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What we learned from a year closely covering diversity in the startup ecosystem

A year ago, Crunchbase News set out to take a closer look at diversity — or lack thereof — in the startup world. While much has been reported about the dismal state of venture capital funding for underrepresented founders, we felt we had a unique perspective on the matter, with our access to Crunchbase Spotlight on Diversity data and our frequent coverage of issues facing start-up entrepreneurs.

We called this ongoing report project Something has ventured. Over the past year, we’ve chronicled the challenges and triumphs of a very diverse group of start-up entrepreneurs as they grow their businesses. At the same time, we probed the broader issues at play: Despite record venture capital investments in 2021, black, Latino and female startup entrepreneurs continue to receive only single-digit percentages of that capital.

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I learned a lot from this coverage, especially from the stories the founders and investors shared with us. With that in mind, here are some of the key points that stand out to me as we wrap up our year-long Something Ventured series.

Things are improving, but not fast enough

In the year since the death of George Floyd in the summer of 2020, venture capital funding for black entrepreneurs more than doubled. In dollars, funding to Latino and female startup founders also increased in 2021.

But those increases all came in a year of record investment in startups – global venture capital funding nearly doubled year-over-year to over $640 billion in 2021, Crunchbase data shows. Black founders received only about 1.3% of total venture capital funding last year –up from 2020, but still a tiny fraction. Percentage, Latino founder funding largely stalledand for the women founders alone, it actually fell last year.

The proportion of new firms joining The Crunchbase unicorn board with at least one female founder in 2021 was the highest proportion since 2015, but still only 14 percent.

In other words, progress remains mixed. A bigger pie means there’s more funding for everyone, but startup founders from non-traditional backgrounds aren’t yet receiving the same levels of investment as their peers.

“We want to ensure that the next leaders of America’s tech ecosystem reflect the diversity of our nation… The change is not yet significant enough. We believe that institutional changes result from changes in our networks,” VC BLACK co-founder Sidney Sykes said last year. “Are the people we interact with today, the entrepreneurs we fund, the friends we interact with different from a year ago? I don’t know if that’s true yet.

Seed funding remains essential

Every successful future unicorn or exit has to start somewhere, with that first round of funding, and it starts with an investor who is willing to bet on a risky idea.

Since seed-stage entrepreneurs typically have little more than a promising idea, they are more likely to be evaluated by potential investors on subjective criteria rather than provable business metrics. That means underrepresented founders who don’t fit the typical mold of what a startup founder looks like – young, white, brash, male – often have the door slammed in their face before they’ve even had a chance to make a viable idea.

But we are starting to see that change. Some historically black colleges and universities (HBCUs) have launched programs and leverage their alumni networks to encourage entrepreneurship and involve students and alumni in the startup ecosystem. And more and more venture capital funds are specifically looking for entrepreneurs who don’t fit the typical mould.

Like Marlon Nicholsco-founder and managing partner of Mac Venture Capital, said last year: “Usually the best people to create solutions, see challenges, or look for opportunities are those who have lived through or have significant experience with those challenges and the underlying opportunities. If we look at black culture or Latinx culture and try to address some of their biggest problems, we’d be foolish to ignore entrepreneurs who come from those communities.

As venture capitalists found themselves fiercely competing with each other for deals last year, they have become more open to considering investments they might otherwise have overlooked, whether in founders who did not fit the usual stereotype, in areas outside of Silicon Valley, New York and Bostonor the kind of ideas they hadn’t considered before.

We also saw this in our coverage of Something Ventured. Three of the five early-stage startups we tracked for the series have successfully raised their Series A rounds in the past year: metafiera game coaching platform led by Josh Fabian, a first-time black founder; e-commerce start-up Repeatled by LGBTQ co-founders Kim Stiefel and Sarah Wissel; and Dawn Healtha mental health startup led by Alex Alvaradowho is Latino and also founder for the first time.

The other two startups we followed—sotea logistics startup co-founded by black entrepreneurs Felix Orwa and Meka Este-McDonaldand Jorofirst female founder Sanchali Pal–’s carbon emissions tracking app – have seen rapid growth that positions them well for their Series A increases.

We also need more diverse check writers

Although venture capitalists have also raised unprecedented capital in recent years, only single-digit percentages of those check writers are black, women or Latino.

For example, venture capital firms founded by women in the United States raised over $7 billion to invest last year— a new high — but their percentage of total dollars raised hasn’t increased significantly in years. Likewise, black investors are only an estimateted 4 percent off partner-level roles in venture capital firms, despite the gains made in recent years.

“We need women and other underappreciated minorities to be check writers,” said entrepreneur Lolita Taub, who recently launched his own start-up venture capital firm, told us last year. “It’s all about who’s doing the checks and seeing those opportunities.”

Even in uncertainty, our priorities must be clear

As we wrap up Something Ventured, Crunchbase News will continue to report on diversity in the startup world and hold the industry to account. We hope this year will see significant progress, not only in terms of dollars going to underrepresented founders, but also in terms of the share of overall venture capital investment that various entrepreneurs receive.

There is a risk that in the middle a slowdown in venture capital financing in 2022, the focus on improving diversity will be pushed aside. We shouldn’t let that happen: in times of uncertainty, it’s especially important that we expand access to capital to more entrepreneurs.

Drawing: Dom Guzman

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