Beyond investments: Seeking real change in diverse venture capital funding

Yelitsa Jean-Charles created Healthy Roots Dolls to teach young Black girls to love and care for their curls, and spent five years building relationships to get her business off the ground. It worked: she closed her first round of funding at the end of 2020: a $1 million seed round from Backstage Capital, Broadway Angels, Lightship Capital, and some individual investors. But she says not all of her conversations with investors have gone well. 

“I would meet with an investor and they would say, ‘This isn’t a fit for us, but have you talked to insert-random-Black-venture-capitalist?’” says Jean-Charles. “Mind you, that person doesn’t even invest in physical products.” Her story is part of a larger pattern of women and minority founders being routinely dismissed by mainstream venture capital funds. From 2015 to 2020, only 2.4% of venture capital funding went to companies with Black or Latinx founders, according to Crunchbase Diversity Spotlight 2020: Funding to Black and Latinx Founders. The 2021 VC Human Capital Survey found that only 4% of venture capital firm employees are Black and 7% are Latinx, and the percentage of minority firm partners is even lower. 

This lack of diversity in venture capital firms and the founders they fund directly affects the types of business that are being built, with consequences for the American economy. According to the Center for Global Policy Solutions, 1.1 million minority-owned businesses, nine million jobs, and $300 billion in income could be generated by fixing discriminatory lending practices. 

“There are so many gaps in the marketplace where underrepresented communities need to be supported,” says entrepreneur Dee Poku Spalding, the founder and CEO of The WIE Suite and founder of Black Women Raise, which provides Black female founders with a network and platform to raise capital. Both of these organizations create communities that enable female leaders to access the training, resources, and mentors they need to succeed.

Last summer there was a widespread movement to inject greater equity into who gets funding. In the immediate wake of George Floyd’s death, companies created new programs to demonstrate their commitment to antiracism. SoftBank launched Opportunity Fund, dedicating $100 million to companies with minority founders. That same week, Andreessen Horowitz set up Talent x Opportunity (TxO), an initiative combining an initial $2.2 million in funding with a 10-month training program for underserved communities. A few months later, Alexis Ohanian, the cofounder of Reddit who is married to Serena Williams, started Seven Seven Six, a venture fund that aims to make more equitable investments. 

Venture capital firms weren’t the only ones seeking to make a difference. Crunchbase allowed founders to highlight their ethnicity, race, and gender in its database for the first time. Big banks like JP Morgan Chase and Bank of America announced funding initiatives of their own while others, like Goldman Sachs, continue to make inroads with existing programs and establish new ones. 

Goldman Sachs has invested nearly $500 million as part of Launch With GS, an initiative founded in 2018 to increase capital flow to minority and female founders and investors. And this month the bank announced One Million Black Women, a commitment of $10 billion over 10 years in direct investment capital to address areas that impact the lives of Black women. 

“No one group of people has a monopoly on great ideas,” says Suzanne Gauron, head of Launch With GS. “This is an area where we think we can do well by doing good and investing capital in areas that are so vastly underrepresented.”  

An uncertain step forward

Nine months after George Floyd’s death, some progress has been made. “In 2015, less than four percent of funds that raised capital were Black- or Latinx-led. In 2020, [it’s] about nine percent,” says Mack Kolarich, chief product officer at Different Funds, which helps institutions manage venture capital funds. “We have a long way to go, but the momentum is there.” 

Some investors are working to create equity, while others are falling short, and some new programs seem to be more focused on philanthropy than investment. The fact that dedicated funds are needed just to direct investment dollars to those who’ve been systemically overlooked is, in itself, evidence of the need for deeper change. “Dedicated capital for diverse founders can help mitigate some of the unconscious bias that occurs with more flexible pools of capital,” Kolarich says. “But they’re not going to fix the problem that we’re seeing endemic in society.”

Poku Spalding cautions against companies designating relatively paltry sums or paying lip service to increasing equity without providing the transparency needed for accountability. “Various companies are citing great big numbers that are being allocated towards underrepresented founders and it’s really hard to track how to access that money,” she explains.

Visible accountability for equitable funding is key. Kolarich recommends that all funds monitor, measure, and publicly report on the gender, racial, and socioeconomic composition of their portfolio. Currently the number of firms that monitor DEI at their portfolio companies has grown to 30% from 19% in 2018.

Why diversity at VC firms matters 

What dedicated funding doesn’t solve for are the reasons why so many Black founders come out of pitch meetings with mainstream funds empty-handed. It’s not that startups with underrepresented founders don’t succeed. In fact, Black and Latinx women-owned startups have a significantly lower two-year fail rate (27%) than the average startup (40%) according to ProjectDiane2020. 

But when Black founders meet with investors, the focus can stray from their business and its potential. “We have stories of founders who have gone into pitch their businesses, for example, in a room with investors and a comment would come back to them about their name being really hard to pronounce…or something else that has absolutely nothing to do with the business, the idea, [or] the growth potential,” says Christina Brown, director of communication for digitalundivided, a nonprofit that advocates for Black and Latinx female entrepreneurs.

Other times, founders report investors failing to retain basic facts about their company or being overly skeptical of their expertise. “The reality is that I am different from most of the people that I pitch,” says James Norman, the founder and CEO of creative content market research platform Pilotly, which was founded in 2015 and has had two small found fund rounds of less than $1 million. “And they are not completely hearing what I’m saying nor believing what I’m saying based on what I know.” It’s those kinds of experiences that inspired Norman to co-found the Transparent Collective, a nonprofit that has helped 52 minority-led companies raise more than $42 million in early-stage funding to-date from investors such as Concrete Rose, Precursor Ventures, and Kapor Capital. 

Diversifying decision-makers at venture capital firms is as important as increasing accountability for equitable funding and there’s evidence that having more diversity of thought among asset managers leads to better outcomes. But it’s also true that Black investors are likely to have gone through similar institutions as their white counterparts and therefore may hold similar worldviews. Richard Kerby, a cofounder and general partner at Equal Ventures, found that 40% of all venture capitalists—and more than 50% of Black investors—attended either Stanford or Harvard. Norman suggests firms “hire Black entrepreneurs—or entrepreneurs in general.”

While investors typically assess the potential for risk during a pitch, “when you get someone who’s an entrepreneur, that starts to eliminate some biases,” says Norman. 

Norman’s idea echoes the approach that Seven Seven Six is taking with its Operator in Residence Program. The program aims to diversify the backgrounds and experience of venture capitalists by training developers or marketers to become investors. Seven Seven Six’s inaugural class consists of three minority and female operating partners, with experience in product management, policy, CX (customer experience), and design.

Founders of color have less wealth to start

White families in American typically have eight times the wealth Black families do, and five times the wealth of Hispanic families. This wealth gap is exacerbated by the pandemic and economic downturn that’s been disproportionately hard on communities of color. Black and Latinx Americans are dying at 2.1 and 2.5 times the rate of white Americans from COVID-19 and are significantly more likely to have had their pay cut, lost their job, and be last to receive PPP loans.

Venture capital is especially important for founders of color, who may not have the network of connections and friends and family able to contribute to early funding.  

“Venture capital allows founders to move and scale companies quickly. I’m interested in a company that can serve millions of people, not just a few —that’s where venture capital kicks in,” says Kevin Dedner, the founder and CEO of Hurdle, a digital mental healthcare platform whose therapists are trained to address issues of race, ethnicity, class, and culture. Hurdle closed a $5 million series seed financing co-led by 406 Ventures and Seae Ventures with participation from F-Prime in January 2021. (Dedner went through Transparent Collective’s founder program in 2018.)

Dedner points to the fact the venture capital firms usually assume that founders can raise money from their social networks through friends and family rounds of funding to prove out their ideas. “There are some rare circumstances where that can happen for people of color,” he says, “but... there’s this historic disadvantage that people come from.” 

Acknowledging this assumption is a way to address the systemic unfairness. “We’ve spent a lot of time over the past three years building what we call our ecosystem, which brings together entrepreneurs, investors, and other interested parties to be part of a single network because so much of access to capital is about who’s in your Rolodex,” Goldman Sachs’ Gauron says.

The wealth gap makes the question of access all the more critical. Denetrias "Dee" Charlemagne, cofounder of Avec Drinks, a startup making healthier, better-tasting mixers that launched online last summer, recently graduated from Columbia Business School. She has raised a friends-and-family round and is working to secure seed funding. “I have $150,000 in debt from business school—which I happily took on. Any wealth I generate, I’m starting $150,000 behind a lot of my friends…So the real question to me is where is wealth going at the end?” 

Venture capital firms can have an enormous impact when they work to be actively antiracist by giving Black and minority founders the funding they need to build game-changing companies. Because when more Black founders build successful companies, they leave paths of opportunity in their wake. 

“Having an example of people [like you] who have successfully founded companies makes a difference,” says Charlemagne. “You can imagine it if you see more of it in your world.” 

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