Venture capital has a race problem.
Studies show that out of all VC funding, less than one percent goes to Black founders. If that number wasn’t staggering enough, according to Forbes only three percent of VC funds employ Black or other minority professionals. Black entrepreneurs and those in the investment realm agree: to increase the amount of VC money going to Black businesses, we must first crack the pipeline puzzle.
Will Morris, founder of EdConnective, a virtual teacher training platform that helps schools get accreditation and improve literacy, is an outlier. Despite being a Black entrepreneur, Morris found success raising in both Virginia and Silicon Valley, including a pre-seed round of approximately $750,000 and more recently a seed round of just over $1 million. But to Morris, the reason his story is such a rare one goes farther back than just a simplified answer of “racism.”
“This problem comes down to a pipeline problem,” Morris said. “There is a gap in Black founders who know that VC funding is even an option. On top of that, there is already a smaller number of Black founders in the Virginia area who would even have access to that funding.
“If you think of five in 100 startups getting funded and then one percent of those five being Black, it would take a lot of pipeline [for Black startups to get funded] even if there was no bias,” he added.
On the investor side, Laura Markley, managing director for Richmond-based VC firm NRV, agreed that this problem comes down to pipeline. While there is a bottleneck of who can get access to information about funding opportunities, the industry presents a diversity problem from the very beginning.
Markley, who spent time in New York City learning the ways of investment banking before shifting to VC in Richmond, noted that career venture capitalists generally tend to come from large investment banks. Because most investment banks recruit from Ivy League colleges where race and gender representation are already skewed, the makeup of large investment banks tends to lack diversity from the beginnings of a career in finance.
Forbes reported that 40 percent of venture capitalists attended either Harvard or Stanford, while Business Insider found that for the last 30 years, only five percent of the attendees of Harvard Business School have been Black.
The top U.S. investment banks are two-thirds male and 80 percent white at the executive level.
“If these are the executives that go on to manage venture capital funds, we’ve already gotten off on a foot with a lack of diversity,” Markley said.
The root of the race issue in startup investing can oftentimes be attributed to this lack of diversity among investors, she said.
Art Espey, a Black entrepreneur in Richmond, explained it quite clearly: White investors oftentimes simply don’t understand the problems or perspectives of a Black entrepreneur.
“If a Black man comes up with an absolutely fantastic idea based on his understanding of the market and the community that he comes from, but nobody in the capital community sees that as an opportunity because they don’t understand that to be a problem or understand the needs of that community, they are not going to be willing to back it financially,” he said. “To me, that is one of the biggest things we need to overcome.”
“I FEEL LIKE THE STANDARDS THAT ARE SET FOR ME ARE DIFFERENT THAN SOME OF MY WHITE COUNTERPARTS. SOMETIMES I FEEL LIKE EVEN WHEN YOU HIT THE BAR THAT WAS SET, THE BAR GETS MOVED AGAIN.”
Back on the founder side, the pipeline gets even tighter due to what Markley calls an information barrier.
Current SEC regulation prohibits founders from publicly advertising their fundraising and only allows communication of these opportunities within the network of accredited investors, a status that requires investors to have a $1 million in net worth, not including their home, to receive accreditation.
“That already blocks out a huge group of Americans who can even be told about an investment opportunity,” Markley said. “Additionally, for those investors who aren’t accredited, it really limits who they can go to to let people know that they are fundraising.”
Due to these network restrictions, if a Black founder isn’t already in the room at these long-standing White male institutions, they automatically miss out.
Markley said she believes that while there is little they can do to knock down this information issue without congressional intervention, NRV has made a conscious effort to expand programs that offer the next best form of communication to their portfolio members: mentorship.
“I think that building diverse networks of mentors and entrepreneurs seeking mentors can be one of the most important ways to interconnect networks that might not otherwise come across each other,” she said.
Age-old institutions that unintentionally block Black founders from the pipeline are not the end of the problem. Many Black entrepreneurs face blatant racism from investors on a regular basis.
Johnathan Mayo’s company, Team Excel, is a tech platform that encourages students to compete based on metrics such as grades, attendance and community service hours. While they have built out an app and full platform, the Black-owned startup has only been able to raise just under $60,000 and only received investment from angel groups, not VCs.
“As a Black founder, you don’t look like the typical Mark Zuckerberg founder like [investors] typically think of, and women founders encounter the same thing,” Mayo said. “I feel like the standards that are set for me are different than some of my white counterparts. Sometimes I feel like even when you hit the bar that was set, the bar gets moved again.”
Mayo said that there are barriers to entry into the startup world that inherently leave Black people out, for example a requirement that for certain accelerators companies have two or three founders or that the company pursues friends and family funding as a first step.
“A lot of time, Black founders are working alone,” he said. “Many of us don’t have that kind of network to bring in additional founders who can drop everything and go full-time with a venture or those people who can help with a friends and family round to get you to the next level.
Mayo added, “Unless people do something to help the pipeline, they won’t see as many Black founders getting funded. And when you don’t fund Black companies, you’re missing out an economic opportunity.”
“IF I WERE A WHITE MAN STANDING IN FRONT OF YOU, TELLING YOU THAT I LANDED A CONTRACT WITH WALMART IN THREE STATES ALL ON MY OWN, YOU WOULD NOT TELL HIM THAT HE DID NOT HAVE A SUSTAINABLE BUSINESS.”
Gwen Hurt was planning her next move after being laid off from her job in Corporate America when, just two days later, she and her daughter were in a car accident that left her in a year of physical therapy. Struggling to continue a successful job search while in recovery, Hurt decided to take matters into her own hands and start her own business: Shoe Crazy Wine.
After encountering issues as an e-commerce operation, Hurt and her daughter decided to pivot to a full-on wine distribution company. And while Hurt has spent the last six years getting her wine distributed in Walmart, Costco, Total Wine & More and Coast Guard and Navy exchanges with nearly $300,000 of her own money, she has not been successful in raising any capital between the VC and angel groups that she has pursued.
“Each time I was told that my business was not sustainable,” she said. “If I were a White man standing in front of you, telling you that I landed a contract with Walmart in three states all on my own, you would not tell him that he did not have a sustainable business.”
Hurt was often turned away with the recommendation that she turn to friends and family, despite the progress beyond that stage that her business has already taken. One investor in particular told her that he didn’t trust that she could deliver on her commitment. Another asked if she really thought people were going to buy wine from a Black-owned company.
“For me, it goes deep into how cultures are perceived,” Hurt said. “Not a lot of positive things about Black culture are said in the mainstream news media, and I think it really cuts deep. I’m at the six year mark with my business. Where is this distrust coming from? Just because I’m a Black woman business owner, that means I can’t be trusted?”
Hurt agreed that having more diverse VC leadership would be a crucial first step in overcoming this issue. But in the meantime, she decided to give up on seeking investment.
“I always go back to my mother’s mantra: you are better than they say you are,” Hurt said. “Never let someone tell you you’re less, because you are more. That’s how you get through it.”