Black entrepreneurs have created lucrative businesses with venture capital. So why are VCs still so cautious about investing in Black-owned companies?
While overall VC funding dropped by 36% in 2022 as inflation and interest rates surged, financing for Black businesses saw a steeper drop of 45%, according to the Crunchbase data. That drop is the largest year-over-year decrease Black entrepreneurs have seen over the past decade.
"We've always invested in white men and that's what we're going to do right now. That's where we're comfortable. That's where we know and believe that we're going to get the return," is how Nichols, who is Black, described the decisions made by some firms. "This diversity thing is cool, we'll pick it back up maybe, you know, once we've weathered this storm.
"It was hard. Us being Black-owned business founders, was it harder? Sure, it probably was," said Dixon. "I think every time we raised money, we had trouble doing it, you know, but I think that the important context to put there is that anybody that raises money, it's not going to be easy." To many firms, investing in founders from diverse backgrounds is considered a riskier bet because the entrepreneurs differ from the norm they've become accustomed to, said Ladi Greenstreet, the CEO of Diversity VC, which works to tackle systemic bias within venture capital.— and make diversity a top priority moving forward.may have been short-lived charity plays rather than investments that firms actually believed would bring in strong returns.
"For most of these Black founders, that's exactly like the expectation, you've got to be extraordinarily exceptional in order to get additional capital," he said. "And if you're truly treating this like all investments that you make then that shouldn't be the case."Pocket Sun is the co-founder and managing partner of SoGal Ventures, a VC firm devoted to supporting women and diverse entrepreneurs.
While investing in diverse teams can often be seen as a moral imperative and something that's done because it's the right thing to do, studies have shown it can lead to higher returns for investors, said John Roussel, the executive director of Colorwave."And somehow, we're still stuck in this situation where we're trying to convince people of that," said Roussel, whose organization connects early stage founders to mentors and capital.
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