“There are Black people in the future.” It’s time to invest in them.
It’s no secret that Black founders are wildly underfunded in tech. And years of declarations from tech companies and venture capital firms have resulted in little change.
But “there are Black people in the future,” as artist Alisha B. Wormsley has pointed out over the years. So, it’s time to invest in them.
Meanwhile, the data that diversity is good for business and key to maximizing returns has been out for years. Still, in the first half of 2021, Black founders in the U.S. raised just 1.2% of all venture dollars raised by U.S. startups, according to CrunchBase data.
Julia Collins, founder at climate-friendly consumer goods startup Planet FWD, told Green Room the lack of funding that goes to Black founders is deeply connected to white supremacy, structural injustice and systematic marginalization.
“And these systems are entrenched and despite nearly centuries of work and social justice, they continue to be pervasive,” she said. “Generation after generation we see the same narrative being pushed forward. The reason why [access to capital] is such a sticky problem is because it’s connected to the core of what’s broken in our country.”
In the tech industry, these inequitable systems manifest as a lack of access to capital for Black founders, as carve-out funds that are a drop in the bucket compared to a firm’s overall assets under management and as Black-led fund managers struggling to raise capital. Mandates, government support and a more thoughtful distribution of capital to both Black-led firms and Black founders, however, could result in a more equitable funding environment.
A mathematical conundrum
Brian Brackeen, now co-founder and general partner at Lightship Capital, pitched his facial recognition startup, Kairos, over 1,000 times to investors. He received 880 nos and 120 yeses.
“It’s really hard to be told ‘no’ 800 times or so in a seven or eight year period,” he told Green Room. “It was daunting. It’s kind of scarred in my brain, and I suspect that my experience wasn’t unique.”
All startup founders face a standard set of problems, such as finding product market fit, getting more customers, gaining traction in the market and convincing investors to fund their businesses. But Black founders face additional burdens around funding.
“I would argue access to capital is the only issue that Black founders have to deal with,” Brackeen said. “The real problem is even with the right traction, they can’t get the capital they need. So you get into this truly mathematical conundrum where the better the startup does, the more cash it needs and the less cash that is available, the riskier the business becomes. There’s nothing more dangerous than scaling without the money you need. It can all come crashing down quite quickly.”
Collins, who helped raise $423M for her first startup, Zume, echoed Brackeen’s sentiment. She said it’s very difficult for startups to scale without that outside investment. There are, of course, a number of businesses that founders can successfully bootstrap, but there are many more that require outside investment, she said.
“And when a founder doesn’t have access to outside capital, it limits the growth of their business,” she said. “And in many cases, being capital-constrained means that you have to make decisions that you wouldn’t otherwise make, that may be suboptimal for your business in opportunity costs and not scaling as quickly as you could. Often the health and well-being of the founder is jeopardized because they’re not able to adequately compensate themselves. They can’t be as opportunistic in the market, so on and so forth.”
The rise of Black-led venture firms
In venture capital as a whole, Black people hold just three percent of all investment partner positions, according to a 2021 joint report by NVCA, Venture Forward and Deloitte. Meanwhile, founders are 21% more likely to receive funding from an investor of the same race than of a different race, according to a 2021 report from the SEC. That reality doesn’t bode well for Black founders.
Since 2015, however, a handful of Black-led venture firms have emerged. To be clear, not every Black-led firm invests solely in Black founders, or even only in underestimated founders, but diversity begets more diversity.
Backstage Capital, founded by Arlan Hamilton, is one such firm. Founded in 2015, Backstage Capital invests in about 30 companies a year and is approaching its 200th investment.
Other Black-led firms include Precursor Ventures, RareBreed VC and Lightship Capital. Hamilton is a limited partner in both RareBreed and Lightship. Part of what led Brackeen to start Lightship Capital was to be the investor he never had. Brackeen said he did have some good investors for Kairos, like Backstage Capital, but there are not enough of them.
“Arlan, though she tries, can’t fund every single Black company ever,” Brackeen said. “She’s like carrying America on her back. So yeah, there’s got to be more and I wanted to be part of that solution.”
A Hunger Games scenario
Despite the rise of these Black-led firms, a separate funding issue comes into play. The success of any fund ultimately hinges on its ability to attract limited partners.
LPs are the ones that provide the capital necessary for funds to invest in startups. Typically, LPs are institutional investors, such as pension funds, family offices, college endowments and trusts.
In the aftermath of the murder of George Floyd in 2020, many investors in the tech industry made platitudes about the importance of racial equity. Christie Pitts, a general partner at Backstage Capital, told Green Room she’s seen some greater awareness among investors and LPs, but “that awareness has not yet resulted in more equitable allocation to diverse fund managers.”
The most recent case in point: Bain Capital Crypto, an all-male VC team without a single Black person, recently announced a new $560 million fund. Backlash ensued and the firm quickly recruited a white woman to join as a partner.
Black fund managers raise smaller funds, on average, than their peers, according to BLCK VC. The average size of a Black manager’s first fund is $30.5 million compared to $57 million for their non-Black peers. That means these funds have less money than their peers to invest in startups.
Part of the reason for those smaller fund sizes, according to BLCK VC, is because individuals and family offices are the main types of LPs that supply Black-led funds. And those sources of capital oftentimes have less money to deploy than, for example, a university or pension fund.
“If you look at the Black-led venture firms that have more than $100 million under management, we’re talking about less than ten total firms,” Pitts said. She added that it’s “100%” because of racism.
A recent study on race and asset allocation found, for example, that strong investment credentials and track records do not offer the same benefits to Black firm managers as they do to white firm managers.
“Even when funds led by people of color possess identical, strong credentials as white-male–led funds, they are judged more harshly,” the study found. “In contrast, white-male fund managers are advantaged by these biases, which perpetuate their disproportionate representation in the industry, and the association between whiteness and investment success.”
In the study, when both Black- and white-led teams were underperforming, the asset allocators favored the Black male-led team. However, they were still unlikely to want to invest in that team. One theory for that, presented in the study, is that the asset allocators felt “morally credentialed” by rating that Black-male-led team strongly, “thereby relieving themselves of any sense of obligation to express serious intentions to invest.”
That theory aligns with anecdotes of Black firm managers who receive early-stage meetings with investors, but fail to receive the necessary funding.
Meanwhile, some Black fund managers also find themselves pitted against each other, as LPs don’t always take a holistic view of all the Black-led funds, Brackeen said.
“They’ll say, ‘Okay, MaC and Lightship, we’re going to have you go into a process together for this one Black fund dollar’ when, in reality, MaC Ventures should be [receiving capital] from their main fund, not their diversity fund,” Brackeen said.
That’s because MaC Ventures has hundreds of millions of dollars under management. Lightship, on the other hand, is actively raising a $50 million inaugural fund.
“It’s not MaC’s fault, but it’s inappropriate by the LPs,” he said. “LPs have created this wild Hunger Games scenario where they’re asking all of us to beat each other to the death. And they won’t adjust for stage.”
Set-aside funds: “Something is better than nothing”
A number of set-aside funds emerged in 2020 in response to calls for more racial equity in tech and society at large. However, the size of those funds often paled in comparison to firms’ standard funds.
Three examples: Andreessen Horowitz, with $12 billion in assets under management at the time, announced an initial $2.2 million to go into its Talent x Opportunity initiative. Array VC, which recently closed a $56.1 million fund, set aside $1 million for racially diverse founders in 2020. And, SoftBank, which operates the $100 billion Vision Fund, set aside $100 million to go toward Black, Latinx and Native American founders.
Collins, who raised $375 million from SoftBank in 2018 for her last startup, said deploying capital is an important part of the solution. But, she’d like to see these set-aside funds be larger as a percentage of the firm’s overall assets under management, she said.
“What I fear is that these sort of set-aside pools of capital will be a box-checking exercise and alleviate the pressure the core fund has to be more equitable,” she said.
Pitts similarly has complex feelings about these types of set-aside funds.
“Arlan has a quote from one of her podcasts where she says ‘something is better than nothing, but it will never be enough,’ so that’s how I feel about it,” Pitts said.
Companies in Backstage Capital’s portfolio have received investments from some of these set-aside funds. Google for Startups, which launched a $5 million fund to invest in Black founders, has invested in Backstage portfolio companies like Goodr and ShearShare. Meanwhile, SoftBank has invested in Backstage portfolio companies like Career Karma and Mayvenn.
That’s partly why Pitts said she can’t “completely hate” set-aside funds.
“But, I can critique it,” Pitts said. “And I can say that it was too late. A carve-out shows dedicated action but it also funnels everything into this smaller fund. So there’s a benefit and there’s a downside.”
One downside is that a smaller fund means smaller checks. Over the next few years, Pitts said she will have her eye on these set-aside funds.
“I am a keeper of receipts,” Pitts said. “Let it be known.”
Changing the system
Increasing access to capital for Black founders is as easy as making the hire and sending the wire, as Tiffani Ashley Bell of The Human Utility has previously said, and as hard as changing the entire fabric of our society, Collins said.
A lack of capital for Black founders stems from the root of what’s broken in our society, Collins said. And, as we’ve seen throughout the entire existence of America, racial equity across any facet, whether that’s housing, education, employment and so on, is hard to achieve.
“And therefore, [access to capital] is going to be really hard to fix,” Collins said. “On the pessimistic side — and the reason why it’s pessimistic is because I feel like this is so hard — it would take a radical restructuring of our democracy. Like, a complete upheaval of the systems that promote injustice. And we’ve been trying to do that. And that is really hard.”
On the more optimistic side, Collins hopes that as more Black founders become successful in their business endeavors, Black folks will have more resources and capital of their own to deploy.
“I think what could happen is, as more wealth is created in this area by systematically marginalized people, we will see more wealth transfer,” she said. “I mean, think about what Arlan has done, and the number of founders that she’s backed as one person. Imagine if we create 100, and then 1,000, and then 10,000 Arlan’s.”
Mandates could also play a role in increasing access to capital, Brackeen said. In August 2021, the Securities and Exchange Commission approved the Nasdaq’s proposal to require companies listed on the Nasdaq to have at least one self-identifying female and at least one self-identifying underrepresented racial minority or LGBTQ+ person on their boards. Companies without diverse boards must explain why they are not able to satisfy the rule. If companies do not adhere to the new rule, they are at risk of being delisted.
“And magically, everyone could find a Black person or woman for the board,” he said. “It took like two months and they were all qualified. It wasn’t just people off the street.”
Beyond mandates, Brackeen also sees the government playing a key role. Last March, President Joseph Biden signed into law The American Rescue Plan Act to fund the State Small Business Credit Initiative with $10 billion. As part of that, U.S. states, territories and tribal governments are able to apply for funding to distribute across a variety of small business financing programs, including venture capital. California, for example, expects to receive at least $1.1 billion.
“So I think the government is actually doing a really good job,” Brackeen said. “But the problem is, nobody knows about it. That’s the real problem. Not the work, but the awareness.”
Brackeen added that equitable access to capital is key to the success of America’s capitalist system.
“If we could just get our fair share based on population of venture capital, you would see the most prosperous country in the world,” he said.
We would also see more companies addressing major problems, Collins said. While not every Black or brown founder builds an impact business, Collins said Black people are “keenly aware of all the ways the system doesn’t work.”
For Collins, she recognizes the system doesn’t work for her and has no allegiance to it, she said.
“Therefore, I’m going to change the system,” Collins said. “And that really is what I think an entrepreneurial journey can bring. And so I think if Black and brown founders were able to access capital in a way that didn’t constrain their ability to grow, and build, then we’d really see a more rapid deployment of the solutions that are going to save us all. And there’s a lot we need right now.”
