The venture capital (VC) industry tends to seldom fund startups launched by women or people of color. To address this inequity, a growing number of VCs have started targeting companies led by women and people of color.
The Data on Inequality in VC Funding
Recent data highlights the dearth of VC startup funding in these businesses. Fortune reports that in 2017, only about 2% of venture capital funding went to startups with exclusively female founders. A separate 2018 report by RateMyInvestor and DiversityVC found that just 1% of early-stage companies that received VC funding were led by Black founders, and only 1.8% were Latino-led.
According to industry observers, that lack of funding of diverse founders is largely due to the typical composition of many VC firms. While more than 70% of venture capitalists are white, just 3% are Black, writes CultureBanx CEO Kori Hale in Forbes. Meanwhile, women comprise 14% of all investment partners. This data suggests that in a business where trust in company founders is essential to attracting investor money, VCs tend to favor entrepreneurs from similar backgrounds as their own.
A New Trend in Venture Capital
However, those figures tell only part of the story. Ironically, companies with diverse founders tend to outperform others by 30% after they are acquired or go public, according to Kauffman Fellows research cited in Bloomberg. Still, with enterprises led by diverse entrepreneurs comprising a tiny portion of companies seeking funding, the report found that organizations managed by white individuals win the lion’s share of funding at every level.
Over the past few years, though, a growing number of investors and organizations have launched funds and programs aimed at addressing the venture capital investment gap.
For example, in 2018 UBS and Village Capital launched VC Pathways. The program connects entrepreneurs from underrepresented communities with experts, helping them grow their social capital, learn how the venture capital world works, and raise startup funding. The program operates in Atlanta, Chicago, and Philadelphia and focuses on areas with an ecosystem of entrepreneurs, angel investors, and other startup backers. To that end, the program introduces entrepreneurs to local investors and mentors who can serve as informal advisors, hosts dinners where founders can meet angel investors they might not have encountered otherwise, and offers training, among other activities.
Harlem Capital Partners takes a different approach. The firm was founded in 2015 by four young African American investors and aims to raise $1 billion to fund 1,000 minority and women founders over the next two decades. To meet that goal, the partners publish their email addresses on the Harlem Capital website—a practice unheard of in the industry—to make it easier for underrepresented founders to contact them. About half of the 950 companies that have made pitches to the firm were not connected through previous introductions.
Another firm, five-year-old Backstage Capital, has so far invested in 100 companies with its $36 million “It’s About Damn Time” fund, which targets underrepresented founders initially ignored by traditional VCs. In 2018, it launched the Backstage Accelerator, which invests $100,000 in each company for a 5% equity stake.