A record 2021 is cause for celebration…and more aggressive change
Shortly after the racial unrest that followed George Floyd’s death, Black startup founders suddenly found themselves in favor. Venture capital funding for Black entrepreneurs reached almost $1.8 billion through the first half of this year1. That’s four times the amount of funding doled out at the same point a year earlier. Could it be that VC firms have finally recognized the untapped potential in Black-owned companies? Not quite.
While $1.8 billion – and for that matter, a fourfold increase – may sound like a lot of funding, it’s only 1.2% of all VC funding dished out in the first half of 2021. And for nearly five years, that percentage has hovered around the 1% mark.
So, why are VC firms continuously turning a blind eye to Black founders? The struggles of Black-owned VC firms may offer some clues.
In the past few years, an arm of VC funds and firms has surfaced, with each focusing specifically on funding companies owned by underrepresented groups. Think Backstage Capital, the buzzy firm started by Arlan Hamilton that specifically targets women, people of color, and LGBTQ+ founders. Some firms have also created so-called diversity funds to go after founders who have historically missed out on funding.
But many of these newer funds have found it difficult to access capital2. Even when the startups that they’d like to fund are backed by promising data and positive results, investors still see these startups as “diversity” investments, which they assume are more about goodwill and social responsibility than actually making back money on their investments. They fail to understand that diversity investing is good investing, and these companies are just as capable of delivering strong returns.
Furthermore, when a founder’s company addresses a need in a diverse community, there’s often a disconnect between the audience being served and the investor’s understanding of the market, leading them to mistakenly think there’s no potential for growth3.
There’s also the harsh reality that investors often have a narrow view of what a founder looks like. Black founders, as well as other founders of color, don’t always have the networks and the social capital to find opportunities. Thus, with little success to their names and with no tenable connections to potential investors, they’re judged on more subjective criteria4. This translates to implicit racial bias and discrimination, forcing founders of color to pursue different avenues for capital.
Just as it is in the world of tech, those individuals without the “right” network face setbacks. Securing funding is less about the quality or viability of their ideas and more about who they know and what they look like.
With all these seemingly daunting factors at play, how can Black founders overcome the obstacles and lock in funding? One option is seeking out funds or firms that are run by people of color, or that explicitly focus on funding underrepresented founders. (Not to mention, we need more people of color to start their own VC firms.) These founders also need to build their networks, through events, LinkedIn, membership in professional groups, and involvement in both local and national incubators and accelerators.
The events of the last year have moved the needle just a smidge, but to ensure that Black founders get an adequate slice of the venture capital pie, they’ll have to force their way into the firms and the meeting rooms at the same time.
1Van Romburg, Marlize and Teare, Gené. (July 13, 2021). Funding To Black Startup Founders Quadrupled In Past Year, But Remains Elusive. Retrieved from: https://news.crunchbase.com/news/something-ventured-funding-to-black-startup-founders-quadrupled-in-past-year-but-remains-elusive/
2Williams, Bärí. (September 28, 2017). One Reason Black Founders Don’t Get Enough Funding? Black VCs Don’t, Either. Retrieved from: https://www.fastcompany.com/40473294/one-reason-black-entrepreneurs-dont-get-get-enough-funding-black-vcs-dont-either
3White, Ronald D. (June 5, 2021). Black, Latinx and female entrepreneurs are still ignored by most venture capitalists. Retrieved from: https://www.latimes.com/business/story/2021-06-05/black-latinx-and-female-entrepreneurs-are-still-ignored-by-most-venture-capitalists
4Connley, Courtney. (October 8, 2020). Black and Latinx founders have received just 2.6% of VC funding so far in 2020, according to new report. Retrieved from: https://www.cnbc.com/2020/10/07/black-and-latinx-founders-have-received-just-2point6percent-of-vc-funding-in-2020-so-far.html
