Black Founders Raise One-Third of VC Funding for Startups

By: Jennifer Magdalene

African-American startup founders are enjoying an impressive degree of success, with recent McKinsey research indicating that black brands are keen to increase the percentage of black-founded unicorn brands in the US. A recent study published by the National Bureau of Economic Research, however, indicates that black founders raise only one-third as much venture capital funding as others during the first five years. The researchers leading the study were Emmanuel Yinfor (an assistant professor of finance at the University of Michigan), Matt Marx (an academic at Cornell University), and Lisa Cook (Federal Reserve Governor).

The Reasons for the Gap

The findings of the study suggest that bias on the part of investors exists. However, this bias is reversing dramatically as they learn more about black startup founders’ capabilities. Emmanuel Yinfor told the University of Michigan’s Michigan News that factors such as professional networks, the size of the startup team, and the alma mater of the founders, explained only one-third of the existing gap. There was over 50 percent of the disparity that quantifiable factors could not explain. The problem is particularly worrisome because VCs are trained to support the most talented founders; their investment typically brings them a large percentage (approximately 20 percent) of the profits. Failing to recognize talent is not only detrimental to visionary startup founders, but also to their own financial ambitions.

A Disappointing Third Quarter

The latest research by TechCrunch also shows that black founders raised only $187 million in the third quarter of 2022. This, they say, is a “staggering decline” from the $1.1 billion they raised in the third quarter of 2021. The research also showed that black men and women tend to receive nearly equal amounts of funding.

Successful Black Startups Set a Precedent

The success enjoyed by black startups is excellent motivation for VCs with ambition. In 2021, black businesses made their presence felt in a wide array of areas, from cannabis cultivation and processing right through to electric vehicle design, NFT communities, and fashion. In this sector, innovative designers are making the most of even small investments—for instance, by having designer fashion made abroad. Today, it is easier than ever to do so sustainably and ethically, with a host of companies specializing in everything from recycled materials to 100 percent natural clothing. Just a few black brands doing a roaring trade include KAI, Brother Vellies, and Lemlem. Some of these pay heed to traditional ways of weaving cloth; others are more into cutting-edge techniques that save energy and time.

Patenting Can Help

According to Yinfor, one of the most important steps for black startups to take is to obtain a patent. Currently, there are fewer patent applications from black startup owners. Patents mean increased funding (since investors tend to show a greater interest in firms with patents) and can be a vital way to narrow the current investment gap.

Recent research published by the National Bureau of Economic Research, has shown that black startup founders raise only one-third of the venture capital funding obtained in the US. The researchers conclude that bias is at play, with investors benefiting from knowing about the capabilities of black business founders. The researchers recommend that more black startups apply for patents, to increase their chances of attracting investors.