Investors bet only 2.6% of their capital in companies founded by blacks and Latinos | The NY Journal

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Progress in recent years has been very slow, which eliminates opportunities for these entrepreneurs

Businesses that are founded by Blacks and Latinos continue to have great difficulty attracting the attention of private equity. The so-called venture capital to finance your operations.

According to a report published by the Crunchbase database, in 2020 the companies formed by these two minorities have been able to raise $ 2.3 billion until August, 2.6% of the total that has moved in financing.

Many Latino start-up entrepreneurs reveal that this is one of the steepest hills they have to climb when they want to get their businesses going. Investors are traditionally white and tend to focus on proposals from entrepreneurs who look like them and who are directed to their market. Women, Latina or not, also face a gap when it comes to obtaining financing.

The recently published report reveals that 2020 – a year complicated by the recession caused by COVID-19 – is the second year in which the amount allocated to these companies declines after it peaked in 2018 with $ 4 billion in 435 agreements. That same year was when more money was put on the market in general business financing in the US, $ 141,000 million.

In 2019 a few more rounds of financing were closed but for a smaller amount.

Since 2015, some $ 15,000 million have been raised by companies founded by blacks and Latinos, that is, these entrepreneurs have only been able to get hold of 2.4% of the private capital necessary for an idea to become a company and later grow. Even Latino companies that have been considered scaled, meaning that they have a turnover of more than $ 1 million, usually start their journey with money that has been raised from families and friends.

The Crunchbase report reveals that most of the financing deals take place in the San Francisco and New York area, where a good part of the technology companies emerge and investors are based. For Latinos in particular, the best states to raise capital are, in order, California, Massachusetts, and New York.

Testimony that among minorities many more women choose entrepreneurship, the report shows that 36% of companies that get financing have a black or Latino founder. In the case of the rest of races and ethnicities, this female percentage drops to 21.

The founders of New Age Capital, a new investment fund that wants to dedicate institutional investors to these companies explain in the report that raising more than $ 1 million in the so-called seed phase (the initial one when launching a company) is the most complicated moment for founders of underrepresented communities in this world.

“This is the phase where metrics matter least and entrepreneurs are judged on subjective criteria. The black and Latino founders experience the rejection of investors at this time because they do not match the profile, ”they explain in this firm.

When certain amounts are not reached in the seed phase, the possibilities of taking the step forward in the following ones are more limited, less money is usually raised.

But the challenges begin earlier because the first capital with which an idea begins comes from own funds or from family and friends. In this sense, the net of heritage surrounding founders belonging to minority groups is notably lower than that of whites.

Hamilton Project verifies that the wealth of a white family is almost 10 times greater than that of a black family. In other words, the inequality with which they are part in the communities marks the way, reducing exposure to greater sources of capital and with it opportunities to grow.

Companies such as Finix, Honest Company (owned by actress Jessica Alba), Brex, Duoligo, Outreach, AuthO and BetterUp, are some of the Latin companies referred to in this report as examples in different phases of raising capital.

The report notes in its conclusions that progress towards more balanced financing is being very slow despite community efforts and the launch of more diverse venture capital firms.

“The reality is that there is a lot to do to ensure that underrepresented founders have access to the same opportunities that non-minority founders have,” and that’s something to get to because “investing in businesses, funds and organizations that reflect diversity is not only an ideological imperative but also fiscally important ”.

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