In 2016, venture capital financing decreased by almost one-third, from $77.3 billion to $52.4 billion. Power and structural racism have crippled the startup ecosystem, and entrepreneurs of color seeking early-stage financing are suffering the most.
Angel and seed investments have fallen below half of the accounted deals for the first time since 2012. With less early-stage capital available, it’s expected to raise money from friends and family and this lack of accessibility is challenging, particularly for entrepreneurs of color.
The Problem: Pattern Recognition And Funding Bias
In 2016, the Center for Global Policy Solutions reported that due to discriminatory financing practices and a bias towards companies primarily operated by white males, America is losing out on over 1.1 million minority-owned businesses, and as a result, foregoing over 9 million potential jobs and $300 billion in collective national income.
Less than 1% of American venture capital-backed founders are black and the percentage of Black’s in decision making roles within Venture Capital isn’t much better. Pattern recognition has enabled VC’s to mitigate risk but has also limited their profit potential and created an inherent funding bias. This bias stems from barriers to early-stage capital, a lack of representation in the investing space and is perpetuated by systems of racism that destroy opportunity within communities of color.
Although entrepreneurs are expected to raise friends and family rounds, this expectation is born of bias. African-Americans have an average net worth of $11,000 compared to $144,000 for white Americans. With this lack of access to early capital and generational wealth, most family members and friends can not invest, regardless of how great the idea is.
Source Cited: Forbes