Diversity Venture

From The Editor’s Desk: To Grow a More Diverse Startup Ecosystem, Start At The Seed Stage

From the Editor's Desk

We have to do better.

That was my first thought after reading Crunchbase’s first Diversity Spotlight Report. Published last week, the report offers a comprehensive look at the U.S. venture funding landscape for Black- and Latino-founded startups.

Our report underscores the extent to which minority entrepreneurs are largely shut out from participating in the incredible wealth generated by the tech industry. 

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So far in 2020—another blockbuster year for venture funding despite a global economic downturn—Black and Latino founders have raised just 2.6 percent of the total VC funding for U.S. startups. That’s despite those two demographic groups combined making up 32 percent of the U.S. population. In the San Francisco Bay Area, just 1.8 percent of the total venture capital invested since 2015 has gone to Black- or Latino-founded companies.

There are no easy or quick fixes for an issue as intractable as systemic inequality, but one area in the report stuck out to me as something the venture industry can start to improve upon immediately: Seed-stage funding.

As noted in our report, minority entrepreneurs often struggle to make it past the seed stage. At this nascent phase, with little more than a promising idea to go on, founders and their ideas are typically assessed on squishy, subjective criteria rather than provable business metrics. Underrepresented founders who don’t fit the typical mold of what a startup founder looks like— young, white, brash, male—often have the door shut in their faces before they’ve even had a chance to make a go of a viable idea.

How do we start to effect meaningful change? 

Ditch the ‘warm intro’

Many VCs will only talk to a founder who’s been introduced by someone they both know. 

One recent study found that founders who get in front of a VC via a “warm introduction” from a shared connection are much more likely to be funded than those who try to break into the insular, clubby world with a cold pitch. A warm intro pitch has a 26 percent chance of getting to an investment committee and, once there, a 4.6 percent chance of getting funding. Cold pitches, in contrast, have only a 1.19 percent chance of getting to an investment committee and a slim 0.38 percent chance of getting funding once there.

The practice of the warm intro, of course, only perpetuates the diversity problem because underrepresented founders are significantly less likely to know someone who can help open the door to an investor’s office in the first place.

There are better ways for investors to find and fund entrepreneurs outside their usual orbit. It likely will require investors to put in more of the legwork to close deals, but as Charlie O’Donnell of Brooklyn Bridge Ventures wrote a few years ago, VCs “should be willing to go through the firehose of crappy deals in their inbox for the money we make.”

Filtering pitches via the warm intro is not only lazy, it’s also inefficient. “Solve the filtering challenge with technology, not by relying on networks,” startup entrepreneur Haje Jan Kamps wrote in a 2017 blog post in which he offers some actionable ideas for how VCs can clearly outline their investment thesis on their websites and then efficiently filter through the inbound pitches to find potential deals that fit.

We are never going to make significant progress on the diversity issue if we don’t open the door to a wider world of entrepreneurs and founders who, by definition, are not part of the established network. 

Put down real money

Raising more than $1 million at the seed stage is the biggest hurdle for underrepresented founders, Ivan Alo and LaDante McMillon, co-founders of New Age Capital, a new fund raising institutional funding to invest in Black and Latino founders, told Crunchbase for the Diversity Spotlight report. 

Entrepreneurs who don’t raise enough money at the seed stage have a harder time gaining traction with their businesses and are less likely to receive subsequent funding, an issue that’s compounded by the fact that minorities on average have far less family or personal wealth with which to bootstrap an enterprise.

It’s also important that venture investors fund minority entrepreneurs “as a prudent investment strategy” that’s part of their primary portfolio, rather than relegating them to “a separate, niche, or impact program,” according to Marlene Orozco, the lead research analyst at Stanford Latino Entrepreneur Initiative and a partner on our report.

Spread the wealth

Our Diversity Spotlight Report found that some U.S. regions are doing better when it comes to funding Black and Latino entrepreneurs. In the greater Atlanta metro area, for example, 5.5 percent of venture investment since 2015 has gone to Latino or Black founders.

With the sudden shift to remote work, more investors are already looking beyond the Bay Area, New York and other established tech hubs to find and fund startups—a trend that also helps entrepreneurs in more diverse metro areas gain access to venture funding. 

The COVID-19 pandemic has hit minority communities especially hard, while the tech-dominated coasts have been more immune to catastrophic job losses. Investing more outside the coastal tech hubs, then, is important not only for advancing racial equality in the U.S., but broader economic parity as well.

Tell me what you think: If you’re an investor who’s invested in successful minority entrepreneurs, what was your process for finding and funding those ventures? If you’re a Black, Latino or other underrepresented founder, what’s been your experience pitching investors and securing funding? Share your story with me at mvanromburgh@crunchbase.com.

Illustration: Dom Guzman

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