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Why Are So Few VCs Investing in BIPOC Companies? Venture capital is no different than most endeavors: it lacks diversity.

By Going Public

entrepreneur daily

Despite a significant rise in public awareness and pledges to increase inclusivity, minority-owned businesses continue to struggle with funding options. Data from the Federal Reserve found that roughly 80% of white companies receive a part of or entirety of the funding they seek. Minority-owned businesses receive the same result just 66% of the time.

Going PublicⓇ, a new series hosted on Entrepreneur.com, explores the journey of four companies who seek investment from both traditional VCs, and crowdsourced from retail investors.

The struggle comes from just about every funding avenue. Venture capital (VC) is one of the more glaring weaknesses. Rather than tap into the overlooked, undervalued base of minority-owned businesses, too many VCs continue to turn a cold shoulder. The result is the further shutting out of communities in need of an equal playing field. Without funding, many minority entrepreneurs cannot bring their company to fruition or scale, resulting in an adverse impact on the individual, their family's potential for generational wealth and the community through a loss of jobs and tax revenue.

Related: The Growth of Sustainable Investing

Each week on Going Public, viewers can follow two unique BIPOC companies as they break through the noise to level up their businesses and hopefully acquire funding from retail investors, as well as mentorship advice from top business leaders. Companies such as PROVEN Skincare, a female-founded and BIPOC led company, and NGT Academy, a next-generation training academy for cyber and network security.

Why Do VCs Not Typically Support Minority Businesses?

Understanding why VCs continue to shy away from minority businesses is multifaceted. At a broad level, though, it appears that a lack of inclusivity coupled with a dearth of understanding is the root of the problem.

Company roles on the investment and back-end support sides of VCs are beginning to become more diverse. However, leadership, and more so investors, remain largely homogeneous, being owned by white men. Some data has found that white men make up less than 60% of the VC workforce but control over 90% of the sector's investment dollars. Minorities, on the other hand, are believed to control roughly 1% of funds in the space.

The absence of differing backgrounds at the top often stunts a company's development, limiting its ability to consider various perspectives, experiences and backgrounds. In investing, a lack of diversity can limit a VCs ability to identify talent outside their circle. The oversight has the potential to harm the firm's bottom line and, more so, often hinder the progress of a minority-owned company.

Related: Fewer Than 30 Women Founders Have Ever Taken a Company Public

Cracking through and receiving consideration from VCs isn't a guarantee that success is imminent. All too often, disparities go overlooked when assessing a company's numbers. Minority owners usually have not been provided the same starting ground as well-funded white ventures. Over generations of oppression, various gaps spanning wealth to education and policing all formed.

While the public becomes more aware of these disparities and systemic imbalances, rearranging our thought processes in the workplace can often lag. That appears to be the case with VCs. Even the most well-intentioned leaders can and often do fall short of correcting analytical biases. For example, without making corrections to its rubric, companies may continue to criticize minority ventures for lacking early-stage funds, which may overlook the wealth gap that exists in many communities of color.

Without re-considering the money flow and processes at the top, VCs will likely continue to lag behind when it comes to funding minority businesses. The problem doesn't lie solely at VCs' feet, but as one of the most popular and influential funding methods, leaders at these companies are implored to take the lead. With their action, the rest of the industry could soon follow a similar path. And we do have positive signs on the horizon, as black-owned businesses broke VC funding records in 2021, netting $1.8 billion during the first half of the year alone.

Follow the Going Public series each week, as it follows companies as they embark on their journeys to raise capital.

Disclosures

PROVEN Offering Circular

NGT Academy Offering Circular

Going Public

Entrepreneur Leadership Network® Contributor

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