, i.e., after potential is evident and risk is reduced. Will the Black VCs have to finance Black entrepreneurs before Aha to get an edge? And will they have to help Black entrepreneurs find the right opportunity-strategy combination to take off before Aha – when no one has been able to predict the right opportunity-strategy combination for success? Otherwise, what value are they adding?
Most importantly, there is nothing to prevent the “white” VCs from cherry-picking the best of the Black ventures and leaving the rest for the Black VCs. This is what happened to the MESBICs. Some minority entrepreneurs who were eligible for “cheaper” MESBIC funding sought funding from the mainstream VCs due to their better track record of building unicorns.
If you are a Black venture with proven unicorn potential, will you seek funding from a small Black VC fund with limited amounts to invest and without a track record? And would you be open to ceding control over the direction of your venture to the VC with a limited track record? Or will you seek funding from the best VCs who are interested in you, and can enhance your odds of success, even if these VCs may not be black? The answers will determine the fate of the Black VCs.
MY TAKE: Many people forget a simple truth about VC: Seeding is easy. Harvesting is tough. Giving money is easy. Making money is hard. There are very few unicorns, and even fewer VCs who get to invest in unicorns. Without unicorns, it is tough for early-stage VCs to succeed. The key question for Black VCs – will they invest in unicorns? And the answer will depend on the value they are adding and for whom? Capital alone is not enough. After Aha, the top-ranked (white) VCs will be more attractive to the best Black entrepreneurs. Black VCs will have to do what even the most successful VCs have not been able to do – invest before Aha, help entrepreneurs find the best opportunity-strategy combination, help to transform startup ideas into unicorn ventures, and reduce risk. Otherwise, these Black VCs, and their guilt-ridden investors, will repeat history.