Rising Beyond Challenges: Black Tech startups pave new path to success amid VC hurdles
By Wesley Brown -- In the face of VC gaps, Arkansas' Black tech leaders innovate and thrive, redefining the path to success.
As Black-owned, tech-focused companies and startups looking to regain lost momentum in the post pandemic era, many are facing obstacles in seeking non-traditional sources of capital to grow and support their business operations.
Today, virtually no sources of venture capital (VC) funds are available to Black- and minority-owned startups in Arkansas. In the startup world, many early-stage companies get their first round of funding by tapping into VC loans and financing from so-called angel investors. This “seed funding” typically comes from close relatives and friends and the company founder investing out of their own pockets to get the operations off the ground.
For privately owned startups that survive those early stages, subsequent VC-supported Series A, B and C rounds allow founders to tap into equity fundraising from big-pocket investors in exchange for a stake in the company moving forward. Latter-stage startups that have seen strong growth in finances, operations and workforce position themselves for “going public,” raising further capital and providing liquidity to buy out early investors or exit with a big payoff.
Nationally, Black entrepreneurs typically receive less than 2% of all VC dollars each year while companies led by Black women receive less than 1%, according to data from Crunchbase.
In the wake of the police murder of George Floyd and the racial justice reckoning that followed, Black founders and Black-led startups saw historic gains in securing VC funding in 2021. However, as momentum around the movement fizzled and market conditions worsened, many of those gains were lost by the end of 2022.
While overall VC funding dropped by 36% in 2022 as inflation and interest rates surged, financing for Black businesses saw a steeper drop of 45%, according to the Crunchbase data. That drop is the largest year-over-year decrease Black entrepreneurs have seen over the past decade.
For startup and tech firms in Arkansas, there has been scant seed funding funneled to companies with Black founders or entrepreneurs needing capital to grow or expand, admits La’Twan Cheathem, vice president and business development officer for Arkansas Capital Corp. (ACC).
“I think time will tell. The conversation is about changing but is it really happening?” said Cheatham. “One thing that I’ve seen with venture capitalists is there is lot effort, but the response has been low.”
A mission-minded Community Development Financial Institution (CDFI), Little Rock-based ACC was founded in 1957 by former Arkansas Gov. Winthrop Rockefeller and other top state business leaders. For its part, ACC contributed $15 million in November 2022 to High Street Equity Partners, Arkansas’ first Blackled venture capital firm led by Tristan Wilkerson and Mitch Brooks.
According to the principals, that investment fund is targeted toward aiding early-stage high-growth tech firms in Arkansas and other underrepresented geographies across the Heartland. To date, however, the Little Rock Tech Park-housed investment firm has yet to fund any Black-owned startups in Arkansas.
Still, the need is there, said Cheatham, noting that the pandemic pushed many individuals into entrepreneurship and starting their own business.
“I think the one thing that the pandemic taught us is that it spurred more entrepreneurs, especially those that were sitting at home and got tired of watching the same old show over and over again,” said Cheatham, noting an increase in the number of pitch contests, incubator programs, and innovation hubs across the state.
Cheatham, a veteran banker with more than 20 years experience at top Arkansas banks, said ACC plans to launch a new micro-lending vehicle to target early-stage startups needing emergency capital. “They may just need $1,000 to scale their business,” he said.
Because VC funding is still in its infancy in Arkansas, underserved startups and entrepreneurs must be creative and wily in seeking funding to launch, scale or expand. Two Blackowned technology firms that have emerged out of the pandemic with robust growth plans are heeding that sage advice.
Only seven years ago, Little Rockbased Nelson Intelligence Solutions LLC (NiS) was a one-man tech startup in the emerging geospatial services and intelligence sector, offering technology expertise and tailored solutions in support of the U.S. Department of Defense, the nation’s intelligence community, and local and state government agencies.
Company President and CEO Eric Nelson took a leap of faith to leave a well-paid corporate position to start his technology firm seven years ago. A 17-year Marine Corp veteran, Nelson said during his first year of business also drove UBER part-time to supplement his income and military pension until he had enough cash flow to run the business full-time.
Today, NiS has more than 40 employees with plans to double that growth over the next few years. Much of that growth is largely due to Nelson’s experience in the Marine Corp with government contracting and his due diligence in securing financing, training and technical assistance through the U.S. Small Business Administration (SBA) and other local and state resources.
“Do your homework and have your stuff together,” Nelson advises Black startups and entrepreneurs. Nelson also notes that “a tight” business strategy is also key for the emerging minority business seeking financing and business deals.
“A lot of time, it comes down to the business plan. If you put a tight business plan together and it shows, and it has the right research and (metrics), it is hard for a (bank) to really tell you no. They can’t tell you your business isn’t going to be successful if you have all the proper research in that plan,” said Nelson.
Although not as aggressive as NiS, Little Rock-based Bami Technologies Inc. has also emerged out of the pandemic with robust growth plans for the future. Like NiS, Bami has also found support and financing several U.S. Small Business Administration’s initiatives, including the popular 7(a) and 8 (a) programs.
“We have accessed SBA training programs and workshops to enhance our knowledge in areas such as business planning, financial management, and marketing strategies,” said Bami Founder Imhotep Temfack. “These resources have been valuable in helping us develop a solid foundation for our business and make informed decisions.”
Founded in 2019, Temfack said he is no longer Bami’s sole employee, recently hiring two full-time employees after winning key federal government contracts. “We are looking to grow even more as navigate various aspects of running and managing a business successfully,” said Temfack, a master electrician whose company provides cutting-edge electrical integration solutions.
Highly touted by Cheathem for its flexibility and less stringent screening requirements, NiS and Bami have found financing through the 7(a)-loan program, the SBA’s primary financing vehicle for small business owners with a maximum advance of $5 million. The 7(a) loans can be used as short or long-term working capital to purchase much-needed equipment or machinery, refinance debt, and/or to acquire, refinance, or improve business property or offices. Key eligibility factors are based on what the business does to receive its income, credit history, and where the company operates.
As a certified SBA lender, Cheatham said ACC primarily works with underserved business owners across the state, educating businesses and banks alike about the 7(a) loan and the rural 504 loan for entrepreneurs in rural areas.
“These products are beneficial to both the business owner and entrepreneur or the financial institution. With SBA lending and the type of lending we do, we give the business owner the much-needed funding to launch, scale or diversity their business,” he said. “(This) allows us to get capital in the hands of individuals that probably got declined through the traditional loan process.”
Nis and Bami are also participants in SBA’s popular 8 (a) business development program, a nine-year program for experienced small business owners “who are socially and economically disadvantaged.” The program's first four years are considered a development stage and the last five years are considered a transitional stage. Once certified, 8(a) participants are eligible to receive federal contracting set-asides, training and technical assistance designed to strengthen operations and bottom line.
Another budding tech entrepreneur, Kwadi Higgins, is looking to jump-start her own business soon. A past participant in the Central Arkansas Startup Weekend at the Venture Center, Higgins has “pitched” startup ideas that would make it easier for people to change careers and another brainstorm that other solves the food desert problem by tapping into each community's resources.
Like other Black entrepreneurs in Arkansas, Higgins said the biggest hurdle is gaining financial support for her ideas.
“I'm dedicated to bringing one of those ideas to life, working diligently to turn it into a reality that I hope will positively impact others,” she said