Diverse Teams Facing More Scrutiny Amid Venture Capital Slowdown
A new report by Dropbox DocSend has shed light on the funding divide in the tech industry, particularly regarding race and gender disparities among founders.
While 2021 witnessed record-breaking levels of VC funding and increased engagement with diversity, equity, and inclusion (DEI) initiatives, 2022 proved to be more challenging for historically underfunded founders.
In 2021, VC funding for early-stage founders experienced a significant boost, with record-breaking funding levels.
Historically underrepresented founders also experienced a surge of investor interest driven by DEI-related investment initiatives in response to the murder of George Floyd.
However, the following year was more challenging. In the third (Q3) and fourth (Q4) quarters of 2022, early-stage funding declined by 39% and 54%, respectively.
The report revealed that founders from historically underrepresented backgrounds (women and people of color) were harder hit than others.
All-female teams with women of color experienced a 51% year-over-year drop in investor meetings, regressing to 2020 levels. Moreover, they were the only group that did not surpass the $1 million mark per raise. Despite spending more time on fundraising efforts, these founders were raising far less capital than their peers.
Diverse mixed-gender teams raised 33% less than all-white teams. In contrast, mixed-gender all-white teams encountered the smallest drop in funding.
Diverse teams face more scrutiny
The data also indicated that investors spent more time scrutinizing teams with minority members, focusing on team slides, market size sections, traction sections, and competition sections.
“This supports the old saying that people of color ‘have to be twice as good’ to get their fair share,” said Mitch Brooks, general partner at early-stage tech VC firm High Street Equity Partners.
“This is the most frustrating data point in the 2022 deck breakdown, and it speaks to what many founders of color know to be true. Many traditional VCs tend to pattern-match with founders who share similar backgrounds. This tendency skews non-diverse and reinforces biases against historically underrepresented founders.”
However, this pattern-matching is counterproductive, as data consistently demonstrates that diverse teams outperform homogeneous teams.
The need for diverse investors
“VCs may have wanted to provide mentorship and guidance to these founders who had been overlooked before,” Iynna Halilou, an investor at seed-stage VC firm Moxxie Ventures, said of the 2021 funding boost. “Mentorship is important, but we need to ask why it hasn’t led to more funding for diverse founders.”
“Discrepancies in 2022 fundraising outcomes may also stem from a lack of understanding of what diverse founders are trying to build,” she added.
“The fundraising value chain needs to be overhauled, starting at the top”
Halilou gave the example of a Black woman founder trying to build a healthcare platform to tackle maternal mortality, an issue that impacts Black women more than other groups. An investor from a different community may not fully comprehend the problems specific to the market a founder aims to address, opting for safer investment options.
“This is why it’s crucial for there to be more GPs and LPs who look like the diverse founders being overlooked today (who may not come from the traditional Silicon Valley networks),” she continued. “For this to happen, the fundraising value chain needs to be overhauled, starting at the top.”