Crowdfunding requires an entrepreneur to mine his or her social networks and use online marketing to collect small sums of money from a large pool of individual investors. There are no credit barriers to clear or wealthy contacts to tap.
Such requirements have presented a challenge for some women and minority entrepreneurs seeking bank loans or venture capital, over and above the ordinary challenges for any start-up trying to raise money.
Alicia Robb, a senior research fellow at the Kauffman Foundation, said women and minorities are often excluded, intentionally or otherwise, from the networks of venture capitalists and high-net-worth individuals that are comprised largely of white men.
What’s more, there’s evidence that minorities face discrimination when applying for bank loans, Robb said. This combination of factors makes women and minorities less likely to pursue financing than their male, non-minority counterparts.
“If you’re connected or well educated or have family members that are connected to these pools of capital, you’re much more likely to access them,” said Nathan Bennett Fleming, a law professor at the University of the District of Columbia and the District’s congressional shadow representative. “But if you don’t have that savvy to access them, you may not even know that these potential funders are there.”
Bennett Fleming and five of his fraternity brothers from Morehouse College have created Black Startup, a crowdfunding Web site where entrepreneurs with business ideas or projects geared toward the African American community can raise capital.
Many of the entrepreneurs will likely be black, though that’s not a requirement, Bennett Fleming said. The money, too, will likely come from African Americans or organizations that aim to encourage the community’s economic development.
“There is significant wealth in the African American community, but we don’t invest that wealth at high rates. A big reason for why we don’t invest at high rates is a lack of knowledge and sophisticated understanding of the capital markets,” Bennett Fleming said.
The District-based Latino Economic Development Center held its first workshop on crowdfunding last month, teaching an audience of about 25 current or prospective business owners how to design and launch a successful crowdfunding campaign.
“It is basically the only financing option we can offer to clients where the only barrier to accessing it is themselves,” said Marla Bilonick, the director of small-business development. “It’s about them taking the initiative and being creative, but there is no profile that’s excluded.”
Bilonick said most of the businesses LEDC encounters would not be eligible for venture capital, and loans from banks or microlenders can be difficult to secure for business owners without a credit history or substantial collateral.
“[For] recent immigrants, it’s not that they have these horrible credit histories and they can’t pay back credit, it’s just not what they’re culturally used to in the countries they come from,” Bilonick said.
Crowdfunding’s main hurdle, she said: An entrepreneur’s ability to get investors to buy into the idea.
Phillip Fanara, a finance professor at Howard University, said the barriers for women and minority entrepreneurs to obtain capital have lessened over the years, though elements of discrimination still exist.
The benefit of crowdfunding for entrepreneurs, he said, is casting a wider net so that their business venture will be seen by a broader base of investors who might be interested in the product or service the entrepreneur is trying to sell.
“Just getting that information [out] more quickly and allowing them a simpler process of buying stock in the business makes it much more effective and efficient for minority- and women-owned firms,” Fanara said.