The Barriers and Lost Opportunities in Backing Canada’s Black Entrepreneurs
There has been much-needed focus on inequality and systemic racism since the Black Lives Matter protests last year. Difficult conversations have taken place, organizations have released statements and commitments have been made by a few to start the process of removing barriers and to better support the Black community.
Within the business community, there has been some action to begin to address the disparity issue.
A number of companies have begun to publicly promote Black entrepreneurs. Ottawa-based Shopify updated its Shop app to feature a spotlight on Black-owned businesses, Yelp made it easier for customers to search for Black-owned establishments, and Uber Eats put a spotlight on, and waived delivery fees, from Black-owned restaurants and Google searches for “Black-owned businesses near me” reached an all-time high last year in the U.S.
In October, the Canadian Black Chamber of Commerce (CBCC) and Facebook Canadaare collaborating on an initiative to support Black business owners and entrepreneurs. Facebook Canada contributed $500,000 in funding to the CBCC’s program which supports members of the Black-business community who have been impacted by COVID-19
Like most efforts around correcting inequality, there is more work to be done. To start, we need to better understand the problem.
Dissecting The Problem
When we looked in the mirror in 2019, of the 145 PE firms that participated, only 8 (6%) of partners were visible minorities. Of the 132 partners at VC firms, only 24 (18%) of partners were visible minorities. PE firms trail the Canadian banking and legal professions which have visible minorities holding 15% and 9% respectively of their senior management positions with VC firms having a higher percentage of partners who are visible minorities compared with banking and legal professions. The CVCA plans to do a follow-up to this study in 2021, with a formal announcement coming soon.
On the importance of diverse investing staff, BLCK VC explains in Techcrunch, “Most firms don’t have a diverse investing staff. They don’t have a diverse investing staff because they don’t understand the value of racial diversity. They don’t understand the value of racial diversity because there are no diverse investors to force them to think about diversity.”
Having a diverse investing staff can begin to address the barriers to entry for underrepresented founders, including Black founders. Canada’s Ryerson DMZ has recognized this issue and has started the Black Innovation Program, one of the few resources available for Black Entrepreneurs.
“Black founders in particular encounter steep challenges when starting and growing a business, from accessing seed capital to having fewer publicly recognized Black entrepreneurs and advisors to turn to,” explains Abdullah Snobar, Executive Director, DMZ, and CEO, DMZ Ventures. “Black-owned businesses often do not lack the talent or ability needed to secure funding opportunities; they lack access to those opportunities: access to mentorship, learning opportunities, and capital.”
Black founders can unlock market opportunities by solving different problems and having different solutions, explains serial entrepreneur James Norman in an op-ed for Harvard Business Review.
“The most common way of doing things is not necessarily the most innovative. When there is an existing company performing well, addressing a problem, and leading the market, it’s not out of the norm for Black founders to challenge that position. This is either because the company is not properly serving people of [colour], or they have a large hole in their solution that presents a tremendous opportunity.”
The existing funding journey has been beneficial to the success of some and detrimental to others. Snobar explains how the existing process has provided more opportunities for non racialized founders.
“In both Canada and the U.S., the vast majority of Black businesses operate as sole proprietorships as the business setup is more affordable. Unfortunately, this causes hurdles when qualifying for loans and even for non-dilutive government funding, making it difficult to get the funding journey started. Additionally, as a result of the racial wealth gap, many early-stage Black entrepreneurs also do not have the personal network needed to raise a “Friends and Family” round of funding.
Race continues to be a key barrier in acquiring small business loans and venture capital distribution. Due to racial bias from banks, reports have found that even Black business owners with great personal credit are half as likely to receive full financing in comparison to their white counterparts. Studies have shown that white and Black loan applicants receive different treatment in how bank representatives encourage them to apply for loans, what products they are offered, and the information they receive.”
In an effort to begin to combat this issue, in September the Government of Canada announced investments up to CAD $221M in partnership with Canadian financial institutions – including up to CAD $93 million over the next four years to launch Canada’s first-ever Black Entrepreneurship Program. The Black Entrepreneurship Loan Fund’s application process has yet to open, with more details expected to be announced soon.
This funding issue is not exclusive to large financial institutions.
While there is currently no available data on this in Canada A 2018 study in the U.S. by Morgan Stanley found that eight out of ten investors said that “multicultural and women business owners get the right amount, or more, of capital they deserve to run and grow their businesses.”
However, that same study found that multicultural and women-owned businesses could account for $6.8 trillion in gross receipts if they matched their percentage of the [labour] force and business revenues were equal to traditional firms. This would represent nearly 3X the current output, with a missed opportunity of $4.4 Trillion.
“Venture capital is another system that has historically oppressed the Black community,” says Snobar. “A U.S. study found that only 1 percent of total venture capital dollars in 2018 went to Black founders, while Black women-backed ventures received a mere 0.2 percent of all VC funding. The lack of diversity that still exists in the venture capital industry is a prominent reason as to why Black entrepreneurs are less likely to be backed by VCs: in the U.S., more than 80 per cent of venture firms do not have even one Black investor.”
Along with how the private capital industry can combat this issue and how we can unlock the significant potential of Black-founded companies, we will explore the few existing funds and programs available to Black entrepreneurs in Canada in the follow-up to this article, Reaching Full Potential: Removing Barriers and Elevating Black Entrepreneurs on Thursday.