New report says Black and Latinx founders have only received 2.6% of VC funding this year

A new report from Crunchbase, a business information site showed that Black and Latinx founders are still far behind their white peers in the aspect of VC funding.

The data service found that as of August 31, 2020, Black and Latinx founders were only able to raise only $2.3 billion in funding, which represented only 2.6% of the total $87.3 billion in funding founders have raised so far in 2020.

The Crunchbase report was released on October 7. Its information was gathered from more than 970 Black and Latinx-founded businesses/companies that have raised VC funding between 2015 and 2020.

“I think it’s pretty shocking,” Crunchbase data evangelist Gene Teare told CNBC’s Make it. Adding that, since 2015, the Crunchbase team has been reporting on female founders, only to shift focus to Black and Latinx founders this year. “Hopefully for the industry, this is a wakeup call.”

Lead research analyst at Stanford Latino Entrepreneurship Initiative, Marlene Orozco said “the lack of funding to Black and Latinx founders is a result to historical gaps in community wealth followed by limited exposure and opportunities to secure capital.”

According to a 2016 report, the Brookings Institute showed that the average net worth of a typical white family was $171,000, which was 10 times greater than that of the typical black family at $17,150.

“Receiving $50,000, $100,000 – and sometimes more – from family and peers is not part of the average Black founder’s journey,” said James Norman, founder of Pilot.ly, in the report. He explains that unlike their white counterparts, black founders barely have the starter money required to launch their company or startup. Therefore, many of them end up relying on loans from family and friends and personal savings from their day job salaries.

It is most difficult for many underrepresented founders to successfully raise $1 million during their initial funding stage, according to Ivan Alo and LaDante McMillon the co-founders of New Age Capital, a seed-stage venture fund. “Black and Latinx founders often experience rejection from investors because they do not fit a certain profile.”

Teare explains this rejection as one that has to do with racial bias and discrimination which has created a wide rift in the venture capital space. She also emphasized the importance of seed-stage funding for any new business or startup. “That early funding is all about you as a founder, your network, and your credibility,” she said.

The initial funds a founder raises at the seed stage of the business can determine how effective the business will kick-off. If the amount is sufficient enough, the business owner can proceed with launching the business, and subsequently have other funding rounds. Usually, it is business owners that have the right network that benefits the most from these rounds. For discriminatory issues or unclear business ethical issues, some investors refrain from investing in minority-owned startups.

To close the racial disparity in the venture capital space, Orozco says that “we need more capital providers and investment professionals to engage with Black and Latinx founders as a prudent investment strategy that should be folded into their primary portfolio, rather than constituted as a separate niche or impact program.”