A deep dive into the unconscious biases against minority startup founders.
As much as we believe ourselves to be an evolved society that no longer conducts discriminatory practices, racism finds its way into different aspects of our lives. Yes, even in the business world, especially in the United States.
Black startup founders in the U.S. have only been able to raise around US$2.254 billion out of the US$215.9 billion venture capital (VC) raised in 2022. This is roughly 1% of the total VC funding generated by startups in 2022. To explain why this is happening, we delve into why black founders struggle to raise funds and how the situation is being addressed.
Lack of representation in VC firms
The lack of black venture capitalists might be the biggest reason behind a lack of funding for black-owned businesses. Black investors only make up 3% of the U.S. VC industry. To put this into perspective, black people comprise 12.2% of Americans. The diversity problem isn’t limited to how many black people make it into the VC industry but also the roles they occupy within it.
A typical VC firm comprises two parts— the investing side and the non-investing side. The investing side includes analysts, senior associates, principals, partners and general partners. The non-investing side consists of the firm’s chief financial officer (CFO), marketing executives etc. The bulk of the representation is on the non-investing side, so black people don’t necessarily have any discretion over who gets funding.
Inability to find investors
You might be thinking: If it’s a problem of representation, it can be solved by hiring more black VCs. It’s not that simple. While black startup founders cannot find funds, black VCs also struggle with the same.
So even if the VC firms hire more racially diverse fund managers, they struggle to convince their limited partners (LPs, who provide capital to VC firms) to fund diverse projects. According to a 2019 study, LPs cannot correctly assess black VCs or fund managers and distinguish between strong and weak black-led startup teams. LPs tend to consider minority startups as attempts at diversity and ignore the very real financial gain that can be received from funding these projects.
Absence of understanding racially diverse circumstances
Another reason black and other minority businesses don’t receive funding is that their products and services are based on their experience, which differs from that of a typical white VC and LP. While VCs have also not met that many diverse business owners, so they don’t know whether a minority business actually has as big a market.
Think of it this way, there are already a lot of shavers and trimmers in the market, and then a startup decides to introduce one specifically for people of color. A white VC or LP would probably think: Why would people of color need different shaving tools?
This happened when founder Tristan Walker pitched his startup Bevel to investors. Bevel wanted to cater to men with rough and coarse hair that people of color typically had. But since the investors didn’t have rough hair (and didn’t deign to consider those who did), 99% rejected him. Despite that, Bevel eventually received over US$35 million in funding and expanded its range of products and began selling them in Walmart, Target, Sally Beauty, Amazon and CVS. The fact that this brand succeeded should tell investors not to dismiss minority-run startups and instead research the opportunities they offer.
How to address the funding issue
Now that we know the reasons behind the lack of funding for black-owned businesses in the U.S., the next question is— how can the situation be fixed? Some black investors have opened their own VC firms to support minority businesses. These include 1863 Ventures, BLCK VC and 4thMVMT.
The rise of the Black Lives Matter movement in 2020 also led to more efforts to fix the funding issue present in VC firms. For instance, VC firm Andreessen Horowitz created the Talent X Opportunity Initiative. This initiative provides funding, mentorship and training to those previously underserved. Similarly, Softbank launched an over US$100 million Opportunity Growth Fund in 2020 to invest in minority startup founders. As of 2022, this fund has invested in 70 different companies, of which 55% are black-founded, 40% Latinx-founded and 5% Black and Latinx-founded.
But of course, a lot more needs to be done till black businesses receive funding at par with white-owned companies. According to Accenture, the VC industry would have to invest US$1.4 trillion over the next 30 years to bring parity between white and black business funding. But this behemoth of a task can become easier if systemic changes are made to employ more minority VCs and learn about minority cultures and their unique needs. Doing so can encourage more investment and innovation among groups who might otherwise feel discouraged from entering the business world.
Also read:
- What is Venture Capital?
- The Guide to Getting Venture Capital Funding
- How Do Venture Capitalists Choose Which Project to Invest In?
Header image courtesy of Envato.
