Report offers the most comprehensive look yet at Black founders, investors while confirming wide disparities and the importance of networks
A little more than one in 50 startup founders or lead investors are Black, according to a forthcoming first-of-its-kind, years-in-the-making study that seeks to identify factors playing significant roles in which nascent, Black-led companies attract funding.
Set to be published in the Journal of Finance by early next year, the study — ”Funding Black High-Growth Startups” — offers perhaps the most definitive look yet at the challenges Black entrepreneurs face. That’s important, because founders and investors are likely to make important decisions — about whether to launch a startup, say, or take a corporate job — based on such data, said Emmanual Yimfor, a finance professor at Columbia Business School who is one of the study’s co-authors.Black Americans have long encountered racial gaps in pay and employment across industries, including within high technology. The U.S. Equal Employment Opportunity Commission published a report last year — subsequently removed from the agency’s website under the Trump administration — showing that from 2014 to 2022, Black workers made up just 7.4% of the high-tech workforce and only 5.7% of industry managers. African American adults currently represent 13% of the national workforce, according to the U.S. Bureau of Labor Statistics. Yet less has been known about startups. Although it’s no secret that Black startup founders struggle to raise venture capital relative to their peers who aren’t Black, just how likely Black-led startups are to raise funding and how much they garner compared to other companies has been something of a mystery. Dating back to at least 2010, there have been numerous attempts — particularly in response to public or political pressure over the venture and startup industry’s lack of diversity — to examine how many Black investors and founders there are and how much money they allocate or attract. Perhaps most notably, Crunchbase in 2020 — following the George Floyd protests — began putting out an annual report looking at the amount of funding going to Black founders. The problem with these efforts is they were typically based on only a relatively small sampling of startups or on self-reported data, Yimfor and his co-authors argue in their study. As such, they didn’t offer anything close to a complete look at funding experience of Black founders or Black-led startups. To get a better sense of that, Yimfor and a team of researchers from Michigan State, Cornell and Columbia universities created their own database. Focusing on the period from 2000 to 2020, they used data compiled by industry research firm PitchBook to create a list of nearly 139,000 American startups with 180,000 founders and more than 46,000 lead investors. The researchers then used pictures on LinkedIn or other websites, and image-recognition and name-classification systems to determine founders and investors’ perceived races and ethnicities, manually going through photographs to ensure accuracy.• Just 3.1% of startups formed between 2000 and 2020 had a founding CEO or a majority of founders who were Black.Yimfor and his colleagues also found that the average Black founder raised about $3.78 million in venture funding — 42% less than what non-Blacks raised. Factoring in that disparity and the relatively few number of Black founders, the researchers found that just 1.3% of venture investment during the 21-year period went to Black entrepreneurs. In terms of trying to take a comprehensive look at Black founders and investors, “this is the most rigorous study that I’ve seen,” said Brit Fitzpatrick, manager of data and impact at All Raise, a nonprofit whose mission is to use data about the venture industry’s lack of diversity to prompt change.“This study backs up a lot of anecdotal data that we’ve been seeing for years,” Fitzpatrick said. Yimfor and his colleagues went beyond the basics. One thing Yimfor and his colleague Matt Marx did with the database was to look into the funding of Black startups before and after Floyd’s murder in May 2020, writing in a separate study that the initial investment spike and subsequent tailing off was an example of “tokenism,” because much of the increase in funding came from venture firms with no prior record of funding such companies. The researchers also dug into some of the potential reasons for the longer-term disparities in funding between Black and non-Black startups. They examined such factors as whether the founders were female, whether they had started multiple businesses, had previously worked in senior or roles or for big-tech companies, or whether they had a PhD or went to a school that had a proclivity for producing founders. Controlling for those and other elements, Yimfor and his team found that the likelihood that a startup with all-Black founding team would ever raise venture funding was 4.3% less than one that had no Black founders. Startups with all-Black founding teams raised about 52% of the total venture funding that was raised by those with no Black founders.Just 12.2% of Black-led companies that participated in an accelerator program raised a seed round, and 7.5% raised a Series A. Those percentages were 16.2% and 10.8% respectively, among non-Black businesses. Only 13.9% of Black-led startups that raised a seed round raised an A round, and 2.85% raised a B. By contrast, 21.7% of non-Black companies that raised a seed round later raised a Series A and 3.5% raised a Series B or higher. The implication of that is that on average, Black startups tend to have lower valuations than non-Black ones before raising additional funding. But even accounting for such lower valuations, Black-led startups still raise on average about 24% less venture funding than non-Black ones, according to the research. Because venture investors are highly paid to find the best startup investment opportunities and many have been very successful doing so, Yimfor said he figured going into the study that they would be using objective criteria to figure out where and how much of their money to invest. Ex // Top Stories Nonprofits feed The City amid lapse in SNAP benefits Local orgs are ramping up their operations to mitigate hunger among San Francisco residents relying on federal food assistance 'Holiday magic' glides into Union Square as ice rink opens Neighborhood business owners are planning festive reasons for visitors to stick around long after they leave the ice Rodney Fong is champion of SF biz, downtown’s comeback Chamber of Commerce has, under Fong, focused on bolstering citywide recovery, advancing small business resilience and advocating for economic vitality As such, he said he expected that about 60% to 70% of the remaining funding gap between Black and non-Black startups could be explained by the relative lack of credentials of Black founders compared to their non-Black counterparts. Among other things, Black entrepreneurs, on average, are less likely to have PhDs, share the same educational or work networks as investors or have worked for big tech companies, according to the study. But such factors only explain about a third to one half of the remaining funding gap, according to the study. “It’s hard to explain who gets funding and why,” Yimfor said. “But the funding gap in particular, the fact that didn’t explain more, that was strange.” The funding gap starts early on. Overall, Black-owned startups are no less likely to raise angel or seed rounds than non-Black ones and more likely to participate in accelerator programs, according to the study. But they raise significantly less money in angel and seed rounds than their non-Black counterparts, and it tends to take them longer to raise each round. Things come to a head with the Series A round, according to the study. Even after factoring in founder credentials and whether they raised an earlier round, Black-led startups are about 12.5% less likely to raise an A round than non-Black ones. And those that do raise a Series A raise significantly less in that round, on average, than non-Black startups.That too was a surprise, he said. He expected that once a Black-led startup had proven itself worthy of an A round, investors would give it a larger-than-average one to make up for the dearth of funding the company had raised in prior rounds, he said. “People would suddenly realize your value, and you would be flush with capital to accelerate your growth even more,” Yimfor said he expected.Touré Owen has firsthand experience with the challenges Black founders can face. He wasn’t able to raise any funding for his first startup, a mobile barbershop service called Trimmed he founded during the COVID-19 pandemic. That company ended up failing. Having led a failed startup is typically thought of as a badge of honor for startup founders — but Owen didn’t find that was the case for him. Even though his current startup — Bella, whose service helps barber and beauty schools manage their student data and comply with government regulation — was built out of his experiences with his first, most investors he met with seemed to have no interest in what he learned from Trimmed, he said. It took him a year to raise initial funding for Bella and when he finally did, a Black investor — Sean Mendy at Westbound Equity Partners — led the round. Mendy was someone he felt he could trust, Owen said. He had known Mendy for years. They had shared numerous personal conversations about their families and more, he said. And they came from similar middle-class upbringings, he said. By contrast, the white investors he met with — who comprised about 95% of the venture capitalists to which he pitched his company — were often aggressive, as if they were trying to rattle him. Combine that with the inherent race and power dynamics, and the situations were uncomfortable, he said.What the study did seem to find, though, was the importance of networks. Black or not, founders who attended the same schools or worked at the same companies as investors were not only more likely to raise funds from those investors, the amounts they raised were significantly larger. That dynamic seems to cut both ways for Black founders. Black entrepreneurs are less likely than non-Black ones to have work and educational connections with the lead partners on deals — unless those partners are Black. And while Black investors are less likely than non-Black ones to invest in companies that are acquired or go public, they are more likely to invest in Black-led companies than have such successful exits. Because venture investors tend to rely heavily on their networks and there are so few Black venture capitalists, such data indicate a big challenge Black founders face in raising capital. But the data also suggests that the connections Black investors have with Black founders helps the former be more discerning in their investments, Yimfor said. As thorough as the study is, one of its shortcomings is that it leaves a lot about how venture investors make their decisions unexplained, said Sean Foote, a venture capitalist and professional faculty member at UC Berkeley’s Haas School of Business. Combined, all of the credential factors Yimfor and his colleagues looked out only explain about 25% of the variability in funding for Black-led startups, for example, according to the study itself. That leaves a lot of unknown variables out there, Foote said.Yimfor said in this kind of research where there’s a lot of uncertainty, the benchmark is being able to explain about 15% of the variability. So, hitting 25% was a significant achievement, he said. Regardless, Foote praised Yimfor and his colleagues for digging into the issue. The study points to the need for venture capitalists to look outside their own networks and experience for investment opportunities.If you have a tip about tech, startups or the venture industry, contact Troy Wolverton at twolverton@sfexaminer.com or via text or Signal at 415.515.5594.
Venture Capital Racial Inequalities
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