September 4, 2017

Changing The Face Of The Investor Community

Ten years ago you could probably count on one hand the number of angel investors, let alone funds run by people of color [although it is rare even today to see the profiles of female or minority investors in the likes of TechCrunch or Entrepreneur]. Nevertheless, we are starting to see articles showcasing the increased activity in this space such as:

I believe in the next 10 years we will see more billion dollar exits from startups started by female and minority founders.

Sorry I couldn’t quite list ten articles on the subject, not sure how widely documented it even is yet. However, on the early stage investing front we are seeing credible fund managers emerging such as:

There is sadly only a handful of funds that operate in this way (send me others if you know any!). Andy Dunn rightly put in his article, Dear Dumb VC:

“The top 2% of VC firms generate 98% of the returns in venture capital.”

Therefore at large, the industry is failing and therefore should look for opportunities to do things differently to improve its success rate. Perhaps we need more transparent reports on the failures of VCs and not only the success stories of the Rockstars.

Arlan Hamilton is the founder of Backstage Capital; a firm focused on investing in underrepresented founders (nearly $2M in over 40 founders so far). She states that investors are missing a trick as underrepresented founders present an enormous untapped market of entrepreneurs. For example, one of the startups in Backstage’s portfolio is Kairos who grew over 7000% from 2015 to 2016. It is no surprise investors such as Marc Andreessen, Chris Sacca, and Brad Feld all invested in Backstage Capital’s initial funds.

Typically we see most VCs ‘pattern matching’ in regards to investing which negatively impacts minority, female and LGBT founders when fundraising. Investors should instead evaluate each opportunity on a case by case basis to increase access to differentiated deal flows. Capitalism is color blind, which is why we need investors who think more broadly too.

Research in 2015 by Social Capital and The Information, from 71 of the top venture capital firms, Hispanics, and African Americans make up just 2 percent of senior decision-making ranks. As a result, there is a correlation in the startups that receive funding. 2010 data from CB Insights states that less than 1% of venture capital goes to underrepresented minority-founded start-ups each year. Minimising this disparity of financing presents a significant opportunity for untapped potential. The emerging female and minority-led funds have an excellent opportunity to spot non-obvious deals that other VCs may miss at the early stage.

Differentiated Deal Flow

Not all underrepresented founders are solving issues related to just their race, gender or class!

A common misconception is that female, and minority-led VCs are only investing into female and minority-led start-ups which are not true. They are investing in entrepreneurs from all backgrounds; they just choose to cast their net wider. Precursor Ventures has invested in over 50 founders since inception in 2016. From the 50 investments, 31% of the companies have at least one female founder, 16% have an African-American founder, and 7% have a self-identified Hispanic or Latino founder.

In the UK we are few steps behind our counterparts in the US, as there are no funds that focus at least a portion of their capital on investing in underrepresented founders yet. Louise Broni-Mensah, a black, British woman became the first black female founder to gain funding from YC in 2014 for her startup, Shoobs. British based investors have traditionally struggled to see the value of casting their net wider to catch investment opportunities like these.

Success stories breed confidence in the investor community

I believe we will start seeing bigger rounds of funding allocated by the well established VCs to participate in Series A and onwards once the funding gap is well addressed for underserved founders at the early stage. When the likes of Walker & Co. become billion dollar companies more attention will be reverted to early stage founders from diverse backgrounds. Suddenly VCs will start seeing what we have always seen. We have more in common than what separates us as people. We will see headlines in TechCrunch such as “who will be the next Tristan Walker” or reports in Techmeme on the IPO of Kairos.

We need more diversity-focused funds, as there is only a handful so far and yet there are so many female and minority-led startups that are underserved and remain undiscovered.

Originally Posted on UrbanGeekz.

Andy Ayim

Andy is Managing Director of Backstage Capital London. Previously a Product Manager who has traveled and worked in over 40 countries in the last five years. He is passionate about telling stories about founders & investors from diverse backgrounds and improving Tech Inclusion.

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