What can Black VCs and founders expect in H2 2022?

Black founders raised 1.3% of last year’s $330 billion worth of U.S. venture investment, totaling just over $4.3 billion. So far this year, Black founders have raised a smaller 1.2% of the $125 billion invested.

The past few months have seen private market investors reduce their investment pace as a possible recession looms, but that 1% figure has barely budged, meaning economic rain or shine, it’s always a challenging time to be a Black founder.

This frustration is compounded because two years ago, “the powers that be” promised change after the murder of George Floyd. The “racial reckoning” — as some called it — saw many voices pledge to help construct a more socially and economically equitable startup market that, this time, included minorities. Minuscule and even backward progress in creating a more fair venture market is dismissive of the importance of change, especially because significant economic progress is needed to help the Black community close the wealth gap.

To repeat what’s been said continually: One can’t outperform, outshine or tactically maneuver around a system that’s intrinsically discriminatory. A million articles can be (and have been) written discussing a lack of equitable fundraising results, fraught funding journeys for minority founders and the need for more diverse LPs, more empathy, more opportunities, more this, more that, just more, more, more — and yet that 1% figure is staying essentially the same. It’s a more significant societal issue masked by the constant reassurance the venture market is on the precipice of change. And yet Black founders are raising an even smaller portion of venture dollars this year than last.

Change takes time when there are mentalities to shift and hearts to sway, though the venture funding gap issue is not quite as challenging to fix as some make it out to be — there are billions of dollars to invest, so all that’s needed is to put more of that capital to work in the businesses of minority founders.

With two quarters left in the year, here are some predictions for what the Black founder community should expect — and aim to do next.

Expect the slowdown to continue

As predicted, the venture capital market slowed in Q2, with just $108.5 billion raised by startups globally, the smallest total since the end of 2020, as TechCrunch reported. U.S. startups raised $52.9 billion in Q2 2022, significantly less than the $70.1 billion raised in the first quarter of the year.

Black founders raised $1.2 billion — or 1.7% of the $70.1 billion — in Q1 before raising just $324 million — or 0.62% of the $52.9 billion — in Q2, according to CB insights. The rest of the year is uncertain, with the economic slowdown predicted to persist.

Angel investor Christina Caljé told TechCrunch that this slowdown is healthy and necessary after last year’s extreme fundraising and the resulting startup valuations. The main issue for the Black community is that during uncertain times, venture investors often revert to the familiar, which could mean focusing on the mostly white-and-male networks they funded before the increased push for diversity a few years ago.

Black and other diverse founders are often the first to be cut when the investing mood becomes more restrained. This implies that the continued decline in venture funding will see the Black startup community experience a more severe regression regarding fundraising opportunities.

To manage the issue, Rodney Sampson, the general partner at 100 Black Angles and Allies Fund, said this is the time for founders, especially, to stay lean and focus on sustaining revenue. Dauda Barry, CEO of Alidasoft and an investor at Francis Fund, agreed, adding that VCs will prioritize profitability in the current climate over the growth-at-all-cost model they favored these past few years.

“Ideally, founders should optimize for a runway of 18 months and a minimum of 12 because we’re back to fundraising cycles of three to six months,” Barry told TechCrunch, adding that this remains an optimal time to build a startup, despite the market downturn.

“More talented people are being laid off that will be looking for their next opportunity,” he continued. “Many investors, especially VCs, have abundant capital from new funds that they have to deploy in the next two to three years.”

From an economic perspective, the issues Black founders currently face are essentially the same as the ones white founders face. What is different is that venture investors are more interested in funding what is familiar to them, meaning Black founders will see a more difficult environment for building relationships, compounded by an increasingly inequitable venture environment.

Expect major shakeups

Brandon Brooks, a founding partner at Overlooked Ventures, said limited partners are still licking their wounds from major markdowns due to the changing market conditions and capital mismanagement from traditional VCs.

Those paper markups by traditional VCs made institutional LPs feel they had more room to deploy capital outside their own networks. After seeing some of those paper prices implode, LPs realized they had less money than expected and, therefore, limited the amount of wealth they would deploy into venture funds.

As a result, Brooks expects to see funds close new capital vehicles at values significantly below their intended raise amounts, meaning those funds may be unable to deploy capital at the pace they had envisioned. In addition, he said he’s already noticing that some LPs are pulling back their capital commitments to VCs.

“This will again negatively impact Black founders because Black VCs won’t have the capital to deploy,” Brooks said. “We’ll see some Black funds closing down because they won’t have the capital to sustain operations.”

Meanwhile, Sampson said Black founders should look for Black VCs regardless of where their startup is located, adding that it’s essential for funds to come together during this time to bring more LPs into the market. Last year, his fund, Opportunity Hub, partnered with The Links to develop an initiative to spur generational wealth in the Black community and increase the number of Black LPs in the industry.

He said this could be a good moment for Black funds to form a collective and approach general partners together. Right now, many of them operate in isolation and aren’t necessarily tapping into Black high-net-worth individuals and institutions — like HBCUs, fraternities and churches — that could help keep them afloat.

Furthermore, Sampson said it’s worth looking at alternative forms of funding, citing Republic and Wefunder as examples of equity crowdfunding platforms that Black founders could tap. TechCrunch previously reported that equity crowdfunding so far seems immune to this year’s market volatility.

Brooks added to that. “If you have a strong consumer customer base and need funding, I’d look into equity crowdfunding,” he said. “Galvanize your community around the mission of your startup.”

Expect a tightened focus on community

Xfund investor Jadyn Bryden said now is a good time for the Black tech community to connect emotionally and strategically support each other. She added that knowing when to pivot the company will be essential this year and that flexibility and focus can help see businesses through the downturn.

Brooks concurred, noting it’s best to avoid frustration because it can adversely affect one’s mindset and performance. “Focus on the controllable,” he said.

Caljé said that Black founders may have an advantage in the coming quarters due to the number of Black VC funds, angel syndicates and accelerator programs launched in the past year. Therefore, this is the right moment to focus on finding the right investors and building relationships.

“There are local and global Black founder communities that have organically formed to share advice around fundraising, term negotiation, business modeling, operational scaling, breaking into new markets and sometimes simply emotional support,” she told TechCrunch.

She pointed to Visible Figures, the Black tech collective formed by entrepreneur Stephanie VanPutten, as an example of a network that Black founders and VCs should consider joining during this time. There is also Omek and European Black Investors Network, while Caljé highlights Impact X, Collab, Harlem Capital, 10×10 and Cornerstone Partners as firms to look at in terms of committed support to Black founders.

“Our visibility and proactivity are more important than ever,” she said. “Building a community of founders and investors around this shared vision for a more equitable startup ecosystem is our strength and obligation.”