May 17, 2022

The Clubby World of Venture Capital Finds a New Bet: Black Entrepreneurs

Austin Clements

was ready to give up.

He’d quit his job in venture capital in 2019 to try to launch his own fund giving early-stage money to tech startups founded by entrepreneurs of color, but investor interest was slim. Last June, he and his co-founder figured that before throwing in the towel, they’d write one final mass email to anyone they’d ever pitched or spoken to about their fund—a group of around 300 people—asking for support.

“This was our Hail Mary,” recalls Mr. Clements, 38 years old, who is Black. This time, as soon as they hit ‘send,’ their inbox began filling with replies from people eager to be involved.

Long known for its insular nature, the venture-capital world has been trying to open up in the past year. According to a 2020 Morgan Stanley survey of venture capitalists, 43% said finding opportunities to invest in companies with nonwhite founders was a priority, up 10 percentage points from the prior year. Another 61% said the Black Lives Matter movement had affected their investment strategy. The survey’s respondents included a higher proportion of nonwhite venture capitalists than the industry at large. More investors have flocked to Black-led venture funds: Among new funds being launched in the first quarter of this year, 10.4% were debuted by Black-led firms, more than double the rate in 2019, according to research firm Different Funds.

The impact is also being felt at Black-founded companies, which attracted around 1% of venture capital funding annually from 2016 to 2020. Though levels are still low, there are signs of an uptick under way: So far this year, companies with Black founders have received 1.4% of all U.S. venture-capital funding, according to data from Crunchbase. Last year, there were a record 306 venture-capital investments in Black-founded U.S. companies, nearly twice the number from five years earlier.

Mr. Clements’s Los Angeles-based firm, Slauson & Co., now boasts investors ranging from actor Ashton Kutcher to

PayPal Holdings Inc.

Though Slauson—named after a prominent thoroughfare in historically Black South L.A.—originally hoped to raise $15 million, they’ve now surpassed $50 million in commitments. Other sizable new Black-led funds include a $134 million fund recently closed by venture-capital firm Harlem Capital, which invests in companies with founders who are female or ethnic minorities.

Mercedes Bent, a partner at Lightspeed Venture Partners, says investors are often more comfortable investing in founders who share their backgrounds.


Milana Shapira

“Our message didn’t change; our strategy didn’t necessarily change,” says Mr. Clements. What did change were the circumstances: The firm’s email blast went out about a month after a Minneapolis police officer murdered

George Floyd,

and Silicon Valley was abuzz with talk about how to improve racial diversity in its ranks.

Determining what companies qualify as “diverse” isn’t always straightforward. In the Different Funds analysis, a Black-led firm was defined as one in which at least one-third of general partners are Black. Investors seeking to back diverse startups often consider the ethnic background of its founders, or its leadership team. Many diversity-focused funds also look at factors such as gender and sexual orientation.

Nearly 80% of investment partners in venture capital are white, according to a 2021 Deloitte study, and around 15% are Asian or Pacific Islander. Only 3% of investment partners are Black, and 4% Latino. By contrast, 13% of the U.S. population is Black, and 19% Latino.

That lack of diversity trickles down, says Mercedes Bent, a partner at Lightspeed Venture Partners, adding that investors tend to feel more comfortable investing in founders who share their backgrounds. A 2014 Babson College study found, for example, that venture-capital firms with female partners are three times as likely to invest in companies with female CEOs than firms without female partners. “It’s all about network and what you’re exposed to,” says Ms. Bent, who is Black.

To try to address the gap, Lightspeed last year reconfigured its traditional scout program, in which people interested in venture capital are recruited to work with the firm to identify investment prospects in exchange for mentorship and compensation. Following Mr. Floyd’s murder, the firm focused specifically on diverse candidates, recruiting a class of 42 Black, Latino and Pacific Islander scouts. Among the more than 100 deals those scouts have brought in to date, Ms. Bent said, half have involved companies with at least one founder of color.

A 2019 Morgan Stanley report found that among venture capitalists who’ve tapped more diverse professionals to help manage portfolios, such as fund managers, limited partners and more, 71% said it was a “very effective” way to increase the diversity of founders they invest in.

The pandemic has helped spur a cultural shift in venture capital over the past year, as more investors jettisoned their typical face-to-face pitch meetings in favor of Zoom, says Michael Seibel, a managing director of Y Combinator, one of Silicon Valley’s most prominent accelerators, making it easier to take meetings with people outside of Silicon Valley, the traditional heart of venture capital.

“Covid has shown the investing world that great founders can be anywhere,” Mr. Seibel, who is Black. That’s especially important, he notes, given Silicon Valley’s lack of diversity. The area’s population is just 2% Black, according to U.S. Census data.

Companies with at least one nonwhite founder tend to outperform their peers, returning 30% more cash to investors when they go public or are acquired, a 2020 analysis by the Kauffman Fellows Research Center found.

Kelli Jones,

founder of Sixty8 Capital, a new, diversity-focused venture-capital firm based in Indianapolis, says that in her experience, companies with founders of color tend to be more disciplined and seasoned, often because they’ve had to build their businesses while struggling to raise cash. “They’ve bootstrapped, they’ve become really cash-efficient,” says Ms. Jones, whose firm just announced it has raised a $20 million fund that will be focused on ethnically diverse founders in the Midwest.

In the first few weeks after the fund was launched, Sixty8 Capital received more than 500 applications from founders. “We have so much deal flow, I almost can’t handle it,” says Ms. Jones, who is Black.

Songe LaRon, left, and Dave Salvant founded Squire, which offers software for barbershops. Fundraising rounds last year landed the startup $71 million.


Squire Technologies

A year after Mr. Floyd’s murder, more institutional players have continued to scale up their investments in firms led by minorities. To date,

Alphabet Inc.’s

Google has committed $60 million to Black-led startups and investment firms, and this spring announced plans to invest an additional $40 million by the end of 2021. PayPal, which committed to investing $50 million in Black and Latino-led venture-capital funds last year, said last month that it plans to double that commitment.

“It’s going to expand the landscape in a way that was never possible before,” says

James Norman,

a longtime tech entrepreneur who has been tracking the number of Black-founded companies that receive venture funding.

In many ways, Mr. Norman says, both investors and Black founders are playing catch up. Many investors in Silicon Valley lack exposure to Black founders, he says, and the reverse is true as well.

Growing up in Michigan, Mr. Norman, who is Black, had been coding since 1995, but made his way to Silicon Valley only after his mother told him about a 2011 CNN special she’d seen about an accelerator there for entrepreneurs of color. Mr. Norman moved to the Bay Area to take part in the program the next year and went on to found multiple companies, most recently a market-research platform called Pilotly. “Without that point of exposure, I never get here,” he says.

With the enormous growth of companies like

Uber Technologies Inc.

and movies like 2010’s “The Social Network,” he says, more people have become aware of the startup landscape and the world of venture capital, which itself has expanded in recent years. There are now hundreds of accelerators across the country, sponsored by institutions ranging from universities to corporations, and more entry points than there used to be.

“Silicon Valley wasn’t built to exclude Black people,” says Mr. Norman. “It’s just there was such a long period of time before we were able to show up.”

The Tulsa Massacre of 1921 destroyed hundreds of Black-owned businesses and homes in the city’s Greenwood District. A century later, entrepreneurs and activists are working to preserve “Black Wall Street’s” memory while pushing to rebuild and recover what was lost. Photo: Rob Alcaraz/The Wall Street Journal

In many ways, when it comes to the push to open up venture capital, one of the most powerful forces might not be the desire to diversify, but the fact that there are more investors out there looking for deals, says

Matt Joseph,

the Black founder of the professional networking app Superconnector.

“There are many more investors and many more types of investors,” he says, noting that in recent years, more online platforms have made it easier for investors to connect with startups. At the same time, he says, larger players have increasingly begun making late-stage investments in startups, prompting more investors to look for deals down the food chain. “It’s a lot easier to find early-stage capital than it ever has been.”

According to research by the Center for Venture Research at the University of New Hampshire, there were 335,000 active angel investors in 2020, up 26% from a decade prior. Venture funding has also become more geographically diversified: The value of deals made in Denver and Chicago during this year’s first quarter rose by 265% and 331%, respectively, over the previous year, according to data from PitchBook. By contrast, in the Bay Area, deal value grew by 58%.

Jesse Middleton,

a general partner at Flybridge Capital, is among the venture capitalists who say Mr. Floyd’s murder prompted a personal reckoning. Last June, Mr. Middleton, who is white, began inviting Black founders to book meetings with him during open office hours, holding more than 80 to date. “The world is literally burning around us,” he wrote after the killing. “I’m going to take action with my dollars & my time.”

Yelitsa Jean-Charles, founder of Healthy Roots Dolls, pictured with the toy she designed to help young girls learn about natural hair care.


Healthy Roots Dolls

“This is not an altruistic business,” he said in an interview, adding that investors who overlook founders from nontraditional backgrounds risk missing out. Mr. Middleton recently worked with his firm to launch a new $5 million fund focused on diverse entrepreneurs, along with co-founder and investment partner

Lolita Taub,

a Latina investor who’s long advocated for more diversity in tech.

“You have to change the people that write the check, and give the check-writing ability to people who have networks of founders who look like them,” he says.

One company the fund recently invested in is Healthy Roots Dolls, which makes Black dolls that help young girls learn about natural hair care. It was the kind of product he might not necessarily have gravitated to himself, says Mr. Middleton.

At this point, says Healthy Roots Dolls founder

Yelitsa Jean-Charles,

who is Haitian-American, investors have been approaching her, rather than the other way around. “People are recognizing they’re missing out on opportunities,” she says. The company’s doll has repeatedly sold out of stock.

Dave Salvant,

who in 2015 co-founded Squire, a company that offers software for barbershops, says that for years, he and his Black co-founder struggled to gain interest from investors.


What steps should venture capitalists take to seek out investments in startups founded by groups that their industry has historically overlooked? Join the conversation below.

“People weren’t giving us the time of day, not taking it seriously,” says Mr. Salvant, who is also Black. Investors, he adds, often mistakenly assumed that Squire’s product was only for Black barbershops, even though the startup was careful not to use photos of Black people in early marketing materials.

The company kept growing, and Squire last year closed its Series B and C fundraising rounds, raising $71 million. Mr. Salvant said that by then, the number of shops using the startup’s software had made it too big for investors to ignore, and that Squire had continued to perform well even amid the pandemic.

Other Black-founded companies that have achieved high valuations in recent years include New York City-based real-estate company Compass and the Atlanta-based scheduling startup Calendly, which recently received a $350 million private-equity investment, valuing it at $3 billion.

For years, says Mr. Salvant, venture capitalists have tended to look for entrepreneurs who fit their image of a promising founder—often, someone who looks like

Mark Zuckerberg.

In the future, Mr. Salvant says, he hopes more Black models of success will help investors see potential where they might not have before.

“Anybody can create a business,” he says. “Talent is everywhere, but opportunity is not.”

Write to Te-Ping Chen at [email protected]

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