A Looming Recession Brings Light to an Ongoing Problem
Welcome to recessionary times. Gone are the days where venture capital, angel investors and private equity funds were plentiful. These outlets have slowed dramatically in 2022 and are expected to continue to dry up throughout 2023. Rising Federal Reserve rates and inflation impacted investors and lenders alike, with both tightening standards. Now, the onus is on businesses to prove their worth and demonstrate how they are going to make money. Diverse founders have the most to lose in this situation as they’ve long struggled to find backing.
Crunchbase data concludes that overall venture capital funding dropped by a third in 2022, with financing for Black businesses seeing an even larger decline of 45%. This is alarming when historically Black founders typically receive less than 2% of all venture capital funds.
While these disparities are nothing new for diverse founders, it’s important to note the reasons behind raising equity that are particularly challenging for Black, Indigenous, and People of Color (BIPOC) entrepreneurs:
- Lack of diversity in the venture capital industry: The venture capital industry is largely homogeneous, with limited representation of BIPOC individuals among decision-makers. This can make it harder for BIPOC founders to secure funding from venture capitalists and private equity firms.
- Bias and discrimination: Unconscious bias and discrimination can influence investment decisions and make it harder for BIPOC founders to secure funding.
- Limited access to networks and resources: BIPOC entrepreneurs often face barriers to accessing the networks, mentorship, and resources that are critical to successfully raising equity.
- Different fundraising experiences: BIPOC founders may have different experiences and cultural backgrounds than their non-BIPOC counterparts, making it harder to navigate the fundraising process and connect with potential investors.
- Stereotyping and undervaluation: BIPOC-led startups may be subjected to stereotyping and undervaluation, making it harder to secure funding on favorable terms.
Addressing these systemic barriers and increasing diversity and inclusivity in the venture capital industry will be crucial in providing BIPOC entrepreneurs with equal access to capital and opportunities to grow their businesses.
It’s not all doom and gloom though. There are benefits and even some solutions to the current market situation. After years of inflated valuations, the pressures of fewer capital sources will force companies to focus on market fit and hone their offerings. This new landscape can inspire alternative ways of approaching a problem, something diverse founders bring to the table in droves.
As well, with venture capital funds becoming more scarce, non-dilutive debt and other alternative types of financing solutions – are attractive options right now. Those seen as the “best and brightest” companies will still be able to secure funding and flourish, but in this market, many companies will fail. Unfortunately, most of those will be diverse-led companies who have an inordinately difficult time securing backing to begin with.
So, how does a diverse small to medium-sized business with limited access to venture capital or bank loans survive in 2023? Taking on growth capital from impact lenders like Founders First Capital Partners will allow companies to continue operating, building, avoiding valuation down rounds and retaining equity in the current downturn and beyond.
Growth capital has advantages over equity financing:
- No dilution of ownership: Debt financing does not involve giving up ownership, a seat on the board or control of the company.
- Quicker cash in hand: Raising equity takes a lot of time and leg work. Debt financing transactions can be completed in weeks instead of months.
- Predictable cash flow: With a term loan, the company knows exactly how much it needs to pay each month, making it easier to plan and manage cash flow.
- No long-term commitment: Unlike equity financing, debt financing has a set repayment period and the company is not committed to having the lender as a long-term shareholder.
- Lower cost of capital: In some cases, debt financing can have a lower cost of capital compared to equity financing, especially for well-established and profitable companies with a strong credit history.
However, it is important to consider that debt financing also comes with its own risks, such as the possibility of default and the need to repay the loan regardless of the company’s financial performance. Additionally, too much debt can be a burden on the company’s financials and limit its flexibility to pursue new opportunities. It is important to carefully weigh the pros and cons of both debt and equity financing to determine the best financing strategy for each individual company.
While downturns in the economy are nothing new, knowing that diverse founders have viable alternatives when private equity and venture capital aren’t readily available, should be a comfort. If you’re interested in learning more about non-dilutive debt financing with Founders First Capital Partners, email us at firstname.lastname@example.org.
Tracy Fuga works in Business Development and Marketing for Founders First Capital Partners where she oversees efforts to connect diverse founders with capital to grow and scale their businesses.