Research shows that most venture capital funding goes to white male founders. According to Pitchbook data, in 2017 only about 2% of venture capital funding went to startups with exclusively female founders. Another study showed that just 13% of companies owned by minorities and 4% of companies owned by women are awarded venture capital.
Those hoping to promote diversity and entrepreneurship are likely to find these numbers concerning, especially since founders from underrepresented communities may not be able to hold a so-called “friends and family round,” drawing on close connections for support and financing before they pitch venture capital firms.
Tilting the Balance
To help address this disparity, UBS and Village Capital created the VC Pathways initiative. The program debuted in 2018 in Atlanta, Chicago, and Philadelphia, where it found established entrepreneurial communities as well as local angel investors, private individuals or groups who help fund startups. VC Pathways connects diverse entrepreneurs with expertise and investor networks to help them grow their social capital and make progress toward securing funding. The ultimate goal: to provide underrepresented entrepreneurs with support so that they can navigate the venture capital space on an equal footing with founders from more privileged backgrounds.
To date, VC Pathways works with 30 early-stage companies and has facilitated 202 mentor connections. It introduces founders to local investors and mentors who can provide personalized guidance, and it hosts events where founders have the chance to meet angel investors. It offers training, information sessions, and opportunities to role-play and receive feedback. It also provides other benefits, such as Amazon Web Services credits and access to certain grants and loans. Perhaps most importantly, VC Pathways emphasizes the value of local expertise, and partnerships with local organizations are central to its efforts.
Although VC Pathways has concentrated on serving entrepreneurs in the three cities mentioned above, the lessons it’s learned may apply to organizations focused on diversity and entrepreneurship across the country. VC Pathways has published a report called “Beyond the ‘Friends and Family Round’” to share three main insights from its experience supporting women, Latinx, and African-American entrepreneurs.
Building Social Capital
VC Pathways’ first recommendation is to help entrepreneurs build social capital, particularly with angel investors. Noting that angel investors account for 90% of startup capital following funding from friends and family, VC Pathways recommends that entrepreneurs cultivate relationships with angel investors who can help them get their ideas off the ground.
Making the first connection can be difficult for diverse founders, though, because angels are busy, generally lack venture capital firms’ infrastructure for fielding pitches, and usually stay within their comfort zones by backing founders who have a lot in common with them.
But community organizations can help break the ice. VC Pathways points to its dinners where founders and angels meet and start conversations, and it recommends that other organizations host similar programs to bring entrepreneurs and angels together.
Fostering Productive Communication
VC Pathways provides a common rubric for founders and investors to use as they evaluate a startup’s readiness for funding. Having a shared set of guidelines helps ensure that both investors and founders form a realistic assessment of a startup’s milestones and trajectory.
The rubric also helps founders make sense of feedback from investors and turn that feedback into action. VC Pathways recommends holding multiple meetings between founders and potential investors—rather than a one-time session—so investors can see how the founders respond to feedback and can track their progress.
Promoting Local Partnerships
Every startup scene is unique, and local organizations know their communities better than anyone who flies in from out of town. For this reason, VC Pathways stresses the importance of partnering with local organizations and giving them decision-making power. This allows for the creation of personalized programs that address each location’s specific opportunities and pain points.
VC Pathways hopes that its report will inspire and guide other organizations as they work with diverse founders. Alone, an incubator or initiative can support dozens of entrepreneurs. But when it shares the lessons it’s learned with others, it has the potential to impact many more new founders, empowering them to secure funding and realize their ambitions.