How to launch a company when investors ain’t writing checks
Sh*t I wish I could share with my former self
Less than 1% of ALL American businesses are funded by angels and VCs. Less than 2% of those businesses have Black or Latinx founders.
So my question is: why are Black and Brown tech entrepreneurs spending so much time trying to get investors to write them checks?
I’ll be the first to admit that I was one of them, shaking my tin cup down Sand Hill Road. I bought into the hype that if I was an amazing person who could build out an amazing idea — in this case, a necklace that transforms into headphones — I would be able to raise all the money I needed to do it, and shoot off into success like a rocketship.
Well, I pitched over 100 investors… I landed 2. I tried to raise $2M… and ended up getting a fraction of that. As a result, I’ve had to be resourceful and creative with how to get things done. …and I have gotten things done. I’m a Black woman in America, after all. We live or die by our ability to get sh*t done.
In any case, the experience was a great lesson for me. It, coupled with a Code2040 entrepreneurship residency, allowed me to open my eyes. It took some time, but today I can see that this model is not for me and many other people.
In the words of my friends, Mara, Jen and Astrid of Zebras Unite, the model “rewards quantity over quality. Quick exits over sustainable growth. And shareholder profit over shared prosperity.” With venture capital in the driver’s seat, we become fixated on “disruption” instead of the cultivation of businesses with careful, sustainable growth.
But the talk of this tech world is always centered around venture-backed business. The tech world puts people who raise rounds on a pedestal. It makes the rest of us more likely to buy into the idea that there’s no other way to build and launch.
However, a narrative around building tech and tech-enabled companies WITHOUT venture capital, I believe, is more realistic for us as a whole.
An important note: I believe that the progress being made on the other side of the table is important, too. More Black and Latinx investors is amazing. No doubt about that. But I realize that it’s going to take some time. And I don’t have that kind of time. I’m building my company today.
We need less gates. We need less barriers.
According to the U.S. Census Bureau, the median net worth for a Black household is about $9,200 and Latinx households is about $12,000, compared to roughly $132,000 for a White household. This means that it’s significantly more difficult for Black and Brown entrepreneurs to start and grow businesses today, whether it’s tech or not.
Money doesn’t flow with abundance in our communities, and we’re often in survival mode.
All we talk about in tech is unicorns, when we should be talking about zebras. Unlike unicorns, zebras are REAL. Zebra companies are black and white — they are profitable and socially conscious. They band together in groups to protect one another. They seek to share resources instead of hoarding them. And they are more concerned about user success than user acquisition.
All of this is to say that there are other approaches to launching and building tech companies today. It seems so obvious to me now, but I was drinking the kool-aid during most of my journey. I think it’s important to tell the stories around this, because I believe that there are more practical ways to empower Black & Latinx entrepreneurs.
Deldelp Medina has been asking the question, “How do we get to make tech in our own way?” She frames this through the topic of The Nerd Lens, which observes that we are almost always seeing this world through the eyes of the white, cis, heterosexual male. She posits that if we could truly build tech from our perspective, we can “create great solutions to our problems and serve our communities.”
I believe that it begins with the exchange of information. So, what I’m going share is some stuff I wish I had known before starting Tinsel. For some, it may be obvious. For others, it may help you avoid a few traps.
It’s a few hard lessons and a few theories. And it’s absolutely where I’m going to start when I build my next company.
A Quick & Oversimplified Primer on Venture Capital
Now, I realize that as Black & Brown people, we just got to the party. So we’ve got some catching up to do. Here’s a super quick (and definitely oversimplified) primer on venture capital. I like the way that Tomer Dean breaks it down in his TechCrunch article.
Where does the money come from?
Pension funds, endowments, banks, insurance companies, and sometimes really rich people. So yeah, investors…have investors.
(Sidebar: there should be more discussion how Black & Brown folks’ money actually pays into this broken model that hardly benefits our people…but we’ll have to save that for another time.)
How does it work?
Those entities invest into a fund, that they understand is high risk, but is supposed to be worth it because it could yield high returns. Let’s say that the bar for success is earning 12% on top of their investment per year. Let’s also say that the fund has about 10 years to return the money to its investors. That means that by the end, it needs to be worth roughly 3X what it started with.
Now, in the meantime, this money is getting dished out to tech companies, but we have to remember that 90% of startups fail. So, something like 80% of the returns come from 20% of the startups they invest in.
This is hard, and it means that VCs are making bets on some tiny percentage of the companies that pitch them to have a huge, huge exit. Only a fraction of those investments (maybe only 1, maybe none) become a unicorn and get the fund’s returns where they need to be.
Unsurprisingly, many entrepreneurs have a rough go of scaling their idea to a billion dollar business. Hm.
A Model: Gather Info. Gather People. Prototype. Monetize. Execute. Iterate.
Okay, now that we’ve set the scene, let’s talk about what could look like if you start off modestly, without significant capital, and gradually grow it from there.
Let’s assume you’ve determined that you’re going to jump into starting your own thing, and that you’re going to pursue the idea in your head, no matter what.
It’s possible to do this with lean resources, but you have to make up for that money you’re missing with sweat, creativity, and resourcefulness.
If you want the the short version, the model is: build a community, prototype, monetize the community, execute, and iterate. What follows is a more detailed breakdown.
Step #1: Talk to yourself.
Before you start working on your idea, you should have a real conversation with yourself about your emotional and financial readiness, and what you actually want to achieve.
For example, when I started Tinsel, I thought that I wanted to build a hybrid of the next Apple and Tiffany & Co, but it took a series of hard lessons to realize that I really didn’t. I hadn’t really had an honest conversation with myself about whether this company vision was aligned with my lifestyle.
It wasn’t completely planned, but it was a welcome surprise when 6 months into building Tinsel, I got pregnant. I’ve been pregnant and/or a mom for most of the time I’ve been a founder. That was a complete game changer.
Tinsel currently makes its product in China, and I’ve had to travel back and forth overseas while my daughter was still a breastfeeding infant. I’ve had to pump in a humid, hot 90 degree factory in Shenzhen. I’ve had to lean hard on my family to help with the baby so I could attend meetings, networking events, conferences, etc. These things were necessary to get stuff done.
At the end of 2016, we finally shipped our first product, and I was starting to feel the drag of burnout. I started 2017 finally asking myself the hard questions…
- How many hours do I want to work each week?
- Do I want to be able to take vacations?
- How much do I want to be making?
- How much money do I have now?
- What’s the minimum amount of money I can live off of month-to-month?
- How low will I let my bank account get before I have to change course?
I had to assess my hopes and dreams (and those of my team) against Tinsel’s business model.
Many of us think we want to be the next Steve Jobs, but in earnest, want to build “lifestyle businesses”, and typically those are seen as not VC-fundable. That’s OKAY. They’re not valued at $1B+ but could still make millions a year.
So, do you want to have a mega-business, a small business, or do you just want to dabble on the side of your 9–5? Put these things into perspective from the beginning.
Tara Reed from Apps Without Code talks about this: “If your business idea requires massive scale to be profitable, stop and start over.” Same thing goes if you are planning to build a free product. She calls these Danger Zone business models. Instead, think about:
- What can you sell that makes lower numbers work? Start from a annual revenue goal and work it backward: if you want to gross $500K/year and your product costs $50, you need to sell 10,000 widgets, homie!
- What other high value services can you offer?
Step #2: Talk to other people.
Start talking to other people about the problem you want to solve, and the issues adjacent to it.
Get on Instagram, Twitter, Medium, or Facebook and start raising issues and your ideas around a solution. Ideally you’d pick just one social channel to focus on.
If you’re starting a company, you should be trying to solve a problem. This is where you want to flex your expertise in the space you are working in.
Start creating interesting and meaningful content for people on the regular. Make it fun and engaging and educational.
Step #3: Start building community.
Gather a tribe around you (NOT your friends) who care about the problem you are trying to solve.
Capture their information. This is as easy as putting up a one-page website with a waitlist. All you need is a form that collects an email address from your visitors.
Then, take that email list and keep your subscribers interested and excited by engaging them with some frequency.
Step #4: Build your prototype.
I love when Tara Reed talks about this, too. She basically says, your job is to answer these 3 questions:
- Does anyone want this?
- What features are important?
- Will people pay for this?
There are so many amazing tools out there to help you build out a software or online business idea. *Note: I still haven’t cracked the nut for a proper “DIY” in hardware without needing highly specialized resources.
The closest equivalent of this for Tinsel was when I bought a bunch of cheap headphones, clay, beads, wirecutters and created a (very ugly) prototype.
So embarrassing. But get creative!
Shout out to Sara Chipps for pushing me to do this way back when.
What I made wasn’t pretty, but it got something out of my head into a format that people could touch, see, and give me feedback on.
Step #5: Launch. Let people try it and see it.
It’s probably going to be janky AF. But that’s ok… the whole point is to answer those questions I mentioned:
- Does anyone want this?
- What features are important?
- Will people pay for this?
Go back to that waitlist and start letting them kick the tires. Choose small segments at a time so you can get fresh eyes on it with each iteration.
Step #6: Keep iterating.
Use your findings to make your product better. Over and over. And over.
Step #7: Get money.
As early as step 3, you’re going to have to start asking people to hand over some cash.
Businesses exist to make money. If you aren’t planning to at least make enough money to sustain your operations, goodbye. Do not pass go, do not collect $200.
Now, if you’ve adequately proven that people want this, and you’ve figured out what’s important to them, then you’re going to quickly find out if they’ll pay you for it. There’s no greater validation than a happy, paying customer. Make sure you have enough of them!
This is where that community comes in. It’s important to tee up people who are ready to have their prayers answered by what you’ve created.
Monetize them by either asking them to pay for your service directly, or crowdfund from them.
Step #8: Get more money.
As far as I know, your funding options are: bootstrapping (using cash in the bank, or credit cards, or a personal loan, etc), relying on wealthy friends or family, crowdfunding, the occasional grant or special funding program, angel investors, and VCs.
In the future, I would like to see new models that leverage communities and support creators. I believe that modern-day patronage and tipping for the everyday value that people provide can add up. If someone helps you become smarter, wiser, happier, or helps put dollars in your pocket — then they created value for you and should be compensated for it.
As a society, we can enable visionaries from all backgrounds to do their best work by supporting a “creative economy”.
In any case: Keep iterating, keep making your customers happy, keep creating value, and keep the money flowing. And, for what it’s worth, it’s MUCH easier to get the attention and consideration of investors when your business is making good money.
So, worst case scenario, you raise anyway. But BEST case scenario, you never need to raise at all.
And now, some pro-tips….
Pro Tip: Don’t try to boil the ocean.
To be an entrepreneur, you have to be a lotta bit passionate, and a little bit crazy. That “crazy” sometimes has us thinking that virtually anyone could be our customer. Do yourself a favor and start with a super specific picture of who you should be selling to. Then, get really good at selling it to them.
I remember hearing Nathan Barry from ConvertKit talk in an Indie.vc interview about how they narrowed down their initial target to a niche they could perfect for direct sales. It wasn’t just professional bloggers…but professional recipe bloggers. And not just professional recipe bloggers…but professional paleo recipe bloggers. Still, that wasn’t specific enough. They went for professional paleo recipe bloggers who were women.
Pro Tip: Manage your money with surgical precision.
Get to know how budgets, cash flow projections and payment terms work. This is critical. There’s a ton of ways to think about this, but this post is already long enough, and I plan to provide more content around this soon. Here’s one resource that’s been coming up a lot recently: Profit First.
Pro Tip: Keep your eyes open.
Keep tabs on what’s happening in your industry, your space. Set up Google alerts for mentions of your company, your competitors, related hot topics.
Don’t make the mistake of thinking you don’t have competitors. You do, even if not in an obvious form. Ask yourself what people are currently doing to manage the problem you are trying to solve.
Pro Tip: Work with people you can trust.
Startup life is hard, and being a entrepreneur is lonely and isolating. If you have doubts about the people you’ve surrounded yourself with, that will only make it worse.
Pro Tip: Always be learning.
We now live in the age of information, and artificial intelligence and machines, robots and drones. Anything can change at anytime. So make sure that you’ve always got new skills that you are honing or opportunities that you are learning about. Your future of employability and making money depends on it.
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Learn more tactics for launching a startup as a Black or Latino/a entrepreneur with modest resources at Black & Brown Founders Project Philadelphia on October 9th & 10th! Check out: https://blackandbrownfounders.com.