How Chicago is changing who raises early-stage venture capital

The city has tripled the portion of seed and angel dollars flowing to underrepresented founders

For those of us who cover the venture capital industry, two narratives are ubiquitous: There’s the story of how much capital has been invested of late; you’ve seen the data — 2020 and 2021 set nearly every record around the world for private-market investment.

The other story that pops up, again and again, is the one noting slim or negative progress in venture capitalists investing in more diverse founders. The pervasive nature of the latter story makes it all the more exasperating to report on. The data neatly showcase this massive problem; why haven’t things changed?

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But there’s some cause for cautious optimism. The Exchange has been collecting data on the Midwest venture capital scene lately, with a special focus on the Chicago area. Thanks to data from M25, a venture capital firm with a Midwest geographic focus, Crunchbase data collected by Chicago-based P33, and interviews with a number of local investors and founders, a tale emerges that it is possible to change the ratio when it comes to venture investment.

Easy? No. Possible? Yes. And worth doing? Definitely.

To better understand what’s going on in Chicago and the larger Midwest, we spoke with Desiree Vargas Wrigley, the executive director of TechRise, a P33 project; Stella Ashaolu, the founder and CEO of WeSolv and the co-founder of Fifth Star Funds; and Kristen Sonday, a co-founder at Paladin and a partner at LongJump.

Let’s start with M25 data on how they are finding it possible to invest in more diverse founders in their region, and then narrow our lens to how Chicago’s numbers are shifting. Then, we’ll bring in notes from active players that are working to keep the industry changing.

State of the Chicago (Midwest) union

M25 invests around the Midwest but is based in Chicago. The firm released an update to its regular diversity report series recently, which piqued our curiosity. Why? Because the firm doesn’t just report investments — it provides a look into how those investments came to be.

Per the investing group, the Midwest is 75% white, 10% Black or African American, 8% Hispanic or Latinx, and 3% Asian. In contrast, M25’s intro calls since October 2020 were with 64% white founders, 12% with Black or African American founders, 17% with Asian founders, and 3% with Hispanic or Latinx founders. Similarly, M25 had 12% of its intro calls with all-female teams, ahead of the U.S. average of 6% of investment dollars.

The result of the work to chat with more diverse folks is that the firm is investing in an increasingly diverse set of founders. M25’s 2016 and 2019 funds invested in 33% underrepresented founders, for example. But if we look just at its 2019 fund, that figure rises to 45%.

All this is to say that it is possible to invest in folks who aren’t former captains of the Stanford lacrosse team. And other investors who put capital to work in Chicago are having similar impacts. Crunchbase data collected by P33 and TechRise – using Crunchbase News data methodology, which Alex helped forge in years past – indicates that the percentage of angel and seed capital that is flowing to Black and Latinx founders in Chicago is rapidly rising.

Per Crunchbase data, here’s the rundown:

  • 2019: $13.6 million, or 5.8% of total
  • 2020: $17.7 million, or 8.6% of total
  • 2021: $38.3 million, or 13.0% of total

The data begs the obvious question: What happened in 2019 and 2020 that led to such a dramatic change in the ratio? We got on the phone to find out.

2020’s turning point

Desiree Vargas Wrigley was clear on what caused a turning point after 2019: It was “the result of the murder of George Floyd.” In its aftermath, many Americans started wondering how they could make things better while becoming increasingly aware of the challenges faced by minorities in the U.S.

For entrepreneurs like Vargas Wrigley, the question was: “How can I use my experience as a founder who’s overcome some of these challenges to help support other founders of color?”

Her ability to contribute was “a motivating factor” for Vargas Wrigley to step into her role at P33. Talking to her peers running other initiatives in Chicago, she found out that they shared similar motives and backgrounds.

“The founder community actually has driven a lot of [the change we’ve seen in Chicago investing], and we’ve fortunately been supported by some of the old guard or the existing institutions that recognize that maybe we have some good ideas and some vision around how to solve this.”

But no one is making change alone. One key word emerged from our conversations with Chicago founders-turned-funders: collaboration. The common thread is that overlooked founders need capital, connections, and community, and it takes a village to provide them with what they need.

Complementary efforts

“I think what we’re realizing here in Chicago is that there doesn’t need to be a duplication of efforts,” Stella Ashaolu said. “It just needs to be efforts to fight in the right places, and we need to support each other. I don’t see it as competition, because the problem is so stark and so huge that we each play a very important role, and have a unique approach to solving this challenge.”

In the case of Fifth Star Funds, which Ashaolu co-founded, this unique approach consists of providing underrepresented founders with a replacement for the “friends and family” capital they don’t have, thanks to checks that are majority-funded by individual donations.

Meanwhile, LongJump recently raised $5 million for its first-check founder-led fund – and its co-founder, Kristen Sonday, is convinced that the pool of talent is deep enough for it. It’s just a matter of putting in the work, she said.

“We have received hundreds of applications thus far, and we think that we’re just scratching the surface. A lot of the founders that we have found or talk to are building really incredible revenue-generating businesses, although they don’t have to be [to be of interest to us]. And they’re so under the radar in Chicago that no one else in the VC world really knows about them,” Sonday said. Consider this a response to the concept of the alleged “diverse founder pipeline problem” in the venture game.

Along the way, each of these initiatives has come up with tailored processes aimed at reducing bias that can be caused by pattern matching, instead taking into account success factors that tend to be overlooked, such as grit.

Will these factors correlate with success further down the line? There are reasons to think so, but it will also be worth tracking.

Sonday herself is well aware that getting the first checks to more diverse founders is not the entire effort. She said that it is “exciting to us to be able to surface new founders and make introductions to that ecosystem so they can get later-stage funding, they can get access to resources, etc., that they might not have had otherwise,” adding that, for her, “one part of the excitement of being as proactive as we are is that we are surfacing founders to bring into the ecosystem that no one knew” but are actively building.

TechRise also helps uncover these founders thanks to its pitching competitions, where winners typically get $25,000 in non-dilutive funding.

“We ended up distributing just under a million dollars,” Vargas Wrigley said. “Those founders went on to raise an additional $10.6 million in just seven and a half months – so [we’re seeing] a great multiple on the investment.” In other words, TechRise is changing the narrative on what funding-ready entrepreneurs look like while helping start a flywheel for them.

With that in mind, the key measure will be how these founders perform beyond the early stage: How many of them go on to raise more funding? How fast? And does this lead to exits? It is too early to tell, but we will be here to report when the time comes. To that end, we’ll track the data to see how the city’s progress in diversifying its seed and angel funding translates to later-stage activity as the year progresses. And if we do see it, then Chicago will have proved that change really is possible.