When Dana Guthrie set out last year to raise $8 million to start her own venture capital fund, she was, in her own words, like a jockey without a track record.

In an analogy to horse racing, investors are often advised to “bet on the jockey, not the horse,” choosing the entrepreneurs they believe will be able to execute their plans. Having never managed a similar fund, she couldn’t point to the rates of return she’d earned in the past. She could only point to statistics showing that underrepresented private equity fund managers outperform their peers. 

“If no one ever takes a bet on me … I would never have the opportunity to establish a track record,” said Guthrie, who ultimately surpassed her goal, raising more than $13 million and becoming the first Black woman in the state to raise an investment round. 

Today, as managing director of Milwaukee-based Gateway Capital, she’s the one offering capital to those who often struggle to get it. Her fund invests in early-stage startups in low- to moderate-income areas of the state, with a particular focus on Milwaukee. 

Guthrie addressed that unequal funding landscape — and what it will take to fix it — at a Wednesday virtual panel about investing in Black entrepreneurs, part of the 2021 Madison Region Economic Development and Diversity Summit hosted by the Madison Region Economic Partnership and the Urban League of Greater Madison. Evan Reed, senior director of impact investment strategy at Milwaukee-based Northwestern Mutual, and Ruben Anthony, CEO of the Urban League of Greater Madison, joined Guthrie on the panel, which was moderated by former Madison chief of police Noble Wray. 

‘Hidden gems’

Entrepreneurs of color face disproportionate challenges in getting loans or investments to start or grow their businesses. With less wealth on average, they’re less likely to have the collateral lenders are looking for, and even when all factors are equal, studies have found that traditional lenders are less likely to approve applicants of color than comparable white applicants. Meanwhile, while Black Americans make up about 12% of the U.S. population, Black-founded startups received just 0.6% of the venture capital deployed in 2020, according to a report by Crunchbase News. That number shot up in the first half of 2021 — to a meager 1.2% of the $147 billion raised.

“Folks just haven’t had the confidence to invest into minority-owned businesses to the level that they need to,” said Urban League’s Anthony, who’s spearheading the $2.53 million project to build a Black Business Hub and an accompanying accelerator fund. The project is designed to provide both affordable space and access to capital for new and existing businesses owned by people of color.

Those who do choose to invest in businesses owned by people of color may “gain hidden gems,” provided they make their investments early, Anthony said. “There’s a lot of upside and a lot of untapped opportunity here in Dane County.”

Investing in Black entrepreneurs isn’t a matter of social responsibility, Guthrie said: It’s just good business, and Black entrepreneurs should make their case accordingly.

“We have unique problems that we face that are extremely valuable and profitable problems to solve, that other communities aren’t aware of. Those are brand new markets that people can jump into and make a whole lot of money off,” Guthrie said. 

“If we go in speaking and requesting funds with that position, like, ‘This is an opportunity that I’m offering you to invest and make a return,’ then the conversation kind of shifts, because I believe that most people want to make money.”

Corporations have increased their investments in minority-owned businesses since the deaths of George Floyd and Breonna Taylor and the ensuing racial justice protests last year. Moderator Noble Wray asked the panelists whether such investments will continue.

That will depend on whether those investments prove profitable, Guthrie said. “In five or ten years, if we look back and there was no return … then no, this will not be sustainable, and no, it will not last.”

Reed agreed. Northwestern Mutual spends money on philanthropy, he said, but the money the financial services company invests is supposed to turn a profit. 

“For me to have a job, essentially, in two years, this fund needs to be successful,” Reed said. “I’m looking for businesses that can provide that return.”

Solutions proposed

If banks want to grow Black wealth, they’ll need to change, Guthrie said, because their traditional processes haven’t served Black Americans. 

“There needs to be some reevaluation and some innovation around how you better support these businesses. How do you meet them where they are? Which part of your processes are, frankly, not working at the moment?,” Guthrie said.

But, she said, changing the funding landscape will also require changing the face of the funders themselves, both by putting more people of color into roles as venture capital fund managers and by mobilizing more Black investors. Just 3% of venture capitalists are Black and 1% are Latino, according to data from Richard Kerby of venture capital fund Equal Ventures.

“I think if we change the makeup and the demographics of the folks who are funding, then you’ll see a change in what gets funded, because you’ll see a more diverse way of evaluating different small business ideas and startup ideas,” Guthrie said.

According to a 2013 report by the W. K. Kellogg Foundation, African American families give away 25% more of their household incomes than white families do. Guthrie would like to see more Black Americans consider putting some of their money to work for them — and for their communities.

“You typically give philanthropically, (but) how can you invest into these communities and expect a return?” Guthrie said. 

Black Americans could be an untapped funding source for Dane County’s Black businesses, Anthony agreed. “A lot of black investors are sitting on the sidelines with their resources and their money, waiting for a great opportunity to come.”