Finally, A Capital Solution for Black Entrepreneurs Inspired by King’s Whole Dream
Capitalism does not permit an even flow of economic resources. With this system, a small privileged few are rich beyond conscience, and almost all others are doomed to be poor at some level. That’s the way the system works. And since we know that the system will not change the rules, we are going to have to change the system.
— Rev. Dr. Martin Luther King Jr.
Dr. King’s words are poignant and clear. He gives a clear call to action for change. Before we attempt to change any system or create a new one, we have to first understand the system and who it is designed for.
A Brief History: The Origins of Modern VC in Silicon Valley
In 1957 Arthur Rock, a corporate finance professional and Harvard Business School graduate, invested in a little known company called Fairchild Semiconductor for a 20% equity stake. Fairchild Semiconductor was founded by Sherman Fairchild when he and seven others known as the “traitorous eight” left Shockley Semiconductor Laboratory to start a new firm. Today, Rock’s capital injection into Fairchild Semiconductors is considered by many to be the first modern venture-investment in Silicon Valley.
As a result of Rock’s investment, a new model of making equity investments started to take shape. Focused on technology companies, new firms emerged aggregating capital from high net-worth individuals and corporations to invest through investment funds. Many of these firms structured themselves as 10 year investment vehicles with a 2% annual management fee and take 20% of the profits generated. This 2 and 20 investment model is still used by investment firms today. The collective activities of starting and aggregating capital to invest in the growth of new companies are the origins of modern venture capital. The up-and-coming companies they invested in, we now call start-ups.
In 1972, one of the early team members of Fairchild Semiconductors, Eugene Kleiner founded Kleiner Perkins Caufield & Byers, which today is one of Silicon Valley’s largest and most established venture capital firms.
Since the mid 70‘s, the system continues to work for who it was designed for; highly connected, well-educated white men. The aggregation of social and financial capital is the result of people working with and investing in people in proximity to their work, lives and experiences. The problem is that this system is largely closed to those who don’t fit the archetype. Like many other institutions in this country, venture capital has neither been accessible to many nor has it evolved much despite the shift in the United States’ demographics, company needs, and the cost of innovation. What’s needed is a change in mindset and a commitment from change-makers. What’s needed is capital innovation.
Capital Innovation and The Rise of the Capital Entrepreneur
While California’s Silicon Valley started to take root between 1957 and 1972, a movement nearly 2500 miles away had the rest of the country’s focus, the Civil Rights Movement. Between 1954 and 1968, Black Americans and their allies fought to have their votes counted, communities left alone to thrive and their existence as human beings acknowledged.
A champion of the people, Rev. Dr. Martin Luther King Jr., a Minister and activist became a highly visible spokesperson and leader in the Civil Rights Movement from 1955 until his assassination in 1968. During his famous I Have a Dream speech, Dr. King called for civil rights and social justice for Black Americans and an end to racism in the United States.
“We cannot be satisfied as long as the Negro’s basic mobility is from a smaller ghetto to a larger one.”
What many may not know is that in the early and mid 1960’s Dr. King began to expand on the economic portion of his dream. The next chapter of King’s dream was focused on economic mobility, the perils of capitalism and the lack of job creation for Black Americans. It was during the 1963 March on Washington for Jobs and Freedom, King declares; “We cannot be satisfied as long as the Negro’s basic mobility is from a smaller ghetto to a larger one.” It’s here that King’s vision becomes clearer. King was not only fighting for social justice, he was also fighting for economic justice. During King’s now infamous speech on economics he recognized that in order to obtain the equality he and others fought for, Black Americans had to have access to capital systems and resources. While King and Black Americans in the South fought for inclusion and access, a new capital institution called venture capital was taking shape in the West. Much like loans, merchant financing, equity investments and other predecessors, venture capital wasn’t designed with Black entrepreneurs and communities in mind.
Unfortunately, Dr. King’s life was cut short and he never got to see the “even flow of resources” he spoke about. Instead many Black Americans continue to struggle to obtain the resources needed to thrive and instead apply bandages to an ailment that requires surgery. To solve these issues, we need ideas that are not rooted solely in social, financial or political deficiencies. We need ideas from people that view the world through a problem-solving lens, entrepreneurs. Specifically Capital Entrepreneurs; people who identify problems or gaps in the financial capital markets and create new products to solve problems or fill in gaps.
To some, entrepreneur-turned-investors are simply changing sides of the capitalism table. In many instances this is true, particularly with the continued growth of Black and diverse fund managers. However, what if entrepreneurs stayed on the “problem-solving” side of the table? What if entrepreneurs saw a problem in the capital market and decided to do what they do best; build a product that solves it?
To be clear, building an alternative investment instrument isn’t a new idea. What many may not know is that despite the growth in diverse fund managers and new forms of investment, there are currently no funds that possess both and focus specifically on Black founded companies. Until now.
Hello World: Collab Capital a New Institution
Recognizing the need for a new solution, Jewel, Barry and I came together to found a new institution for Black entrepreneurs called, Collab Capital. Instead of focusing our energy on the deficiencies of our entrepreneurial ecosystems and communities, we’ve concentrated our efforts on building a set of financial and educational tools to help Black businesses grow. As a result, what we’ve centered ourselves over a growth-capital solution for Black founders seeking capital who value profitability, ownership, and optionality.
We are setting out to shrink the wealth gap by helping Black founded businesses overcome the funding and network challenges that often stifle their growth. Our intentions are to invest in a new class of entrepreneurs who are building sustainable, profitable companies, hiring in their communities, and reinvesting in the founders that come after them. To do these things, we’ve designed a new investment product which aligns our interests with both the investors and founders we serve and support.
In the simplest form, our capital product is designed to reduce the cost of acquiring customers for entrepreneurs, while leaving room to grow a business focused on profitability instead of just growth. Doing this ultimately provides entrepreneurs with choices where they may not have had them before.
Furthermore, for investors seeking diversification in portfolio construction and return mechanism, our investment instrument focuses on profit sharing instead of company valuations and exits. We believe that focusing here will decrease the likelihood and number of portfolio companies that go to zero, while providing returns throughout a greater portion of our fund’s life.
Essentially, we decided to not focus on what Black entrepreneurs don’t have and how certain capital models don’t work for them. Instead, we focus on galvanizing, organizing and catalyzing what our community of entrepreneurs, executives, and influencers do have. We have each other. We cannot change a system that does not want to change. So, we’re building a new one.
We’re excited to share our journey, and invite you to follow along on Twitter at @collab_capital or sign up for our Capital Innovation newsletter here. Additionally, if you’re a founder please tell us about your company here. Likewise if you’re an investor and would like to learn more about our model get in touch here.
- Justin Dawkins
General Partner, Collab Capital