Mass has everything needed to increase the number of Black founded tech companies, except the political will
The Boston metro area rivals Silicon Valley in terms of innovation. In 2015, the Boston-Cambridge Quincy metro area ranked third out of 130 such regions in both the number of venture capital deals and the number of companies receiving venture-capital funding.
Boston also has a sizable Black population in terms of absolute and relative size. So, why then does Boston have so few tech companies with Black founders? And, why do some smaller metros have more Black tech founders than Boston when they don’t have the same competitive advantages?
Why should we care? What are the potential solutions?
Based on my research, the number and success of Black tech founders are largely immaterial to the success of the local area economy, in Massachusetts or any particular metro area. In Mass, that comes with a lackluster effort to increase the number of Black tech founders, or to accelerate their success.
According to CrunchBase, Black founders in the US received less than 2% of venture funding annually between 2015 and summer 2020, while 13% of Americans identify as Black or African American. In an efficient market, capital should flow to the opportunities with the best risk-adjusted levels of return. The fact this doesn’t happen means there is some type of failure or friction in the marketplace. James Norman spells out the barriers in his article, “A VC’s Guide to Investing in Black Founders,” as does “The Black New Venture Competition,” a Harvard Business School case study written by Karen Mills, Jeffrey J. Bussgang, Martin Sinozich, and Gabriella Elanbeck.
Why should we care?
For one, we can make the world a better place. The planet faces many challenges. We need as many people as possible working on solutions—both to improve our surroundings and to provide better returns for socially conscious investors. Michael Porter’s theory of shared value depends upon the free flow of capital to people and opportunities. The fact this doesn’t happen is itself a problem to be solved.
We can also solve “niche” problems by helping Black and brown founders. There are problems millions of individuals of different ethnicities and genders face; such issues often go unnoticed by mainstream investors because they are simply unaware of these felt needs. Niche is understood differently when applied to ethnic groups. Rubix Life Sciences, a company that uses data analytics for underrepresented populations within health research, was considered to have a “niche” focus, even though there are several billion people that fall into that niche. These solutions also provide the potential for significant returns as millions of others in the same ethnic or gender category have the same problem.
We can also create wealth. Tech creates good jobs. With equity, it’s a great wealth generator. Tech can create millionaires, transform a community, and help address issues such as gentrification.
Then there is the national competitiveness factor. We will become more competitive as a nation when we include more people in the tech revolution. The digital divide is not technology haves and have-nots, as everyone from all income levels and social groups have a smartphone. The digital divide is those who consume technology and those who produce technology.
And let’s not forget about role models. We need examples to inspire and create the next generation of problem solvers, wealth creators, and philanthropists. Those in venture capital need to see examples of Blacks as successful founders, in order to feel comfortable taking the meetings and making the investment.
Finally, there’s proof that these investments spur returns. Reinventure Capital, a venture fund focused on “investing in a more perfect multicultural, equitable, and prosperous union,” shows that BIPOC funds can outperform their peers.
Why are some metros better at producing Black-founded tech companies?
It appears certain metros both prioritize technology and see Black founders as critical to economic development. Tech has the potential to bring in a significant number of jobs—jobs with high wages. It’s often more cost-effective to focus on launching hundreds of startups, rather than trying to lure in a large employer who will demand millions in tax and infrastructure incentives.
When tech is core to a city’s economic growth strategy, the city’s leadership is more likely to be proactive in helping Black founders. A research paper by Nick Auqino looked at the legal avenues for channeling public and private funds to Black Entrepreneurs in Massachusetts and compared it with other cities that seemed to have a greater number of Black Tech founders. The study looked at public pension and university endowments, direct public investments through quasi-public agencies, private foundation investments, federal tax incentives (e.g. new market tax credits) and opportunity zones, and donor-advised funds. The conclusion: Mass had all of the legislative or regulatory tools in place relative to any other city or state. What was missing was the lack of political will.
In terms of industries, Boston/Cambridge is a region with a fairly large and diverse economy. Consequently, the number and success of Black tech founders are largely immaterial to the success of the local area economy. That isn’t the case in other cities. As a direct result, the effort isn’t there to increase the number of Black tech founders or to accelerate their success.
What are some potential solutions?
In addition to STEM education, increasing the diversity of the tech workforce, increasing the number of business plan and pitch competitions targeted to Blacks, hiring Black private equity and venture partners, and starting funds targeting Black founders, what else could be done? Suggestions include:
Having a point person for the collection and listing of Black-founded tech companies. At a city, state, or even private-sector level, a database can be maintained of Black or Latinx-founded tech companies. This running list can highlight those looking for funding rounds—distributed to VCs, private equity firms, angel investors, etc. An annual list of Massachusetts Black founded companies from start-ups and larger should be published prominently.
“The Best Place to Start a Company” metrics. Through research, determine the metrics that best enable the start and success of Black founded tech companies. By developing metrics, a city, state, or trade association can measure and manage our improvement.
A Black tech showcase/conference. The city or state, a tech company or venture group, could host or sponsor a Black tech conference like other cities already do. This helps founders, investors, and others in the startup ecosystem meet each other.
Recruitment. Each year, the Bay State could attempt to recruit one or two Black-founded tech companies, the same way we recruit Fortune 500 companies. The cumulative impact over time would be powerful.
Payment in Lieu of Taxes (PILOT) investments. Graduates from Massachusetts colleges and universities often go on to start businesses outside the state. Universities could offer targeted support to their alumni starting businesses in state and the university receive PILOT credit for such investments.
Best Practices Research. Research what the top 10 cities for Black start-ups such as Atlanta, Washington DC, New York, Raleigh Durham, Oakland, and Los Angeles are doing to create an ecosystem that fosters Black tech startups.
Private sector solutions. Under the “Unicorn” method, an investor’s primary focus is in finding the next “Unicorn”— a company that will become a billion-dollar company or at least return 10 times their investment. Of their 10 investments, a VC will attempt to average a 20% return.
The Mass Black Founded Tech $100k – A sizable pitch competition.
Foundations and nonprofit solutions. Before a market becomes efficient, there is always over/underinvestment. We saw this with the dotcom crash. The belief is there is underinvestment in the Black tech sector. Program-related funds could be used to research what is causing this market failure, and fund investments, in order to help the market for Black founders become efficient.
The problem of underinvestment in Black-founded tech companies is as much a financial problem as a social problem. For example, answering the question of what does a company need besides capital? Do they need introductions? Help building prototypes, finding a strategic partner, finding a first customer or a key member for the management team? Investors are often former operators who are problem solvers, and have large networks that could be used to solve these problems and help Black tech founded companies succeed. Treating the under-investment in Black tech companies as a social problem can help resolve many downstream problems. If we look at under-investment as a social problem, we can create better solutions. Solving this problem will enable more capital to naturally flow into Black businesses.
At one time, a successful tech investor looked like a NASA scientist from the 1960s. But the successful Dot Com founders looked nothing like that. So, investors started to look for the next white kid with purple hair, a nose ring, and an innovative idea.
In the same way that children need to see role models that look like them, investors need to see successful Black tech founders. Most people can name several successful white tech founders: Jeff Bezos, Mark Zuckerberg, Steve Jobs, etc. But they would have a tough time naming a single Black tech founder.
It’s not that Black tech founders aren’t successful, it’s that most people have never seen or heard of them. By making Black founders more visible, investors will start to see a pattern of success. Increased exposure—local business papers, online papers, articles, TV interviews—will help investors think the Black founder in front of them could be the next Robert F. Smith.
We have serious issues of wealth disparity and concentrated pockets of poverty, and addressing the lack of procurement from both the public and private sectors from Black vendors would help. It’s often a reallocation of existing contracts. We need to support Black tech founders because tech creates new wealth, and has the potential to have a material impact on financial disparity.
The governor should form a commission consisting of a cross section of stakeholders with the purpose of generating action orientated recommendations. Once we are able to invest in Black-founded tech companies, both in terms of capital and resources, we will see significant impact in the community.