Black People and Venture Capital

I recently gave a talk at the 2015 National Black MBA Association Washington DC Chapter (NBMBAA-DC) Entrepreneurship Expo. My talk, titled “Black People and Venture Capital” available below.

I started with a discussion of the key financial institution in the country, the Federal Reserve, which controls the allocation of capital via monetary policy, the tools used to control the supply of money. The Fed is located at 20th Street and Constitution Avenue N.W. and I encouraged DC entrepreneurs to visit the institution, since the Fed directly impacts the ability of small businesses to get capital.

I also encouraged Black businesses in DC to use the recently established Offices of Minority and Women Inclusion as a powerful potential source of capital and contracts. Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act contains a provision creating an Office of Minority and Women Inclusion (OMWI) responsible for monitoring diversity efforts at the agencies, regulated entities and agency contractors. (For those unfamiliar with these Offices, we offer a seminar describing in detail the duties and performance of the 29 OMWI Offices. http://www.eventbrite.com/e/office-of-minority-and-women-inclusion-omwi-performance-opportunities-for-minority-and-women-firms-tickets-4633212062 )

In my talk, I cite my belief that crowdfunding, or raising money online for people, projects and products, is one of the only viable ways Black companies can get funded, as detailed in my books on the subject: Top 50 Crowdfunding Campaigns: Fifty Most Successful Crowdfunding Campaigns at:http://www.amazon.com/dp/B00RKK4NL0 and The JOBS Act: Crowdfunding for Small Businesses and Startups at: http://www.amazon.com/JOBS-Act-Crowdfunding-Businesses-Startups/dp/143024755X/

Key trends in crowdfunding include the following:
• Kickstarter and Indiegogo continue to dominate crowdfunding.
• Corporate America is into crowdfunding..major brands, including Kia and Kimberly-Clark, have launched campaigns to test the market for new products.
• Startups raised $204 million through equity models in 2013; that number was expected to top $700 million—7 percent of the overall crowdfunding market—in 2014.

I also discuss my belief that the key to getting angel or venture capital funding lies in being referred to investors by another investor or entrepreneur. A good way to do this is via Keiretsu Forum, a global angel investor network, but I noted they have not funded a single African American firm.

I referenced “Dunbar’s Number”, named for psychologist Robin Dunbar, who found that “humans are able to maintain relationships with no more than roughly 150 people at a time.” Dunbar’s research shows that “when it comes to meeting people who can help you professionally, three degrees of separation..is the magic number because when you’re introduced to a second- or third-degree connection, at least one person in an introduction chain personally knows the origin or target person.” 

As I said on Mashable, http://mashable.com/2014/07/21/startup-racism/ 1% of VC funding goes to Black people. This is no accident. Other studieshttp://elitedaily.com/money/venture-capitalists-still-overwhelmingly-fund-white-male-entrepreneurs-minorities-women/ have confirmed that “venture capital funding overwhelmingly goes to white men.” Given this, it makes no sense to solicit funding from people you know are not going to fund you. Viable alternatives include crowdfunding, angels, bootstrapping and possibly, bank financing (but not really).

At one point, I outlined a strategy of buying real estate in Black communities to use as an asset for a startup franchise location. Further, I referenced my Blank Crowdfunding Business Slideshttps://drive.google.com/file/d/0Bx3S91AlzNJ4Uk1qc3czckpKRWRIcC1RX0dVcWlkUjJsZ2M0/view?usp=sharing as one way to begin to outline your startup capital needs.

I discussed using credit cards, personal loans and other resources to accumulate enough capital to start a business and about how “an increasing number of VCs want startups to engage in crowdfunding before requesting backing” but how VCs are still too racist and greedy to allow Black companies the room they need to serendipitously discover and uncover market value. I pointed out how this was exactly how Google uncovered the strategy that eventually led to a $200 billion market value.

Finally, for those determined or foolish enough to pursue VC funding, I discuss the main reasons why people don’t get funded:

• Your character, integrity or leadership is questionable
• You failed to spot issues with your team because you’re too trusting, too polite, or too focused on yourself
• Not referred to investors by another investor or entrepreneur
• Hard-headed to the point of being unable to listen to input from an experienced, reasonable and knowledgeable investor
• Not deeply embedded in your niche or area of expertise
• An inability to stop, and think,

and finally, 

• 99% of VCs are racist and/or sexist.

Financial Conflicts of Interest

We define a financial conflict of interest as a situation in which a person, institution or organization has more than one financial  interest in a particular investment vehicle or asset. The problem occurs when parties whose interests are singular, and thus not compromised, depend upon a conflicted individual or institution for primary advice concerning the purchase, sale or retention of the conflicted financial asset. The conflict "corrupts the motivation of the individual or organization" providing advice. 

According to the White House's Council of Economic Advisers, "conflicted retirement investment advice costs investors $17 billion each year,"

The US Department of Labor recently held a hearing on conflicts of interest in the provision of retirement investment advice. The goal of the hearing was to gather testimony on the Employee Benefits Security Administration's (EBSA) proposal to reduce conflicts of interest in the retirement advice marketplace.

As I noted in my testimony, and paraphrasing Martin Luther King, “All investors are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one investor directly, affects all investors indirectly.”

We agree with others who “see the need for better balance between short- and long-term investing.“  Unfortunately, little in the Department’s Conflict of Interest proposal serves to enhance that balance.

This is particularly important. As the market value of environmental, social and governance factors continues to grow, companies and investment managers will engage in fraudulent practices related to these factors. These practices will range from simple falsification of environmental, social and governance records to more sophisticated, but no less fraudulent methods related to environmental, social and governance ratings. We have provided evidence that unethical practices have flourished in capital market institutions, propelling ethical standards of behavior downward. Thus, unethical behavior has become standard in the financial services marketplace.

While the Department's proposal is flawed, it is the very least that can be done to begin to address the problem.

Declining Black/White unemployment differential

Our Fully Adjusted Return (tm) model predicted Black Unemployment would fall from 9.5% in June to 9.1% in July. 

The forecast was confirmed this morning by the US Department of Labor - Bureau of Labor Statistics. 

The difference between Black and White unemployment now stands at 4.5%. We note this is the second lowest differential of the Obama Presidency, surpassed only by a 4.0% differential in February, 2008. Our Fully Adjusted Return model shows that the difference is poised, assuming the Fed does not raise rates, to fall further. See: http://www.bls.gov/news.release/empsit.t02.htm 

Your Freedom will not be brought to you by Comcast, Sprite or Google...

We are delighted that an idea and initiative we suggested has begun to get traction, as evidenced by an effort launched in July called “Venture DC 2015”. Sponsored by Comcast and supported by DC’s Department of Small and Local Business Development (DSLBD), the well funded Venture DC initiative claims to seek to “empower emerging entrepreneurs who are addressing and solving some of DC's most pressing challenges related to health care, education, housing, economic security and access to financial services, specifically in Wards 7 and 8.”

Perhaps a little background is in order. On January 19, 2015, Martin Luther King's Birthday, we convened several DC-based Black Tech firms, policy analysts and others at a meeting in Washington, DC to discuss social innovation and technology. For more, see: https://www.linkedin.com/pulse/martin-marion-tech-william-michael-cunningham-am-mba

“We focused on the role technology might play in addressing Black Male safety and security issues. The meeting resulted in a discussion about developing an app/apps to address Black Male Health Issues, specifically including the problem of elevated homicide.”As we noted at the time, this is extraordinarily difficult. But we also asked “what is the point of having tech skills if you cannot use them to improve lives, ALL lives, including the Black ones?”

(Besides, there's already an app that is being used to complain to police about Black and homeless people and to report non-crimes. We doubt this came up at the Comcast event.)

Venture DC 2015 probably did not address these issues. This is one reason having a truly diverse (race, gender, income) group discussing these issues, as we did on 1/19/15, matters. The picture below shows attendees at our meeting in contrast to one photo from the Venture DC 2015 meeting.

Left, Jan 2015. Right, Aug 2015

The Comcast event also follows my March 12, 2015 testimony to the DC City Council Government Oversight Committee on the lack of performance with respect to health care for DC residents, Black contracting. The video can be viewed at https://youtu.be/rlr_DomOais and the details of the testimony can be found at "DC's revealed Black Economic Development "Plan"" https://www.linkedin.com/pulse/dcs-real-development-plan-william-michael-cunningham-am-mba

Unfortunately, if you are an African American male actually from Wards 7 or 8, the City’s revealed economic “development plan” for you is to offer limited low wage employment (I know..I know...better than nothing) while devoting millions of dollars in funding to non-minority companies. 

For example, the D.C. Council gave nearly $33 million in tax breaks to Living Social and "gave" several valuable public properties to a firm called Fundrise. See: http://www.washingtonpost.com/blogs/dc-wire/post/dc-council-approves-livingsocial-tax-breaks/2012/06/26/gJQAQAvv4V_blog.html  and http://dc.urbanturf.com/articles/blog/fundrises_plans_for_the_r.l._christian_library_on_h_street/9772

As we have noted before, our economic research reveals the following: there is not a single city in the United States of America where the majority of Black people resident before gentrification have been better off post-gentrification. Not one. See:  http://twisri.blogspot.com/2015/04/gentrification-and-black-people-in-dc.html

Clearly, the issues we raised in January and March remain unresolved, even after we outlined (for the Chair of the DC City Council and the head of DC's Economic Development Department) two entirely new socially responsible financial instruments to help with these problems, 

Unfortunately, issues of honest inclusion limit the ability of the Comcast-funded effort to legitimately serve the needs of the African American portions of the Ward 7 and 8 community. This is, of course, not surprising. Your freedom will not be brought to you by Comcast, Sprite, or Google.

Obama's Climate Plan

The Obama Administration released an ambitious, forward looking climate plan today. This is a big deal: the Administration's Clean Power Plan seeks to "reduce carbon dioxide emissions by 32 percent from 2005 levels by 2030."

Several have characterized the Plan as "the strongest action ever on climate change by a US president." We agree and note that "hundreds of businesses including eBay, Nestle and General Mills have issued their support for..(the) plan.."

The picture above shows Environmental Protection Agency (EPA) Administrator Gina McCarthy speaking in early July at Georgetown University in Washington, DC with a Community Environmental Activist. (The Administration is reaching out...broadly.)

According to the White House, the Plan will:

• "..reduce premature deaths from power plant emissions by nearly 90 percent in 2030 compared to 2005 and decrease the pollutants that contribute to the soot and smog and can lead to more asthma attacks in kids by more than 70 percent. The Clean Power Plan will also avoid up to 3,600 premature deaths, lead to 90,000 fewer asthma attacks in children, and prevent 300,000 missed work and school days.
• Create tens of thousands of jobs while ensuring (Electric energy) grid reliability;
• Drive more aggressive investment in clean energy technologies than the proposed rule, resulting in 30 percent more renewable energy generation in 2030 and continuing to lower the costs of renewable energy.
• Save the average American family nearly $85 on their annual energy bill in 2030, reducing enough energy to power 30 million homes, and save consumers a total of $155 billion from 2020-2030;
• Give a head start to wind and solar deployment and prioritize the deployment of energy efficiency improvements in low-income communities that need it most early in the program through a Clean Energy Incentive Program; and
• Continue American leadership on climate change by keeping us on track to meet the economy-wide emissions targets we have set, including the goal of reducing emissions to 17 percent below 2005 levels by 2020 and to 26-28 percent below 2005 levels by 2025."

Coming on the heels of the Pope's well researched and tightly reasoned statement, Obama's climate initiative suggests the Administration agrees that climate change is a moral (and, as a result, a political) issue.

The Plan should give a boost to renewable energy entrepreneurs and supports global efforts to divest from coal. (See our statements to the governments of Hong Kong and Norway.) The investment implications are clear: institutional and retail investors should increase their investments in renewable energy (solar, wind, biomass, etc.) and decrease their exposure to coal.

Perhaps most importantly, this action suggests it is no longer rational to question what so many have stated.. that  “Climate change poses risks to people and ecosystems by exacerbating existing economic, environmental, geopolitical, health and societal threats, and generating new ones. These risks increase disproportionately as the temperature increases.”

The Administration is taking strong, forward looking action. Well done.