Black investors, founders still face big challenges in venture industry

In late spring 2020, though, it looked like the industry might turn over a new leaf. The murder of George Floyd triggered nationwide protests that shone a spotlight on the systemic racism embedded within numerous parts of American society — including in the venture industry. In the wake of those demonstrations, venture capitalists and their firms promised to do better.

Prominent Bay Area investors including Chamath Palihapitiya spoke up in favor of the protests and for racial equity. Firms such as Andreessen Horowitz and SoftBank set up new funds designed to invest in companies founded by Black entrepreneurs and members of other underrepresented groups. And the National Venture Capital Association and Crunchbase launched initiatives to collect data on Black representation and funding in the industry.

Despite those sentiments and efforts nearly four years ago, not much has changed.

Just 11% of all venture firms nationwide employ even a single Black investor, according to Venture Forward, the organization the NVCA created to promote and study diversity in the industry.

While investment in Black-founded startups surged in 2021, hitting a record $5.1 billion, the tally has plunged in the two years since, dropping to just $700 million in 2023, according to the latest data from Crunchbase. That’s the lowest amount of funding for Black-founded startups since 2016.

Perhaps worse, those in and around the industry say, the discussion around diversity and inclusion and the urgency of doing something about the venture business’ historic inequities seems to have died down.

Sydney Sykes, a San Francisco-based partner with Lightspeed Venture Partners, compared the situation to a startup that shuts down or is acquired with little fanfare.

“You’ve just seen a slow halting of conversations around diversity,” said Sykes, who co-founded BLCK VC, a group that promotes equity and inclusion in the industry. “It’s kind of like a quiet exit … That sometimes makes it even harder to call out change.”

The industry didn’t changeThe venture business’ lack of diversity in personnel and investment is obviously bad for Black investors and entrepreneurs. But it has wider repercussions.

Venture capital has been one of the primary ways of creating and distributing new wealth in recent years. Successful venture-backed startups can benefit and enrich not just their founders and investors, but their employees, business partners and the communities in which they operate. What Silicon Valley companies have repeatedly shown is that a lack of diversity among their investors and founding teams frequently has long-lasting consequences in terms of the diversity of their workforces and business partners.

But venture firms and the startups they back are also harmed by their lack of diversity. Most notably, they can miss out on business opportunities, whether in the form of talented Black entrepreneurs or businesses that cater to members of groups underrepresented in the industry.

Such groups — not just Blacks, but women and Latino people — have huge amounts of purchasing power, said Lisa Lambert, the chief investment officer for private markets at the George Kaiser Family Foundation.

If you’re a venture firm and “you don’t have Black people or females sitting at the table, you’re not going to get high-quality Black entrepreneurs or female entrepreneurs in your portfolio,” said Lambert, a Bay Area-based investor who formerly ran the venture arm of U.K. utility National Grid. Partners from underrepresented groups, she said, “make you credible to those diverse audiences.”

Sykes, Lambert and other Black investors and experts chalk up the lack of progress to a number of factors, including economic uncertainty and the broad national pushback against diversity, equity and inclusion efforts by conservative academics, activists and politicians.

But the experts also argue that the industry, even in the wake of the George Floyd protests, never really changed the way it operates. The same system that largely excluded Black investors and ignored Black founders in the past remains essentially the same today.

“We didn’t fundamentally change the systems that we had in place before,” said Brian Dixon, a managing partner at Oakland-based Kapor Capital. “The way that allocators [of venture capital] continue to allocate is just a broken system.”

As recently as two years ago, things seemed to be looking up for Black investors and founders. Within U.S. venture firms, the proportion of investment professionals who are Black had steadily ticked up, going from 3% in 2018 to 4% in 2020 to 5% in 2022, according to Venture Forward.

The numbers were even better at younger and smaller firms. African Americans comprised 8% of the investment professionals that worked at firms that were founded in the previous 10 years and 11% of those working at firms with five or fewer employees, according to Venture Forward.

On the funding side, the number of funding deals raised by Black-founded companies in the U.S. had steadily increased, going from 186 in 2016 to 419 in 2021. And the dollars flowing into such companies jumped too, rising more than seven times between 2016 and 2021.

But such gains were uneven and modest at best, and in some cases quickly reversed.

diversity efforts hit a wall

Even as Blacks made inroads at smaller and newer firms, they comprised just 1% of all investors at venture outfits with 21 or more employees and at those that were more than 10 years old. Those are the kinds of firms that tend to be the most powerful and influential in the industry — and the ones that tend to get in on the best deals.

Even as venture funding for Black-founded companies hit new levels, it still amounted to a tiny portion of overall venture investment — just 1.5% of U.S. funding in 2021, according to Crunchbase. And it has plunged since. Last year, it amounted to just 0.5% of U.S. venture funding.

The economic uncertainty over the last two years has played a role in that reversal, Black investors and analysts say. The downturn in the public markets in 2022, the rise in inflation and interest rates and the fear of recession prompted the industry to slash overall investment. It also prompted firms to focus much more closely on their day-to-day operations, rather than on strategic initiatives such as increasing diversity.

When the economy is booming, venture investors are willing to take more risks and to prioritize things like diversity rather than being monomaniacally focused on financial returns, said Mandela SH Dixon, the former CEO of All Raise, an organization that promotes the inclusion of women in the venture industry.

“But when things are bad and the money train slows down, people go into self-preservation mode, tighten their purse strings, narrow their focus, and revert back to the ‘safe’ and ‘proven’ models of success,” said Mandela SH Dixon, who is Brian Dixon’s wife, an angel investor and the former CEO of Founder Gym, an organization that helps train entrepreneurs from underrepresented backgrounds.

To some extent, the pushback against diversity efforts has also thwarted efforts to make the venture industry more inclusive. Prominent figures in the tech and finance worlds, including Elon Musk and fund manager Bill Ackman, have been increasingly outspoken against such efforts. The Supreme Court in June barred consideration of race in college-admissions decisions. And in September, a federal court temporarily blocked Fearless Fund, an organization that had established a grant program for Black women entrepreneurs — a group that’s drastically underrepresented — from awarding such grants.

Such developments threaten to make it legally harder to set aside funding for entrepreneurs from traditionally underrepresented groups, Brian Dixon said. But the DEI pushback has also given cover to venture investors who weren’t all that interested in the first place in diversifying their ranks or investments, Lambert said.

Together with the economic environment, the pushback “creates a steep set of challenges for Black founders and Black VCs,” said Y-Vonne Hutchinson, the CEO of ReadySet, a San Francisco-based DEI consulting firm that counts venture firms among its clients.

Relationships still rule

But the biggest obstacle to making the industry more diverse is that venture firms and investors haven’t fundamentally changed the way they do business, Black investors and industry observers say. The venture industry is a relationship-based business. Firms and investors form networks with entrepreneurs, companies, schools and other firms. Such networks tend to be fairly homogenous, filled with people of similar backgrounds — frequently white or Asian males who went to Stanford or Ivy League schools.

The industry has also been built around what critics call pattern matching. Venture capitalists are often former entrepreneurs who built successful startups. Because of their own success, they tend to think that successful entrepreneurs will have similar backgrounds to theirs. That dynamic tends to perpetuate itself, ensuring that because the venture industry is dominated by white and Asian men from top-ranked schools, venture funding predominantly goes to startups founded by similar people, critics say.

That system remains in place, Lambert and others said. While some venture firms set up funds to focus on founders from underrepresented groups, those pools of money were dwarfed by the much larger funds that firms continued to invest the same ways they always had, according to Brian Dixon. While some Black investors were able to launch their own venture firms and some were hired by existing firms, few made their way into the biggest firms that have the best established networks and tend to score deals with the most promising startups, Lambert said.

That’s important, because the only way the industry is really going to change is if top-tier firms open up to Black investors, starting at the entry level, giving them access to their networks and partnerships and investment opportunities and teaching them the business, she said.

“What I’d like to see is a sea change in the culture of venture capital,” Lambert said.

“If you haven’t diversified your pipeline” of talent, she said, “then you’re not going to see any material change” in the industry.