Diversity & Inclusion

How can we make venture capital more inclusive?

Even with all the mandates proposed in 2020, underrepresented founders still only receive a small percentage of venture capital funding. Three regional investment experts discuss how this can be fixed.

(L to R) Luke Cooper, McKeever "Mac" Conwell and Andy Will. (Courtesy photos, image by Technical.ly)
Three years after a wave of DEI promises, mandates and social media campaigns, the amount of venture capital reaching founders from marginalized groups is … largely unchanged.

According to a new report from McKinsey, Black and Latinx founders received just 1% and 1.5%, respectively, of total VC in 2022 in the US. At the same time, women-led teams received only 1.9% of funding, and 0.1% of all VC funding went to Black and Latinx women founders. Comparatively, a digitalundivided report from 2020 found that of founders raising nine figures, .64% of all VC investment went to Black and Latinx women founders since 2018, though the number of those founders raising over $1 million more than doubled.

Those percentages are significant. According to McKeever “Mac” Conwell II, the founder of RareBreed Ventures in Baltimore, the dollar amounts for diverse founders might have increased, but the percentage of founders getting that money has stayed the same.

For founders of color, he said, the biggest issue right now is the early-stage funds they need to get their startup going. That’s mostly being filled by small microfunds or nanofunds that provide those essential foundational supports.

“People of diverse backgrounds — we see them being the lifeblood of venture capital going to diverse founders,” Conwell, the cofounder of BLCK VC’s DC chapter, told Technical.ly.

But that gap still exists in the big leagues of VC, and promised progress just isn’t where it was supposed to be after 2020. And it needs to change for more than one reason, said Luke Cooper, founding general partner and managing director of Baltimore’s Latimer Ventures.

“What’s even more compelling is that Black and Latino founders are not only undervalued in this way, but they’re over-performing,” Cooper said.

So, how can we change the world of VC? Local experts, including Cooper and Conwell, gave us the lowdown.

What happened since 2020?

At the beginning of the pandemic, Conwell noted, there was a period of inactivity as the world tried to make sense of what came next. But from there, things took a huge upward turn, resulting in 2021 being the biggest year ever for VC in DC.

What’s even more compelling is that Black and Latino founders are not only undervalued in this way, but they’re over-performing.Luke Cooper  Latimer Ventures

“We had this explosion where money was flowing all over the place and DEI was very central to the conversation,” Conwell said. “Then as things started to turn and economic conditions have gotten worse and worse and worse, we’ve seen a significant amount of money being pulled back out of the venture ecosystem.”

According to Conwell, a lot of the money at the very top of the venture food chain still came from corporate entities like pension funds, endowments and large corporations, which are beholden to balance sheets and stock prices. And when prices aren’t doing so well, like the past year or so, things start to get cut — including a lot of DEI programs. Or, at the very least, people return to what they know, which are the traditional startups from New York City and Silicon Valley mostly run by white men.

“Most pension funds don’t have to care, because the system they’ve been running for however long in the new millennia has worked for them in whatever capacity they believe it to be,” he added.

For Cooper, it also goes back to what corporations promised back in the second half of 2020. Many, he said, were reacting in the moment of a horrible event and wanted to boost equity, but didn’t think about how to keep those mandates priorities in a tough economy.

“People made a lot of comments and promises in the wake of George Floyd,” Cooper said. “I think they were well-intentioned, but maybe not as thoughtful as they could have been.”

A changing world

In 2023, investment also looks much different than it did just a few years ago. Artificial intelligence is dominating the investment field and interest rates keep climbing. For Andy Will, principal at DC’s Zeal Capital, AI is also leading to a different landscape. While software engineering always seemed like a great way to drive upward mobility, since it doesn’t require a degree, he thinks that might not be the case as AI continues to grow.

“That skill set can be quite lucrative and quite valuable. But as you have AI copilots help with coding, there’s a potential that there’s going to be significantly fewer software engineers needed in the next 10 years,” Will said.

This year also brought a big change for founders, especially in DC, with the fall of Silicon Valley Bank (SVB). Conwell noted that SVB was a place where founders could go get a bank account or a loan even if they had bad or no credit. He said its failure is detrimental for founders who might not come from a household with high financial acumen.

“As you have AI copilots help with coding, there’s a potential that there’s going to be significantly fewer software engineers needed in the next 10 years.”Andy Will Zeal Capital

“It’s extremely destructive when you think about diverse founders who maybe don’t come from a household that practices good money or were taught how to handle money or good financial literacy,” Conwell said. “Where do you go? If you go to Bank of America and you have bad personal credit, they’re probably not giving you a business account — or even talking to you about a business line of credit and such. Silicon Valley Bank was the place to go for that. They’re gone.”

What’s next?

According to Will, change at the VC level starts with investment fund teams. If a VC fund has a very homogeneous team with similar backgrounds and skills, they’re just not going to have the same networks or viewpoints to create real change and provide larger-scale opportunities to build wealth.

“We, unfortunately, have seen less progress than we would have hoped coming out of 2020 and into today. However, we see a massive opportunity there and we’re really doubling down our inclusion investment strategy,” Will said. “We think time will be very, very kind to us from a performance standpoint by taking a proactive approach there.”

For Cooper, it’s also about redefining what a successful founder looks like, especially in the tech space.

“Underrepresented founders often create companies that have the potential to outperform their peers, and tap into underserved markets. But to make these investments into more underrepresented founders, VCs have to just think differently,” Cooper said. “We think that just because Facebook was very successful, every great founder is going to look like a Mark Zuckerberg.”

People of diverse backgrounds — we see them being the lifeblood of venture capital going to diverse founders.Mac Conwell RareBreed Ventures

At a higher level, some federal issues need to move forward. Conwell said that there are currently bills in the House and Senate that would increase the limit for LPs and venture funds under $100-to-$150 million. Primarily, it would expand the number of investors in a fund from 99 (or 250, in some cases) to 2,000 investors. At present, if Conwell wanted to raise a $50 million fund at RareBreed — much of which would likely go to founders of color — he’d likely have to ask for at least $500,000 from each investor (with some wiggle room since some could invest more than that). As a result, he’d have to raise from large funds and very high net-worth individuals, which tend to be the same people currently not investing in underrepresented founders. Expanding that number to 2,000 investors would bring that minimum investment of $500,000 down to $25,000, which is a little more achievable.

That’s a far cry from the original minimum at RareBreed for funds $10 million and below, which is $10,000, and opens up investment to many (especially as the House just passed legislation that could allow more people to be accredited investors).

For real change, Conwell said he’d like to see an increase in the number of LPs in funds under $250 million, a change in accreditation rules so that anyone can take the test to become an investor and a grant program from the Minority Business Administration where founders could receive up to $500,000.

In the meantime, Cooper encourages founders to remember how strong and problem-solving they can be, and not to let the current blockages stand in the way of building something great.

“Just don’t forget about how powerful you are, in your own skin, to affect the evolution and change in the company that you’re building in a way that does not require a ton more money,” Cooper said.

Full disclosure: Technically Media CEO Chris Wink is a limited partner in RareBreed Ventures, whose leader McKeever Conwell is featured in this article. That relationship is unrelated to this report.
Companies: RareBreed Ventures / Zeal Capital Partners

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