The past decade has seen Black founders raise a vanishingly small portion of venture capital funding. How to fix the problem? That question is always met with the same answer: Allocate more capital to Black entrepreneurs.
But that has yet to happen. In fact, Black founders receive less than 1.5% of all VC funds, whether bull or bear market. So what’s going on?
Perhaps it’s time for this discussion to center on limited partners (LPs), especially because they sit at the very top of the VC power structure. According to McKeever Conwell, founder of RareBreed Ventures, if LPs aren’t allocating more money to diverse funds or managers, then, in some ways, there will always be a dearth of capital that can — and possibly will — be allocated to diverse founders.
On an institutional level, the onus for change lies on those with the power to make it happen. Backing diverse funds means supporting diverse thinkers and their networks. It’s imperative, then, to put pressure on LPs to back more funds that prioritize diversity, support diverse funds and managers, and create specialized funds to invest in diverse founders.
“Reward the actual behavior and not intent.” Kerry Schrader, co-founder of Mixtroz
The amount of capital allocated to diverse individuals needs to go up, and LPs must first care and rehash their own core values in order to drive economic equity.
“There will always be reasons to question how much they actually care,” Conwell said. “But we’ll see over time.”
The mandate of responsibility
LPs have the power and flexibility to demand that at least part of their capital be allocated to diverse founders because fund managers are beholden to them as the source of their money, Black Women Talk Tech co-founder Esosa Johnson told TechCrunch.
“Their feet haven’t been pushed to the fire,” she said about fund managers. “After all this time, they need to be held there.”
Kerry Schrader, the co-founder of Mixtroz, agreed, saying LPs must hold venture general partners (GPs) and fund managers accountable for metrics that include diversity in proportion to the size of the fund. As the 37th Black woman to raise $1 million or more in VC funds, she said that without accountability, excuses will continue to be the norm.
“Reward the actual behavior and not intent,” she said.
Rachael Twumasi-Corson, the co-founder of hair products maker Afrocenchix, also feels LPs should bear more responsibility for where their capital is allocated. Twumasi-Corson is one of a handful of Black British women to raise more than $1 million in funding.
“It’s important for LPs to ask fund managers to commit to ESG targets, including social targets around economic empowerment for historically marginalized groups,” she told TechCrunch. “This benefits Black founders and encourages more diverse businesses with a greater chance of success and return for the LPs.”
But the problem is that diversity is not necessarily a core value of many LPs, meaning backing funds that seek to increase capital allocation for Black and brown founders isn’t a priority. That ethos started to shift after the murder of George Floyd, with more in the industry becoming aware of the importance of such targets.
However, it’s imperative to keep the fire going, Johnson said.
“If the LPs said, ‘Hey, I care about the return, but I also want to make sure that you are getting the return from serval walks of life, ages, sex, women, people of color,’ it forces fund managers to choose the right founders with those qualifications,” she said. “But a lot of these fund managers are not seeing that level of granularity.”
In the absence of data, bias rules
The lack of data about Black venture dollars is a continuous hindrance to the Black VC community. There is little to no evidence of what happens when Black funds receive sizable investments over time, and the metrics regarding the success of Black founders compared to the general market are sparse. This is because Black people haven’t received enough money over time to be deemed worthy of tracking.
The lack of historical evidence can be — and often is — used against the Black community when it comes to investments because it doubles down on the risk and unfamiliarity many already associate with the Black community. This needs to change; statistics will help prove that Black founders and funds can perform just as well as their non-Black counterparts and combat any bias on the part of investors.
“At the end of the day, this is a money business.” McKeever Conwell, founder of Rarebreed Ventures
“This data allows you to paint an objective picture,” Black Ops Ventures GP James Norman told TechCrunch, adding that it can help point them in the direction of a more diverse crop of managers and entrepreneurs currently succeeding in the venture space.
But data on the performance of Black-led venture funds is sparse. Without more hard figures — and with Black founders and investors often viewed as a collective rather than as individuals — it may be harder for LPs to make the call to commit funds to Black funds.
“Nobody is fired for investing in a fund started by some white guy who went to Stanford,” Conwell said. “At the end of the day, this is a money business. You invest in a fund led by a group of diverse managers, and God forbid their investment thesis is investing in diverse founders. If you invest in a fund like that and it doesn’t perform well, you probably will lose your job.”
The way ahead
It’s ironic that LPs retreat to networks deemed safe and familiar, because most of the capital goes to white men, and most VCs are not profitable in risk-adjusted terms. That just means it’s time to try something new, Norman and Johnson said.
“People are putting too much money into a single group of people that aren’t diverse enough in thought and innovation to represent different things,” Norman said. “They need to get out of the traditional game of what they do because the math is showing it’s not working.”
Norman believes more people of color need access to top-performing existing funds to start shifting the landscape from the top down. He’s not a fan of mandates, because he feels it will give LPs another excuse to turn founders away after hitting the required diversity quota. Instead, he is working on making data more accessible so that greater emphasis can be placed on objectivity.
Johnson agreed, adding that more fund managers of color should be given opportunities to let them tap into their own networks and increase diverse capital allocation. LPs also should look further to educate and expose themselves to diversity of thought so they can better guide fund managers on the best ways to create a portfolio of diverse founders.
Conwell suggests more LPs should look at setting capital aside for diverse funds or start putting smaller checks into emerging funds rather than deploying large amounts of capital into the same fund managers.
Hopefully, more ways to support change will arise, he says, pointing to the law allowing funds under $10 million to have up to 250 LPs. RareBreed Ventures used this approach to find more diverse individual small-check LPs, and Conwell hopes for legislation that will allow the same for larger funds.
“The more we have things like that happening, the more change will come,” he said.