The Truth About VC Funding — and How to Avoid Losing Your Soul While Building a Business

As an entrepreneur, I have big dreams for my business and my community.

But as someone with a background in journalism and activism, I’m also aware that, when it comes to growing a successful business, the odds are stacked against entrepreneurs of color like myself.

It’s a harsh reality that many are facing in today’s world of venture capital and investment.

That’s why I want everyone to be aware of the following myth about entrepreneurship in America that gets told over and over again.

It goes a little something like this.

Imagine two college buddies starting a small business in their apartment with a promising idea that could disrupt a traditional industry. They have raised some seed capital from family and friends, but they don’t yet have a clear plan for what to do with the money they are raising to grow their business. Despite this, they somehow manage to secure six to seven figures in funding.

Now imagine those founders are Black, Latinx or Native American. Do you think the scenario I just described would have played out the same way?

The unfortunate truth is that most venture-backed startups are still overwhelmingly white, male, Ivy League-educated and based in Silicon Valley.

This lack of diversity at the decision-making table is a major factor in why entrepreneurs of color face such significant hurdles when it comes to securing funding.

But there is hope on the horizon.

In my short time of being a business owner, I’ve learned that there are many alternative funding sources out there. And they all offer promising results to those who are willing to explore this new frontier and hold onto their values.

So let’s dive in and explore what options are available to small business owners who are determined to change the world.

First, let me just say that, as someone who has been exposed to a number of alternative funding sources that are available to entrepreneurs, I believe that more founders should seriously consider options beyond VC funding.

While venture capital may seem like the most glamorous and coveted option, the reality is that it’s a broken system that overwhelmingly favors a select few.

As I’ve learned from one of my mentors, Jenny Kassan — who is an author, expert attorney for social enterprises and a finance innovator — it’s pretty clear why the VC funding system is broken.

“The underlying issue for why there isn’t more money going to women and underrepresented minorities is that those are not the people who are around the table making investment decisions,” Kassan once said.

Next, it’s important to acknowledge the stark racial and gender disparities in VC funding.

As of the last count, businesses led by Black women have received only 0.0006% of the total funding pie since 2009.

This is a shocking and unacceptable statistic. There are now more than 1 million people of color-owned businesses in the United States. Yet women and people of color face systemic barriers in accessing VC funding, which perpetuates a cycle of exclusion and inequality in the startup world.

But beyond issues of equity and representation, there are practical reasons why VC funding may not be the best fit for every business.

For one, it’s an incredibly risky and competitive field.

The majority of VC-backed startups fail, which means that founders who do secure funding must be prepared to operate in a high-pressure, high-stakes environment.

Additionally, VC funding often comes with strings attached, such as strict growth targets and pressure to achieve high growth quickly. This can stifle innovation and creativity, as founders may feel compelled to prioritize short-term gains over long-term sustainability.

So, what are some alternative funding sources that founders can explore? Here are a few options to consider:

1. Crowdfunding — Crowdfunding platforms like WeFunder and Silicon Prairie allow businesses to raise capital directly from a community of supporters. This can be a great option for early-stage startups that have a passionate and engaged audience.
2. Grants — There are a variety of grants available for entrepreneurs, particularly those from underrepresented backgrounds. These grants may be provided by government agencies, non-profits or private foundations.
3. Community Development Financial Institutions (CDFIs) — CDFIs are financial institutions that provide affordable loans and other financial services to underserved communities. They often have a mission to support economic development and social justice, making them a great fit for businesses that prioritize impact and community engagement.
4. Non-VC Impact Investing — Impact investors seek to generate social or environmental impact alongside financial returns. If you’re able to connect with impact investors who invest outside the VC model, this can be a good fit if your business has a clear mission or social purpose.

Of course, these are just a few examples of alternative funding sources.

The right option will depend on a variety of factors, including the stage of your business, your goals and your values. The key is to think creatively and strategically about how to fund your business in a way that aligns with your vision and values.

Now, let’s address some common questions that founders may have about alternative funding sources:

Q: Aren’t VC investors more likely to provide mentorship and guidance to their portfolio companies?

A: While it’s true that some VC investors offer support and guidance to their portfolio companies, this is not a universal experience. Additionally, there are other sources of mentorship and guidance that founders can tap into, such as accelerators, incubators and industry networks.

Q: Don’t alternative funding sources have lower returns than VC funding?

A: It’s true that VC funding has the potential to generate high returns, but it’s also a high-risk, high-reward game. Alternative funding sources may offer more moderate returns, but they also come with lower risk and fewer strings attached.

Q: Can’t businesses still pursue VC funding alongside alternative funding sources?

A: Absolutely. In fact, many businesses use a combination of funding sources to achieve their goals. The key is to be intentional and strategic about how you structure your funding, and to make sure that you’re not compromising your values or mission in the process.

Now that we’ve gone over the facts, don’t you think it’s time for more founders to consider alternatives to VC funding?

By doing so, we can create a more equitable and inclusive startup ecosystem that supports a wider range of entrepreneurs and business models.

That’s the kind of American Dream I want to pursue.