Why Chicago Seed Founders Need Support Now
Any entrepreneur can tell you that building a business from the ground up is no small feat. Although many people may possess the desire and drive to do the substantial work required to launch a new company, few end up securing the necessary funding to turn their venture into a success. And for entrepreneurs who are also women, transgender, non-binary, and/or people of color, the obstacles tend to be significantly more daunting. However, it’s not necessarily a bad time to be a founder, particularly if you’re in the seed stages of fundraising. Although global VC funding rates overall saw a decline these past few months, seed funding reached a record $4.5 billion in Q1 of 2022, representing a 33 percent increase from Q1 of 2021. At the same time, a report published by World Business Chicago in partnership with Chicago:Blend and Fifth Star Funds found that despite only raising 5.7% of total venture capital since 2019, 23% of all Chicago startups participating in deals had a woman founder. So, the funding opportunities are out there. Certain demographics of people just aren’t getting an equal share.
How can we ensure that entrepreneurs from marginalized genders and races, especially those in the seed stages of funding, have the same opportunities as white cisgender men to raise money for their businesses?
What is a seed founder?
“As we’re designing interventions to help early stage founders, it’s important to have a roadmap to understand what points to intervene and where/how we can provide assistance.”
- Joey Mak, Executive Director of Chicago:Blend
To start off, let’s clarify a few definitions relating to the rounds of fundraising:
- Pre-seed: The earliest stage of fundraising, when the company is just getting off the ground. Most companies at this stage are operating solely off the founder’s own money
- Seed: Typically the first official stage involving outside investors. Entrepreneurs in the seed stages are typically funding their business with the help of angel investors (individuals who provide early stage funding in startups, typically in exchange for ownership equity), incubators, venture capital firms, or friends and family
- Series A, B, C: The subsequent series of funding rounds following the seed stage, where the founder seeks out much higher amounts of VC dollars to help them move past the development stages, rapidly grow and scale their businesses, and set their company up for long-term success
- Angel investors: Individuals who provide early stage funding in startups, typically in exchange for ownership equity
In order to help marginalized seed founders, we also need to define who exactly qualifies as a seed founder. In Chicago in particular, nailing down a definition continues to be a challenge. According to Joey Mak, Executive Director of Chicago:Blend and GET Chicago Tech Equity Working Group (TEWG) member, there’s no clear consensus on what defines a seed founder in Chicago, as the stages of fundraising can vary wildly depending on the market. However, for our purposes, we choose to define a seed founder as a business owner in the pre-Series A stages of fundraising, with their companies valued somewhere between $200,000 and $4 million (although the range may shift depending on the industry sub-sector).
Although the exact definition of a seed founder may be nebulous, there’s one thing that many Chicago-based entrepreneurs can agree on: there’s a large gap in resources and assistance for founders who are struggling to advance from seed to Series A stage. According to P33, another TEWG member, women and BIPOC-founded companies are typically raising $1.2 million in the pre-seed and seed stages; comparatively, companies with all-male teams typically raise closer to $4.8 million in those same stages. That’s 300% more funding to one, already over-resourced group of people, and there’s nothing that proves their businesses are 300% more innovative or likely to serve the needs of their customers or communities.
What are the most pressing challenges facing seed founders?
“Early stage startups failing or scaling today has economic consequences for our city in the years to come; no one wants promising startups to fail because they didn’t have access to the resources they needed at the beginning.”
- Evan Shy, Entrepreneur in Residence at P33
The challenges of fundraising do admittedly vary depending on the market of the business; but there are a number of obstacles that extend across industries that place marginalized founders at a particular disadvantage. Joey Mak has identified that there are a lot of implicit biases in the minds of investors, especially when it comes to founders who have atypical methods of pitching and speaking with investors, or whose businesses are not well understood. Studies have shown that potential investors tend to treat women founders with much more skepticism right from the jump, asking questions centered around how the founder will avoid losing the investor’s money rather than how they plan to make money. By contrast, entrepreneurs who are men are often given the benefit of the doubt when it comes to funding their ventures, sometimes even after they’ve proven themselves to be a risky investment.
Another across-the-board barrier for marginalized founders is the lack of connections, as well as difficulties forming them. We know that raising VC dollars can often be more reliant upon who you know rather than how good your ideas are; many investors often don’t even accept meetings with entrepreneurs without a warm introduction. All Raise, an organization that provides support and resources for women and non-binary entrepreneurs and another member of our TEWG, recently conducted interviews with more than 50 women and non-binary founders, and 100% of them identified “friendly networks of investors, founders, and operators” as most critical to their success. However, two-thirds of the interviewees stated they were struggling to build that network. And when we look at the persistent homogeneity of the VC industry, it’s not difficult to see why.
Support for marginalized founders
Despite all this, the outlook for women, transgender, non-binary and BIPOC entrepreneurs isn’t entirely bleak. There are a number of organizations in the Chicagoland area who are working diligently to bridge the gap and ensure that marginalized founders have equal access to resources, connections, and VC funding. In fact, our GET Cities Chicago Tech Equity Working Group (TEWG), a rolling cohort of 15–20 accelerators, incubators, and funds, was designed to ideate solutions for these issues. The organizations within our TEWG are currently working both together and individually to create interventions to help move us toward an equitable Chicago tech ecosystem, and I’m excited to share just a few of them here.
Earlier this year, P33 — in partnership with GET Cities — created an initiative called Speed Round designed specifically to help early stage founders succeed. Through Speed Round, entrepreneurs are able to refine their pitches after receiving direct feedback from advisors and investors, while also gaining access to a VC database of over 2,500 firms. The pitch itself is used as an organizing function to help founders evaluate their business through the lens of an investor, learning how to use evidence to validate the opportunity and how to tell that story across their fundraising material. The initiative has already proven itself to be a success, with participating founders raising a combined $21.3 million so far. P33 has also created the Founder Resource Hub, a community-generated collection of tools, workshops, accelerators, incubators and more to aid the Chicago startup community. Additionally, All Raise hosts currently hosts a series of Masterclasses for women and non-binary founders to help demystify the process of seed fundraising and accelerating the growth of a start-up.
Furthermore, solutions to closing the funding gap should not be exclusively focused on helping founders. Increased diversity and inclusion amongst the checkwriters in Chicago can also lead to more equitable distribution of VC funds. As such, Chicago:Blend is preparing to launch their second cohort of Chicago Venture Fellows, a program that provides aspiring, underrepresented venture capitalists with the knowledge and connections they need to break into the industry. All Raise also hosts a VC cohort program that pairs rising associates, principals, and partners with peer learning groups to help guide them to the next level in their careers. Their VC Champions program also matches high achievers with Partners for 1:1 mentoring to help them elevate their careers.
Chicago is already recognized as one the top cities in the country for economic growth, entrepreneurship, and diversity in tech; and the outcomes for marginalized groups in this city continue to improve year over year. In 2022, the proportion of startups involving women, Hispanic or Latino, and Black founders that raised any amount of venture capital rose to 23.3%, up from 8.2% in 2019. We recognize that there’s still a ways to go before we can call Chicago a truly equitable environment for diverse founders and funders, but I’m confident that we have all the right tools, resources, and people housed in this city to help us finally get there.
