Minority tech startups in the US have seen almost no progress in VC funding

Black and Latinx founders have the best chances of attracting investments in New York — but low odds in California.

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Black and Latinx tech startup founders have made almost no progress in securing venture capital (VC) funding over the past seven years in the US, a Crunchbase study released today found. During that period, startups helmed by Black and Latinx founders received just 2.4% of VC investments; so far this year, that figure is slightly higher at 2.6%.

Reasons cited for the persistent low percentage derive from the greater poverty among those groups relative to the white population. Black and Latinx would-be founders have much less access to their own seed capital and to resources from family and community members to launch their firms, yet such “bootstrapping” is considered an essential first step before investors will join in. And they often lack the professional or college networks that can be crucial to connecting with initial “angel” investors or to the venture capital community that typically funds later rounds.

That reality exists for Black and Latinx business of all kinds, a separate McKinsey study found, and shows up as a lower percentage of loans approved to non-white-owned small businesses. Black-owned small businesses, in particular, struggle to get loans, according to McKinsey, with only 29% being approved. That compares to 50% approvals for Latinx applicants and 60% for white applicants. Only 1% of Black-owned small businesses get bank loans in their first year versus 7% of white-owned small businesses. As a result, Black-owned SMBs are typically two-thirds the size in terms of revenue as white-owned business, and they ted to hire fewer employees given their smaller scale.

“The percent of VC funding for going to Black and Latinx founders has not changed significantly because of many reasons, several that extend beyond the technology industry and indicate a broader issue of systemic racism in our society,” said Gené Teare, Crunchbase’s data evangelist.

The ability of Black and Latinx startups to get venture funding is also heavily influenced by where they are located. The San Francisco Bay Area, which absorbs about a third of venture funding nationally, is one of the worst places for Black and Latinx tech startups to get funding; only 1.8% of the $4.6 billion venture funding to Bay Area firms since 2014 has gone to Black and Latinx firms.

By comparison, it’s better for Black and Latinx tech startups to be in greater Atlanta or greater New York, where they've received 5.5% and 5.2% of VC funding, respectively, in the last six years. In that period, greater New York accounted for $4.4 billion in total funding, a close second to the San Francisco Bay Area; greater Atlanta saw only $400 million in VC funding over the same period. 

Latinx-founded tech startups fare better than Black-founded ones; Latinx firms get about 65% of venture funds provided to the two groups. Still, that funding falls well below their populations — even in ethnically diverse states like California and New York.

In California, Black-founded firms have gotten 0.6% of VC funding since 2014, though Blacks are 5% of the population. Latinx-founded firms got 1.2% of VC funding over the same period, but are 39% of the population — an even smaller ratio than Blacks when population is factored in.

In New York state, Black-founded firms have received 3.1% of VC funding since 2014, while representing  14% of the population. Latinx-founded firms got 2.2% of VC funds, and are 19% of the population — again, doing less well proportionately than Blacks.

The best states for Black-founded tech startups are Georgia (4.9% of funding), the District of Columbia (3.5%), and New York (3.1%), though only New York has any significant level of VC funding available. All other states have insignificant percentages of VC funds going to Black founders.

The best states for Latinx-founded tech startups are Massachusetts (3.9%), New Jersey (3.7%), and Colorado (2.6%), with only Massachusetts having significant levels of funding available. New York, which does have significant funding available, comes in fourth at 2.2%. Florida comes in a close fifth at 1.9% but has little funding available. Funding-rich California is in sixth at 1.2%. All other states have insignificant percentages of VC funds going to Latinx founders.

If there’s a bright spot in the Crunchbase data, it’s that Black and Latinx startups are more open to being led by women than white startups. Of Black and Latinx tech startups, 39% are led by women, compared to 21% of all firms. But that bright spot isn’t that bright: just 4% of venture capital went to startups founded by women, and another 9% went to startups founded by both women and men. Women comprise 50.2% of the working-age US population.

Copyright © 2020 IDG Communications, Inc.

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