Venture Capital Demographics: Why Do We Only Make Up 1 Percent?
Venture capitalists looking for new opportunities and new markets often fail to recognize the emerging domestic market — the America that is not just white men — says David Teten.
As a partner at New York City-based ff Venture Capital, Teten describes himself as “yet another white male in the overwhelmingly white male venture capital industry.” It’s his job to look for non-traditional entrepreneurs, “because I’m a fiduciary,” he said in a Forbes interview.
The venture capital industry is dominated by men (89 percent of venture capital partners), specifically white men (76 percent of the total). Of all venture capital partners studied, 1 percent identified as African-American, according to the National Venture Capital Association/Dow Jones VentureSource.
A venture partner is a person who a venture firm brings on board to help them do investments and manage them, but is not a full and permanent member of the partnership, according to AVC.
Just 8 percent of venture capital-backed companies in the U.S. have a female founder, according to CB Insights.
Speaker and coach Nichelle McCall helps aspiring and emerging entrepreneurs create investment-ready tech and online startups. As a tech entrepreneur, McCall raised $500,000 for her own software company, BOLD Guidance, in a year.
The U.S. population is 37 percent-minority, according to the Census Bureau. Multiracial Americans are the fastest-growing groups, followed by Asians and Hispanics. Minorities are expected to be the majority of the U.S. population by 2043, and this demographic shift is mirrored by the rise in purchasing power of these minority groups.
“Going beyond the 1 percent makes economic sense,” McCall said:
“With the growing change in demographics, overlooking women and minority entrepreneurs for venture capital, simply means venture capitalists are missing out.
Women account for 85 percent of all consumer purchases. (African-American buying power was projected to be $1.1 trillion a year, according to the Nielsen Company). Investors are losing money by not investing in companies that develop services targeting this market or created by a founder in this demographic.”
The venture industry tends to have a herd mentality, Teten said. “We think that investors who acknowledge reality and adapt to a changing market are likely to have better returns than those who think the future will look just like the past.”
Venture capitalists aren’t necessarily biased. They may just be lazy. For example, ff Venture Capital looks at 2,000 companies a year and invests in 10 to 20 new ones (between 0.5-to-1 percent).
They “have to be pattern-matchers by virtue of the deluge of incoming companies they need to process,” Teten said. “They often tend to stay in the same pool they’ve always looked at and can easily match. They’re not necessarily inherently biased; they just don’t bother to look…It seems obvious that investors should pursue uncrowded markets, but common sense is not always common.”
McCall identifies venture capital firms that are actively seeking minority entrepreneurs, including Kapor Capital, Camelback Ventures, National Minority Angel Network, 37 Angels, and Golden Seeds.
Teten’s picks of investors targeting the emerging domestic economy include Astia Angels, a global network focusing on women-led ventures; and the Comcast Ventures Catalyst Fund, which focuses on minority entrepreneurs. Organizations such as CODE2040 are playing a role in increasing minority representation in tech, he said.
A seed and early-stage venture fund that focuses on Internet and software companies, 645 Ventures seeks out non-conventional entrepreneurs and provides them with the capital, resources and mentorship needed to build their companies. Founder Nnamdi Okike wants his investment team to mirror the diversity of his target entrepreneurs, believing a diverse team can better identify promising entrepreneurs who don’t fit the mold.
McCall says there are more African American-owned tech companies aren’t getting venture capital support for reasons that lie with both the companies and investors.
Entrepreneurs may lack access to advisors. Mentors are important when starting a new company. They bring knowledge and experience of starting and managing a successful company, and can help strategize to build a company that meets necessary milestones that makes you appealing to both customers and investors.
Startups need to know what investors are looking for in companies. They may not understand the different phases of investment, or what milestones they’ll face in each investment phase. Understanding this is critical for getting funding.
Investment is about building relationships, not just asking them to write a check. Founders usually need to court 10 times the number of investors needed to receive the funding they need. “Therefore, if they need five investors to invest $1 million in their company, the founders need to meet at least 50 investors. Many African-American and women founders do not personally know that many funders, so there is extra effort (and sometimes travel) that has to take place for them to access the right circles of investors,” McCall said.
People invest in what they know. They bring expertise and connections to a company to help it grow. “If 76 percent of venture capitalists are white men, how do they bring expertise to an industry that is unfamiliar to them? This means diverse entrepreneurs have to do extra work in educating investors on their industry and the market rather than simply selling them on the opportunity,” McCall said.
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