Though the need for greater equity in venture capital funding has been talked about for years, a new report from data service site Crunchbase shows that Black and Latinx founders still lag behind their peers when it comes to VC investments.
As of Aug. 31, 2020, Crunchbase found that Black and Latinx founders raised $2.3 billion in funding, representing just 2.6% of the total $87.3 billion in funding that has gone to all founders so far in 2020.
The report, which was released Oct. 7, sourced information from more than 970 Black and Latinx-founded companies that have raised VC funding since 2015. Over the course of five years, Crunchbase found that just 2.4% of total funding went to Black and Latinx founders.
"I think it's pretty shocking," Crunchbase data evangelist Gene Teare tells CNBC Make It. She says since 2015, she and her team have been reporting on female founders and this is the first year they've done reporting on Black and Latinx founders specifically. "Hopefully for the industry this is a wake-up call."
Marlene Orozco, lead research analyst at Stanford Latino Entrepreneurship Initiative — a research program that's one of 11 organizations that partnered with Crunchbase on this report — said "the lack of funding to Black and Latinx founders is a result of historical gaps in community wealth followed by limited exposure and opportunities to secure capital."
As of 2016, the $171,000 average net worth of a typical White family was 10 times greater than the average $17,150 net worth of a typical Black family, according to the Brookings Institution.
"Receiving $50,000, $100,000 — and sometimes more — from family and peers is not part of the average Black founder's journey," James Norman, founder of cultural insights technology platform Pilot.ly, says in the report. He explains that even before raising institutional funding, many underrepresented founders don't have the starter money that's needed to launch a business and they end up relying on "personal loans, credit and day job salaries" to substitute "readily accessible capital from their social network."
Ivan Alo and LaDante McMillon, co-founders of New Age Capital, a seed stage venture fund that invests in startups by Black and Latinx founders, both agree that raising more than $1 million during that first official funding stage is one of the biggest challenges for underrepresented founders.
"This is the stage where metrics matter less, and founders are assessed on more subjective criteria," Alo and McMillon say in the report. "Black and Latinx founders often experience rejection from investors because they do not fit a certain profile."
This rejection, Teare says, is often linked to racial bias and discrimination within the venture capital space that can have a long-term impact on a founder's success. She explains that the process of raising seed funding often comes when a business is just an idea or in the beta test stage.
"That early funding is all about you as a founder, your network and your credibility," she says. Once a founder receives that early funding, they can then move forward with the capital to launch their business and raise more rounds of funding, which are then usually based on actual metrics of the business. But, if Black and Latinx founders don't have access to networks that are providing them with starter capital, then Teare says it's harder for them to even move to the next rounds of funding where they are judged more heavily on business metrics.
To address this gap in funding, Orozco explains in the report that "we need more capital providers and investment professionals to engage with Black and Latinx founders as a prudent investment strategy that should be folded into their primary portfolio, rather than constituted as a separate, niche or impact program."
When looking at the 10 leading venture firms in the U.S., Crunchbase found that just 3% of the companies they've invested in since 2015 are led by a Black or Latinx founder. The report also highlights data from the nonprofit organization BLCK VC that shows 81% of all VC firms don't have a single Black investor.
In addition to making engagement with Black and Latinx founders a primary investment strategy, Teare says another way to close this funding gap is for VC firms to expand investments beyond companies that are located in major coastal areas. According to Cruchbase data, San Francisco and New York are the top two U.S. regions for venture capital funding. And, with both of these cities having a high cost of living, Teare says "investing across the U.S. [can] expand the base and opportunity for underrepresented founders."