- Black entrepreneurs have historically faced disparity in how they receive venture funding and typically receive less than 2% of total dollars annually.
- After George Floyd paid the price for racial justice, firms vowed to make diversity a top priority, and black founders saw historic annual gains in securing venture capital funding.
- By the end of 2022, adverse market conditions led to a 36% drop in total venture capital investment, but funding for black entrepreneurs dropped by 45%.
In 2016, Beatrice Dixon finally made a deal with Target lead her line women’s care products. But she had one problem: she was still making them in the kitchen of her Atlanta home, and she needed to scale up quickly.
The CEO and co-founder of The Honey Pot Company, a brand of vaginal health products, had the “impossible” goal of launching in 1,100 stores and needed funding to attract manufacturers so it could fulfill the retailer’s orders.
She managed to secure this crucial round of funding from New Voices Foundation, a foundation led by Richelieu Dennis dedicated to supporting women entrepreneurs of color. Using this funding, as well as some funding from family and friends, Dixon was able to quit her job, move operations out of the kitchen, and open Target stores across the country by 2017.
Roughly six years later, Dixon’s products became a staple in retailers across the country.
“It was really tough, man, we were out of luck,” Dixon told CNBC in a recent interview about the difficulties she had in finding investors. “I don’t know what would have happened if we hadn’t received this money.”
Dixon is one of many black entrepreneurs who have struggled to get funding for their business and relied on venture capital funding earmarked for various founders. While Dixon and many others were ultimately successful, black-led ventures and black founders have historically faced disparities in securing venture capital funding.
In general, black entrepreneurs usually receive less than 2% of all venture dollars each year while companies led by black women make less than 1%, according to Crunchbase.
Since the police killing of George Floyd and the ensuing racial justice payback, black founders and black-led startups have made historic strides in raising venture capital funding in 2021. of these revenues were lost by the end of 2022.
While overall venture capital funding is down 36% in 2022 due to soaring inflation and interest rates, funding for black businesses has been down 45% according to data from Crunchbase. This drop is the biggest annual decline black entrepreneurs have seen in a decade.
“In 2020 and early 2021, there were many political and cultural conflicts that brought more attention to black and diverse founders,” said Kyle Stanford, senior analyst at Pitchbook. “No one wants this to be the reason they focus on investing in any group, but it really brought attention to the problems that VCs have had by investing in anyone other than straight white males.”
Marlon Nichols, co-founder and managing general partner of MaC Venture Capital, said various businesses tend to bear the brunt of slowing down venture capital because firms typically resort to the status quo during times of economic uncertainty.
“We have always invested in white men and that is what we are going to do right now. This is where we are comfortable. This is where we know and believe we will make a profit,” says Nichols, who Black described the decisions made by some firms. “That variety thing is cool, we might come back to it once we weather this storm.”
The so-called “risk bets”.
In 2014, Dixon was working at Whole Foods and was suffering from an ongoing case of bacterial vaginosis that she couldn’t get rid of. Then, she said, her late grandmother came to her with a solution—in a dream.
“She just told me she came with me and saw me struggle and she knew how to fix it and she basically hands me a piece of paper that has a list of ingredients on it and she tells me to remember what’s on it. paper,” Dixon said, remembering her grandmother’s dream. “I did it in a couple of days and basically this formula cured me.”
The mixture, which included ingredients like lavender, apple cider vinegar, grapefruit seed extract and rose, also helped family and friends, Dixon says. Using a $21,000 loan from her brother, she began selling the product and displaying it at trade shows and shows.
Using her connections at Whole Foods, she got the product on store shelves, but was unable to seriously scale and attract outside investors until she struck a deal with Target.
“This was hard. Was it harder for us founders of a black-owned business? Of course, it probably was,” Dixon said. “I think every time we’ve raised money, we’ve had problems with it, you know, but I think the important context is that anyone who raises money, it’s not going to be easy.”
While he doesn’t exclusively invest in diverse ventures, Nichols said he’s more likely than some VCs because MaC Venture Capital is led by a diverse team, unlike other firms that are typically run by white men.
“Investors are mostly white and male, and they usually come from wealthy communities, which means they have very specific backgrounds, they’ve experienced very specific things, and they’re comfortable with very specific things,” said Nichols, whose latest firm opened in 2019.
For many firms, investing in founders from different backgrounds is considered riskier because entrepreneurs are different from the norm they’re used to, says Lady Greenstreet, CEO of Diversity VC, which works to eliminate systemic bias in venture capital.
Since Floyd’s murder in May 2020, many major banks, corporations and investment firms have pledged to change that and make diversity their top priority going forward.
However, the dramatic drop in funding seen by black founders in 2022 indicates that some of these pledges may have been short-lived philanthropic efforts rather than investments that the firms actually believed would bring big returns.
“When you take on venture funding, you expect that you now have a partner, and if you succeed, your partner will continue to support you, he will help you raise the next round of funding. right?” Nichols said.
For white-led teams, there’s no expectation that recipients have to be “extraordinary” in their first two years of operation to receive follow-up funding, but the bar is much higher for black entrepreneurs, said Nichols, whose firm manages about $450 million in assets.
“For most of these black founders, that’s exactly what you’d expect: you have to be extraordinarily exceptional to get additional capital,” he said. “And if you really treat it like every investment you make, then it shouldn’t be.”
“Great Blue Ocean”
Pocket Sun is the co-founder and managing partner of SoGal Ventures, a venture capital firm dedicated to supporting women and various entrepreneurs. Since the firm opened in 2016, it has spawned numerous unicorns or startups valued at over $1 billion. Businesses include Function of Beauty and Everly Health.
“In terms of financial investment, this remains a huge blue ocean that people can dive into,” Sun said.
“Venture capital is a very privileged and exclusive industry, and it always has been. And it has such disproportionate power to decide on the future of technology, the future of innovation, the future of quality of life in so many ways,” he said. Sun.
Investing in different teams can often be seen as a moral imperative and something that is done because it’s the right thing to do, research has shown it can lead to higher returns for investors, said John Russell, chief executive of Colorwave.
“And somehow we’re still stuck in that situation where we’re trying to convince people of that,” said Roussel, whose organization connects early-stage founders with mentors and capital. “It really requires, you know, strong players who take the lead and show people that there are opportunities here and generally the same success rates regardless of skin color.”
Dixon, founder of The Honey Pot, cited her own success as an example. “Obviously it’s safe to bet on black business,” she said.
The company’s products are now in 4.6 million homes, nearly double what they were two years ago. They are also sold nationally at retail stores such as Walmart, CVS, Walgreens, and more. Honey Pot did not share its current valuation or annual sales.
Dixon urged investors to put their biases aside and look at companies by their fundamentals: balance sheets, innovative strategies and business goals, not by the color of their teams.
“The color of my skin shouldn’t be part of the conversation, period,” she said. “And yet, it’s still there, isn’t it?”
Credit: www.cnbc.com /