An Investor’s Take on Mending the Funding Divide From The Inside Out
For almost six years, I’ve sat in on investor meetings and made deals with startup teams committed to disruption. I’ve seen entrepreneurship in its greatest form, and as an early-stage investor, I’ve been part of getting exciting ideas off the ground and into the marketplace. Uniquely, my career as a founder-turned-investor has been surrounded by nuanced advocacy for social equity and fair opportunities, driving me to relentlessly champion underrepresented voices and create a level playing field for all.
Early in my career, I worked closely with the leadership gender gap as part of the effort launching the Gender In Leadership Report in the United Nations (UN) Human Resource Office in 2014. The report, led by UN Secretary-General Ban Ki-moon, captured real-time labor figures, laying out which avenues of leadership women worldwide were pursuing and what opportunities they were being given with year-over-year (YoY) analysis. I recall a feeling of optimism as I witnessed progress.
Despite the forward movement, UN Secretary General Ban Ki-Moon delivered an insightful address explaining that the seemingly forward movement “has been far too slow and uneven.” The opportunities, while more equitable than in previous years, were still disproportionate. Almost ten years after this report, our economy is still seeing a similar slow and uneven pattern of progress for women and other minorities including those with entrepreneurial aspirations — especially through early-stage investing.
The Funding Divide
Before becoming part of an investor team, I worked with a team of self-made founders to launch STEM education programs aimed at aiding underserved minorities. The product and curriculum took a 3D approach to training computer programming skills, building business development knowledge, and working with social justice awareness. The funding rounds put me in front of many venture capitalists (VCs), some with a knowledge of the market but many without knowledge or interest— a challenge I later realized was telling of my path to come. My primary customer base consisted of racial minorities, and my entire team was diverse. Challenges arose as venture capital investors saw our product as more philanthropic than venture-backable, believing that our product was more of a charitable service than a serious, profitable business.
Looking back at my startup story, there’s a lot I could have done differently, but that story is not dissimilar to those of today’s underrepresented founders. Data shows that more and more, teams of diverse members see disproportionate opportunities and down rounds in contrast to all-male, all-white teams. This past year, we saw female teams raise the lowest average of dollars per meeting, receiving about $14,259 per meeting, compared to all-male teams raising on average $25,000 per meeting.
It’s no secret that underrepresented founders receive less funding than white men. But this comes paired with the disproportionate opportunities women and other minorities face in early-stage fundraising, as revealed in Dropbox DocSend’s annual Funding Divide report. In 2022, female founders saw the most increase in founder meetings YoY by 17% but ultimately saw the least amount of funding. The data reveals investor behavior that is telling when considering 2021 progress. While diverse markets were trending following a public outcry for inclusion in 2020, VCs took it upon themselves to mentor underrepresented founders. While mentorship and business counsel are healthy for the startup ecosystem, there’s been enough of it, and what founders need is supplemental capital.
The Modern Investor
Our modern economy and marketplace reflect cultural priorities and, more so, the significant societal movements that demonstrate our values. Social equity movements in the past few years, like Black Lives Matter and #MeToo, called VCs to action. I recall living in New York during this pivotal time and seeing the venture capital community turn its attention to important cultural changes. Investors gave more early-stage dollars to minority-owned businesses in 2020 than in any other year. While society as a whole spotlighted diverse markets and issues, investors had those ideas at the forefront of their minds. In fact, minority-owned businesses were 25% more likely to experience above-average profitability in 2020 based on the public’s outcry for support.
In response, investors began to see that companies with greater gender and racial diversity were more profitable. Simply knowing companies with diverse team members earned 12% more YoY than those teams lacking diversity created opportunities investors would be foolish to pass up. However, diverse businesses often solve problems many investors don’t fully understand. Some investors skip in-depth market education in their deal-making and forgo proper planning to understand markets they, themselves, may not align with on a personal level.
What happens when VCs jump to the deal based on eagerness rather than educated due diligence? Investors were left with unmet expectations about companies they didn’t take the time to understand, resulting in a degree of fallout for their portfolio businesses, creating risk aversion in the long run. The risk aversion makes way for a less diverse marketplace. Today, research shows that Black-owned businesses, in particular, make up only a small share of firms and revenue in the country.
Hitting the brakes at the early stage
When investors turn down meetings with diverse startup teams because of a lack of market knowledge, VCs might miss the opportunity to learn about unknown profit margins This only propagates an extended disconnect between investors and diverse, necessary products and, frankly, exemplifies a dilemma in stifling true innovation. If investors are stuck running after one type of founder’s resume with their gaze fixed on one type of new-age vertical, venture capital becomes siloed, and investors leave critical business opportunities on the table. For example, an application designed to address female health has a high potential for cultural and market impact. However, when an all-male investor team receives a business pitch, there will undoubtedly be a disconnect on the true importance of the product. The disconnect leads to a lackluster motivation to become educated and bring flourishing ideas to fruition.
In a recent study, The National Venture Capital Association’s (NVCA)VC Human Capital Survey sampled 2,500 investors in the US to find only 14% of decision-makers in VC investment firms are women, and 3% of decision-makers are Black or LatinX. This contrasted with today’s investor behavior, DocSend reports that investors spent 50% more time reading the traction slide in startup pitch decks and 41% more time reading the market size section for all-female teams compared to their all-male counterparts. This indicates a disconnect between how checkwriters understand female markets.
Recent data also points to investors spending an inordinate 125% more time viewing the team section for all-female startups compared to all-male teams. When we take into account that all-female teams raised less than male teams in 2022 and 2021, it suggests that in two very different fundraising climates, investors ask one question about the validity of all-female teams and their plan to monetize a product in their target markets.
Check on Your Checkwriter
Over my career and throughout my life, I’ve had the privilege of living in and interacting with global, diverse communities. I spent my early years in Cameroon and Madagascar, where I’ve seen what innovation looks like firsthand: I met people with an unmatched grit and creativity trying to solve their everyday’s challenges such as increasing access to reliable electricity. I’ve witnessed unmatched brilliance in entrepreneurship in France, the UK, and Senegal. I’ve seen technological advancements in Russia, Korea, Japan, Brazil, and Scandinavia. Beyond our country’s culture and around the globe are markets of people meeting needs, solving crises through technology, and breaking new innovative ground. There is a need for more open-minded checkwriters and a new culture of de-risking underrepresented founders. In the US, our country’s current lack of VC diversity narrows our ability to create global disruptors and international successes.
One solution remains obvious: We need more diverse checkwriters to understand diverse ideas. When investors become too reliant on their networks and on “what they know”, they miss out on uncovered profit margins.
Being part of an investor team means it’s my job to help create economic progress and facilitate breakthroughs in the marketplace, but if we want to see change, we have to enact change. These efforts are not for nothing. Creating opportunities for investors to become aware of their own bias taps into new, diverse voices to create impact and equity in modern fundraising.
To see a more equitable economy, investors have to know change starts at the early stage. The funding gap that exists between minorities, women, and their counterparts is not too far gone. Enabling businesses to get off the ground is the first step to diversifying our marketplace, and education is a powerful tool.
