In Chicago, black entrepreneurs seeking venture capital face excessive scrutiny and discrimination

By Steve Friess
Photography by Sebastián Hidalgo

Support for this article was provided by Rise Local, a project of New America Chicago

Boyede Sobitan and Fola Dada dressed their best for the meeting — sharp blazers, solid ties, pressed slacks, shined shoes — and came prepared with a pitch deck full of facts and figures. The financier they were meeting was far less professional in every way. He sat across Sobitan and Dada at a checker-topped Starbucks table in a sweatshirt and jeans, checked his phone constantly as they spoke and, just a few minutes in, seemed fidgety and annoyed to be there. The visit, he impatiently said, was “a favor to a friend.”

The duo forged ahead cheerfully on that unseasonably warm January 2016 morning in Chicago. They sought $250,000 in venture capital for OjaExpress, their nascent company taking online orders for and making deliveries of hard-to-get food items popular among immigrants from Africa and the Caribbean. “It’s Peapod for exotic groceries,” as Sobitan says often.

The idea, they tell me later, came from Sobitan and Dada’s personal experience. Both are second-generation Americans whose extended families, both originally from Nigeria, either drive long distances to the rare grocer stocking, say, Ghana yams or cassava flakes or spend big money to import the items from Africa. By the time of the Starbucks meeting, they’d already lined up specialty grocers in the Chicago area to work with, designed an easy-to-use website and made a few hundred deliveries with virtually no promotion. An underserved market, that holy grail of online startups, clearly existed, but they needed money for advertising, delivery personnel and the expenses that would grow as OjaExpress would.  

In retrospect, Sobitan and Dada never had a chance that morning.

“We might as well buy lottery tickets to fund our big ideas rather than take VC meetings or go to pitch-slam contests. It’s just white folks giving money to white folks for ideas that white folks like.”

Entrepreneurs of color, a wealth of damning data show, receive an insignificant fraction of the billions in venture capital dollars forked out each year to support startups. Bank loans, too, are elusive. “We might as well buy lottery tickets to fund our big ideas rather than take VC meetings or go to pitch-slam contests,” grouses Davidson Moss of Chicago, a failed tech entrepreneur and African American who went back to working in his family’s restaurant after maxing out his credit cards trying to get various concepts going. “It’s just white folks giving money to white folks for ideas that white folks like. And they say, ‘Hey, it’s business, it’s not personal.’ But VCs are definitely more comfortable losing money on white folks’ dumb ideas than sitting still to listen to something that’s outside their world.”

This roadblock — a lack of access to capital to support fledgling companies — is a potent unseen force preventing many ambitious and industrious people of color from finding success as entrepreneurs. Of the $58 billion invested by venture capitalists in U.S. startups in 2015, only 1 percent went to black-owned enterprises, according to the analytics firm CB Insights.

Many entrepreneurs of color succeed in grade school despite fewer resources, and go on to earn advanced degrees and become the first in their families to break into the middle class in white-collar fields. But then they sit down on coffee dates with borderline hostile and obviously disinterested white men and women, as Sobitan and Dada did that morning, and they realize the bottom rung of the American Dream ladder is coated with yet another layer of grease.

“The No. 1 problem founders of color face is the bias they encounter when talking to investors,” says Stella Ashaolu, 31, a Chicago entrepreneur of Nigerian descent who plans to seek funding early this year to grow WeSolv, a 2-year-old website that helps major companies find and hire business-school students of color. “In those kinds of conversations, it’s always an uphill battle just to get yourself to where they’re ready to have a real conversation about your viability.”

Sobitan’s description of the Starbucks meeting is virtually identical to the many stories I heard over the course of reporting this story.

First, the duo was pestered on why they hadn’t tapped “friends and family” for startup capital, a common effort that would-be funders regard as evidence of how successful entrepreneurs have been at convincing those closest to them of an idea’s potential. Many entrepreneurs of color hail from families of limited means, as Sobitan and Dada had to explain to the investor, who is white.

“I’m one of the first people among my friends and family to even endeavor to do what I’m doing,” says Sobitan, 36, whose parents emigrated from Nigeria in the 1970s and both work in health care. “I can’t go to my mom and say, ‘Hey Mom, can I get a check for $50,000?’”

With awkwardness now infused in the dynamic, the investor expressed contradictory doubts about OjaExpress. On one hand, he dismissed the data Sobitan offered on the fast-growing number of recent immigrants in the U.S. from Africa and the Caribbean, and their desire for the foodstuff of their native lands. “Do immigrants even have money to spend on this type of product?” he asked with disdain, Sobitan recalls. “And what are these things? I’ve never heard of them.”

Then, on the other hand, he fretted that if OjaExpress became popular, Amazon would just swoop in and price Sobitan and Dada out of the market. More likely, the entrepreneurs countered, was that Amazon would buy them out — and that would be a fine outcome to them.

“We thought it would be an easy sell,” says Sobitan. “We thought that we had a product, all we had to do was put it out there and everybody would be throwing money at us. When that didn’t happen, you say, ‘OK, something’s going on.’ From that standpoint, we know there’s a different set of rules coming from investors.”

While the meeting (and several others just like it) was a bust, OjaExpress is not. Sobitan and Dada spent the subsequent two years working their day jobs — Sobitan is a hospital administrator and Dada is a software engineer — while developing their company on the side. In 2017, Sobitan says, the company delivered 4,000 pounds of food in the Chicago area and launched service in Washington D.C.

They’re proud of their growth, but they also know the lack of funding has hindered them and squandered time.

“We definitely would have been in six or seven cities easily by now,” Sobitan says ruefully. “We got this far on our own dime. Imagine where we’d be if we had $250,000 back then.”

A few weeks after we first meet, Sobitan excitedly emails with one more data point to bolster his confidence in his concept: The website BuiltInChicago listed OjaExpress as one of “50 Chicago-based startups to watch in 2018.” “We made this list,” he writes, “and we are self-funded!”

***

Lest anyone believes this is the carping of entrepreneurs who just can’t cut it or don’t understand the cold truths of the business world, the first line of a report released by President Donald Trump’s Commerce Department in April lays out the problem in the starkest, simplest of terms: “Capital access remains the most important factor limiting the establishment, expansion and growth of minority-owned businesses. Given this well-established constraint, the current financial environment has placed a greater burden on minority entrepreneurs who are trying to keep their businesses thriving in today’s economy.”

The report, aptly titled “Disparities in Capital Access between Minority and Non-Minority Businesses,” also lays out why it matters: “Minority-owned businesses continue to be the engine of employment in emerging and minority communities. Their business growth depends on a variety of capital, from seed funding to establish new firms, to working capital and business loans to expand their businesses, to private equity for acquiring and merging with other firms. Without adequate capital minority-owned firms will fail to realize their full potential.”

Or, as economist Raj Chetty, head of Stanford’s Equality of Opportunity Project, put it in December after releasing a study showing a devastating correlation between family affluence and the prospects of succeeding as an inventor: “There are great differences in innovation rates among people of different races and income strata. Those differences don’t seem to be due to an innate ability to innovate.”

The numbers from a variety of sources provide empirical evidence of a shameful situation:

• Minority business owners are denied bank loans at three times the rate of non-minority owners, and when they get them they’re less than half as large and the interest rates are, on average, 1.2 percent higher, the Commerce Department report said.
• Fewer than 3 percent of venture capital firms have black or Latino investment professionals, the industry monitoring publication PitchBook reported.
• Nearly 60 percent of black-owned firms reported “credit availability challenges” at banks versus 32 percent of white-owned firms, according to a 2016 survey by the Federal Reserve Banks of Atlanta and Cleveland. Even among companies with revenues of more than $1 million in the prior year, 49 percent of minority-owned firms said they struggled to get bank loans versus only 25 percent of their white counterparts.

What’s more, a recent study led by the National Community Reinvestment Coalition offered fresh evidence that unsubtle racial bias is at play. Between May and July 2017, researchers sent black and white men with identical qualifications and characteristics to apply in person for $60,000 small-business loans at 17 East Coast banks. The white men were twice as likely to receive help for their loan applications from bank staff and three times more likely to be invited back for a second meeting, according to the study. Meanwhile, the black men were six times more likely to be asked about their marital status, and 12 percent of the black entrepreneurs were quizzed about their spouse’s employment status. None of the white entrepreneurs were asked about their spouses.

How does this get better?

“Well, we’re entrepreneurs. We figure out other ways.”

The data adds up to a systemic barrier to the ability of communities of color — already financially disadvantaged by decades of redlining that denied many African Americans government-back mortgages, and thereby entry to the middle class — to build a financial infrastructure.

***

On a frigid Friday evening in December, five African-American startup founders settle in at a dimly lit Italian restaurant in Chicago’s Loop at the request of their friend, WeSolv founder Stella Ashaolu, who wants me to meet them.

They all have at least one college degree, most are juggling day jobs along with obligations to their companies and, between them, their firms represent at least $5 million in annual sales. Their stories of natural entrepreneurship are intriguingly similar, too: Amanda Spann, who has an app company, sold homemade hair barrettes to classmates in elementary school; OjaExpress’s Sobitan got neighbors to sign actual contracts for lawn and snow services in his teens; Thomas K.R. Stovall, founder of the networking site and organization ImBlackInTech, paid for college through an online custom wheels and tires business he operated out of his dorm at Tennessee State.

Also, not one has received a dime of venture capital, won a pitch slam, or obtained a small-business bank loan.

Eugene Douglas and his 3-year-old company, NewLogix, would seem like a no-brainer for investor support. For one thing, the firm’s workflow software tailored for utility, health care and government offices already has a seven-figure, multi-year contract with a Fortune 100 client. Most start-ups proudly tout the big fish they reel in to bolster their appearance of viability, but Douglas, 36, is nervous that to do so in an article about racial bias in the business world could jeopardize the relationship. I agree not to disclose it.

Douglas is the son of a UPS employee and a minimum-wage cashier raised in the Chicago suburb of Bollingbrook, Illinois. His parents, the descendants of slaves who migrated to northern industrial states during the Great Migration, faced a commonplace economic struggle of foregoing college educations to make ends meet for their growing family. Until his mother graduated from nursing school in her mid-30s and was able to make a better living, they lived off food stamps and had some rent help from Douglas’s grandparents.

Douglas studied computer science at Trinity Christian College near Chicago on scholarships and $50,000 in student loans before spending a few years working as a data analyst for various politicians in Las Vegas. By 2015, when he launched NewLogix out of the Chicago apartment he shared with his wife, Douglas had been working as a database analyst for a utility company and realized how inefficient and cumbersome the commonly used workflow software was.

Ironically, the success that Douglas has had only further proves the divide between black entrepreneurs and their white counterparts when it comes to accessing startup capital. Douglas actually did have a so-called “friends and family” round — he borrowed $20,000 from his wife’s parents, who are white. His in-laws had inherited real estate in the 1990s and made a bundle getting out before the bubble burst in the Great Recession. Douglas laughs out loud when I ask if the company could have existed without that starter loan: “No, no, no, no, no. Without that, we have a great idea, no funds to execute it.”

At dinner, Douglas is exasperated by his inability to interest investors in the company. He’s paid his in-laws back and recouped the $80,000 he and his wife have put up over the years. NewLogix is profitable and has six full-time employees, but he says it can’t take on many more clients — and certainly not any big ones — because there’s not enough capital to spend on the cost of servicing them.

He’s on the hunt for $1 million to scale up. He explored a bank loan, but even with an above-average credit rating and a little bit of home equity he could only borrow about $20,000. “That’s what, a week of the payroll?” he grouses. “That’s not going to do anything.

“It’s frustrating because you’re trying to do it the right way, you know?” he says. “It’s not an unvalidated idea. It’s good enough for one of the largest utility providers in the country! That should validate what we’re doing in the eyes of the VCs.”

As he expresses his frustration, fellow entrepreneur Thomas K.R. Stovall, 38, perks up from a private conversation with Ashaolu at the other end of our table. Stovall, whose ImBlackinTech group has thousands of  members in more than 40 states and six countries, insists it’s impossible to know specifically what goes into decisions by VCs to fund or not to fund. Venture capitalists are notoriously fickle, frequently aloof and capricious, and usually opaque with how they decide what to take leaps on, he says. Likewise, each business has its own particularities, each case its own nuance, each founder’s presentation its own quality.

But, he continues, in some ways it doesn’t really matter: “VCs, for the most part, do not invest in people of color and women. Do I think there’s some sinister, racist thing going on at the majority of VCs? Consciously? No. I think people do what’s comfortable for them. And, yeah, some VCs may actually be racist. I’m not disqualifying that.”

Then what? I ask. How does this get better?

“Well,” he replies, “we’re entrepreneurs. We figure out other ways.”

***

By the time many entrepreneurs of color are ready to seek funding or launch businesses, they’ve already spent much of their lives being underestimated and discouraged. Ashaolu, for instance, took one of her first such hits in high school when a guidance counselor told her that acceptance to UCLA, her dream school, was “probably too much of a stretch.” She politely insisted he review her grades anyway, then took satisfaction when he admitted she “might have a chance.” He never apologized for prejudging her, of course.

“You can’t grow up as a black person in America and not internalize the negative messages and images that are constantly being put in front of and attributed to you,” says Ashaolu, who has a political science degree from UCLA and an MBA from the University of Southern California. “Even getting in an Uber, the driver says, ‘Well, what do you do?’ And I say I’m the founder of a tech company. And then I explain what my company does and they say, ‘Oh, that’s actually a good idea.’ Actually? My white friends who are founders don’t have people say it’s ‘actually’ a good idea. That’s what we get on the regular.”

It’s no surprise, then, that researchers find minority entrepreneurs, accustomed to stultifying microaggressions and mystifying rejections, don’t even apply for credit or seek venture capital at the same rates as other groups. According to the survey released in 2017 by the Minority Business Development Agency, one-third of minority-owned firms with revenues under $500,000 did not apply for loans because of fear of rejection and only 17 percent of similar non-minority firms stayed away for that reason. The aforementioned Federal Reserve study  offers an explanation of why: the approval rate for funding of black-owned firms is 19 percentage points lower than that of white-owned companies.

For the most part, the “other ways” to which Stovall alludes amount to one: bootstrapping. That is, doing more with less, throwing any revenues back into the company, foregoing salaries, learning additional skills to avoid hiring experts and finding the least expensive approach to everything.

“I wish I wouldn’t have focused so much on raising capital for Alchomy because it was so difficult and it just stops you from getting out the product and making the best product you can have,” says Spann, of an app that helps users find interesting drinks at bars near them. “I was spending so much time pitching to different people, doing research on different people, figuring out what angle I’m going to pitch to them, I’m taking away precious time that I could be using getting a great product that’s actually profitable that doesn’t need an infusion of cash.”

Black-owned or minority-focused VCs are often cited as a potential panacea, but there aren’t that many of them and they account for a tiny fraction of available startup capital.

Spann, 30, now has six apps under her company Happii, including the 8-month-old Afridate, which boasts more than 20,000 users and “helps you search for eligible black singles, by nationality and ethnicity, anywhere in the world.” She says that between Afridate and TipOff, a word-guessing game launched in November that already has more than 5,000 users, she’s ready to head back out looking for some capital to accelerate growth — but this time she says she’s specifically targeting black-focused venture capital firms. “I tend to make products that are a little more focused on the African-American markets, so I think they’ll get the product,” Spann says. “I want people who will either use my product or get the value of it.”

Black-owned or minority-focused VCs are often cited as a potential panacea, but there aren’t that many of them and they account for a tiny fraction of available startup capital. Several outlets — from banks to university business schools to co-working centers in urban areas — offer networking events, entrepreneurship training sessions and occasional pitch-slam opportunities aimed at minority entrepreneurs, but in actual dollars the funding is modest.

The largest fund dedicated to minority venture capital is a $25-million pot of money set aside in 2016 by 500 Startups, a VC firm that has otherwise plunged more than $200 million into more than 1,800 startups since 2010. “That’s great and important,” says Davidson Moss, the Chicago businessman who gave up on his startup dreams, “but there are thousands of minority entrepreneurs vying for that money. It’s a drop in the ocean.”

Another minority-focused VC that draws a lot of media attention is Backstage Capital, founded by Arlan Hamilton, a black lesbian whose mission is to fund companies led by “underrepresented founders.” Backstage has disseminated more than $2 million in investment — backed by the likes of Mosaic co-author Mark Andreessen and Slack CEO Stewart Butterfield — among more than 50 companies in two years, which sounds impressive until you realize that’s an average of $40,000 per startup. Meanwhile, for context, a study of more than 60,000 tech startups from 2012 to 2014 found that the average failed startup raised $1.3 million via venture capital.

“I realized that [access to] opportunities were only for certain people. If anyone else wanted in, they’d have to create their own access and their own experience,” Hamilton told CNN last year. “I said, ‘I could not do this, but then I won’t see any change. If they won’t let me in, I’ll start my own league.’”

Despite the modest amount of investment being set aside for underrepresented groups, Stovall is encouraged by the trend. ImBlackInTech, his fast-growing networking organization that costs $400 a year for a premium membership and as much as $1,800 to enroll in some of the entrepreneurship programs, did not require VC money. Still, the site boasts that members have, collectively, “raised and generated” $415 million in capital.

Stovall believes the conventional VC route is probably a waste of time for most minority founders — and that building “networks of people who look like me” can pay bigger dividends. “That means athletes, entertainers, business folks who have done well, who are hovering around tech but aren’t necessarily cutting any checks yet. We need to cultivate relationships there and get money from those folks,” Stovall says. “We need to say, ‘We don’t need a seat at your table. We’ll build our own table.’”

***

Twenty years ago, Lyneir Richardson appeared on the cover of Crain’s Chicago Business as the city’s Young Entrepreneur of the Year. At the time, he was founder and president of LakeShore Development & Construction, a homebuilding firm he launched with $70,000 in savings and a $466,000 loan he received from the local bank where he had worked for three years as an attorney. Unlike so many African-American company founders, Richardson enjoyed a number of unusual advantages and went on to build a real estate firm with more than $7 million in annual revenue.

The good times didn’t last long. He expanded too quickly and wasn’t able to deliver homes as quickly as he had promised, so by 2004 he sold LakeShore for $150,000 and the assumption of his debt. He’d go on to work as vice president for urban retail development for General Growth Properties and advised the mayors of both Chicago and Newark, N.J., on ways to help minority entrepreneurs access capital and develop businesses that have the potential to transform the low-income neighborhoods so many are raised in.

Richardson sees his experience and the lessons he learned as important to share. He tried, he says, to improve the real estate ecosystem in disadvantaged areas of the city, but the pathway to profitability was more complicated than raising money, building things and then selling those things.

All of that has been the preamble, he says, to his current experiment, the new real estate firm called Chicago TREND — which stands for Transforming Retail Economics of Neighborhood Development. It’s not a charity but a “for-profit social enterprise,” he says, built on a model that requires what he often refers to as “patient equity capital.”

Richardson, who also serves as director of Rutgers University’s Center for Urban Entrepreneurship and Economic Development, uses that phrase a lot to describe the sort of investor who is willing to back enterprises that have long-term promise and probably will pay off but are unlikely to provide a high rate of return on investment. Success, to those willing to invest, is as much about profit as it is about having measurable impacts on the income, crime, and employment rates in these communities.

“My argument was I can identify entrepreneurs of color and I can give them capital and I can strengthen neighborhoods but I can’t give you an above-market return,” Richardson says. “What’s missing here is a deeper connection to wealth that can be patient and says, ‘Go try this. I know you don’t have all the i’s dotted and t’s crossed, I know you may not be profitable for five or 10 years, but I believe in you as an entrepreneur and I believe in your work ethic and your problem-solving ability, so I’m with you.’”

To this end, Richardson has used his academic credentials and business connections to raise $7 million from the John D. and Catherine T. MacArthur Foundation and the Chicago Community Trust to provide as seed money for retail projects in specially selected locations in the city’s most blighted areas.

“VCs do not invest in people of color and women. Do I think there’s some sinister, racist thing going on at the majority of VCs? Consciously? No. I think people do what’s comfortable for them.”

Chicago TREND, launched in 2014, is part venture capitalist, part matchmaker between developers and neighborhoods. The firm gathers and provides “hyperlocal” market data aimed at answering the questions investors have about the potential dimensions of the market. So far, one project featured a new daycare center and urgent care center, another involved relocating a minority-owned restaurant into a new retail space that also included a minority-owned bakery and dry cleaner.

“Ultimately, it’s local businesses that will drive the employment in those communities that we serve, that’s the real answer,” says Leon Walker, 30, managing partner of DL3 Realty, a minority-owned firm that has helmed several projects involving Chicago TREND funding. “No amount of government or charitable contributions are going to completely solve a lack of job opportunities and high unemployment. We have to have the private sector, which has the largest pool of capital, come in to play.”

Richardson, now 51, believes he has seen the minority entrepreneur–funding problem from every angle. He agrees with Stovall that the process would be easier if the Oprahs, LeBrons, and Jay-Zs jumped in with patient capital, but it’s easier to talk about those folks than it is to cultivate them as investors.

“I’m a very visible entrepreneur with very visible economic development and entrepreneurship experience, and I don’t have a deep connection with even three billionaires,” he says. “So if I don’t have a rapport with three financially significant individuals given my 30-plus years in business and entrepreneurship, imagine folks who don’t have as many years and as much reputation and a platform like Rutgers and support from foundations. Many athletes and entertainers are businessmen themselves, but I don’t see them providing patient capital to young entrepreneurs. That’s just not happening, period.”

Richardson believes patient equity capital ought to come with mentors who can teach new entrepreneurs how to avoid the pitfalls that led, for instance, to his earlier business demise. New businesses fail frequently, and many successful entrepreneurs cite their earlier failures as instructive and valuable. But between the difficulty obtaining capital and stigmas within minority communities that can make failure humiliating, Richardson says many entrepreneurs of color are embarrassed to ask for help or don’t know where to turn.

“It took me five to 10 years to publicly talk about failing,” Richardson says. “But we have to because when you fail, your credit score gets damaged. Maybe you have to file for bankruptcy. There are vendors who you didn’t pay, so you have reputational loss. Maybe the IRS is chasing you for unpaid obligations. All of that makes it hard to walk back into a new investor or new bank and say, ‘Give me capital.’ But white people do it every day! I now can tell the story proudly that I have battle scars. I’ve been there on the best day on the cover of Crain’s closing a multimillion-dollar deal to being at the bottom where I’m hiding from my creditors. It’s all part of being in business.”

***

The week after my dinner with the group of black founders — and the day after his third child is born — Eugene Douglas peels away from his family to meet with an investor from a West Coast venture capital firm. He brings with him NewLogix’s vice president, a white woman, because this particular VC is known to be drawn to companies owned or operated by women.

It doesn’t help.

“She said our revenue is good, our product and concept is great, but we need more revenue,” he says. “It’s this chicken-and-egg dance. They tell us to get more revenue but we can’t raise enough money to have the infrastructure to support getting that revenue. You read stories all the time about people who have zero revenue, conceptual ideas, no clients, and they get big checks. We have a great product, large clients, a wide open market. What are we doing wrong?”

For now, he says, he’ll keep at it. But this place he’s in — stuck in the awkward space where NewLogix can’t afford to engage new clients but also can’t afford to stagnate — is an existential threat.

“There’s opportunities we have to invest and to submit requests for proposals, but we need to be more aggressive with pricing and we can’t do that because we have to make a certain number to maintain where we are,” he says. “Could we go under because we’re this successful but can’t get to that next level without capital? Oh, yes. We’re rapidly approaching that point.”

 

Support for this article was provided by Rise Local, a project of New America Chicago.

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Steve Friess is a freelance journalist based in Ann Arbor whose work appears regularly in The New York Times, Washington Post, the New Republic, and many others. He was a Knight-Wallace fellow at the University of Michigan in 2011-12. He tweets @SteveFriess

Sebastián Hidalgo is a freelance visual journalist based in the Midwest.