From Fyre Fest to Theranos, the Invisible Racial Subtext of Raising Capital [Op-Ed]

By Lynnise E. Phillips Pantin Mar 22, 2019

This week, millions watched "The Inventor: Out for Blood in Silicon Valley," the HBO documentary about disgraced startup founder Elizabeth Holmes, whose failed venture, Theranos—once valued at over $9 billion dollars—revealed her to be a fraud. Holmes dropped out of Stanford University to start her self-described “revolutionary” blood testing medical technology company, which rapidly pushed her net worth over a billion dollars. She was featured on the cover of respected magazines, profiled in highly regarded newspapers, and held in esteem by Presidents Clinton and Obama. Until it all unraveled.

And then there is the story of the failed Fyre music festival and its creator, Billy McFarland. It was so compelling that it spurred two documentaries: "Fyre Fraud" on Hulu and "Fyre: the Greatest Party that Never Happened" on Netflix. Viewers delighted in the schadenfreude of the festivalgoers’ outrage and marveled at the massive fraud surrounding not only the Fyre Festival, but Magnises, an earlier failed credit card venture founded by McFarland—a college dropout and founder of two defunct companies. He was convicted of wire fraud in 2018, having stolen $27.4 million from investors. The release of both documentaries triggered a flood of jokes, memes and thinkpieces on social media based on the shocking details of the fraud.

The ease with which Holmes and McFarland were able to raise staggering amounts of money demonstrates the role of unconscious bias in capital raising and the racial wealth gap in action. Yes, their sagas certainly tell the tale of greed, fraud and deception. But the most striking element of their stories is how quickly wealthy, mostly White, investors threw massive amounts of money at both founders, hailing them as the next Steve Jobs and Mark Zuckerberg despite obvious warning signs that both companies were all hype and little substance. The questions raised by the fraudulent founders cannot be explored without a frank examination of the role that race and the racial wealth gap play in startup success.

Their infamous ascents suggest that if you are White and have the right pedigree and a new or novel idea, access to capital is relatively accessible. But entrepreneurs of color without means or resources experience entrepreneurship in a vastly different way. Tristan Walker, a Black entrepreneur who has raised $33 million dollars for his startup, Walker & Company Brands, has noted that “everything I do is judged two times in either direction.” He has never been given the benefit of the doubt that propelled Holmes and Theranos to unicorn status.

As the director of Columbia Law School’s Entrepreneurship and Community Development Clinic, which provides free legal support to underserved entrepreneurs, I see firsthand how entrepreneurs of color with great ideas, hustle, grit and actual products struggle to find mentorship and financing for their ventures. Quite simply, these talented, ambitious entrepreneurs do not have the same access to capital as their White counterparts.

Despite their individual disgrace, McFarland’s and Holmes’ success in raising capital remains a lesson in the ways that race, privilege and wealth dictate startup success. The country’s disparities have manifest in a dramatic racial wealth gap that affects entrepreneurship in profound ways. Although the numbers are on the rise, successful founders of color are largely absent in entrepreneurship because of lack of access to capital. Many of these underrepresented entrepreneurs do not have access to the traditionally White, male networks that McFarland and Holmes relied on for funding.

The racial wealth gap affects all methods of capital raising for startup businesses. Funding streams to entrepreneurs mirror where the wealth already exists, resulting in White male entrepreneurs receiving the majority of startup funding. Federal Reserve data shows that White families on average had seven times the wealth of Black families and five times the wealth of Latinx families in 2016. When entrepreneurs of color reach out to their friends and family for seed capital, this wealth gap puts them behind their White counterparts, even for the most innovative ideas.

The numbers are stark: women founders of color make up only 3 percent of all U.S.-backed angel deals and men of color make up 25 percent of all U.S. angel-backed deals in 2016. In 2017, only 16 Black women-led companies had raised over a million dollars in venture capital funding, and Black women represent just .0006 percent of the $424.7 billion in total venture funding raised since 2009. Although organizations such as Founder Gym, an online program that teaches underrepresented founders how to raise money to scale their tech startups, digitalundivided, a pipeline incubator for Black and Latinx women entrepreneurs and Smarter in the City, a high-tech accelerator that supports businesses owned by people of color, have emerged, the disparity in capital raising between founders of color and White founders still exists.

It may be difficult to conceptualize changing the status quo given the statistics and the fact that it is challenging to develop recommendations to regulate private behavior that operates in a space of power, privilege and structural racism, but it is possible to create an environment that supports diversity in entrepreneurship and prioritizes equality of access to capital for entrepreneurs of color.

The first step is to call out the operation of bias in the private finance markets by questioning hype and developing an understanding of the work needed to overcome bias. The next step is to expand access to social capital by investing in underserved entrepreneurs through training, entrepreneurial education, mentorship and exposure. A key component is to make incubators and accelerators more inclusive. Research shows that women and people of color do not participate in accelerators and incubators at the same rates as their White, male counterparts. The next step is to turn to public support or public subsidy of private funding, such as taking advantage of “Opportunity Zones” in the recent tax bill and using them to an advantage by creating diverse and inclusive entrepreneurial ecosystems, including crafting “friends and family” funds and pushing for tax credits to expand venture capital investments in startups founded by people of color.

The underrepresentation of people of color in the entrepreneurship ecosystem represents the loss of a multi-billion-dollar business opportunity. Addressing the racial disparity in capital raising is particularly imperative as the United States becomes a majority-minority country by 2040. The racial disparities in the startup ecosystem must be addressed or the number of missed opportunities will only increase and the country will lose its innovation edge.

Lynnise Pantin is a clinical law professor and director of the Entrepreneurship and Community Development Clinic at Columbia Law School. She teaches and writes in the areas of entrepreneurship, economic justice and clinical legal education. Follow her on Twitter @LynnisePantin.