Charley Moore still remembers being the only black startup lawyer practicing on Silicon Valley’s Sand Hill Road.
That was 25 years ago. Earlier this year, Moore raised $223 million in growth capital for Rocket Lawyer,marking one of the largest funding rounds for a startup founded by a black entrepreneur.
While venture funding for black entrepreneurs in the U.S. remains woefully small, Crunchbase’s numbers show a significant increase over the past year that coincides with the racial justice movement reigniting across the country.
Funding to black entrepreneurs in the U.S. reached nearly $1.8 billion through the first half of 2021, a more than fourfold increase over the same period last year. Led by funding for early-stage startups, this year’s six-month total has already surpassed the $1 billion invested in black founders in all of 2020 and the $1.4 billion invested the year before.
Entrepreneurs and investors who spoke to Crunchbase News say several factors are driving more positive change after years of painfully slow progress.
For one, more black investors are being elevated to the level of partners in venture firms or are amassing their own funds to provide capital to a more diverse set of entrepreneurs. A handful of high-profile exits along with large late-stage rounds to black-led companies are also paving the way for more promising startups.
And in a hyper-competitive trading environment, venture capitalists are looking outside their normal social and geographic spheres for promising new companies to fund.
But perhaps more than anything else, it was the murder of George Floyd last summer, and the ensuing racial justice movement, that lit a fire under Silicon Valley.
“I haven’t seen this amount of interest and conversation in the broader business community about race since the anti-apartheid movement of the 1990s,” said Moore, whose company offers low-cost online legal services to individuals and small businesses.
To be sure, much work remains to be done. Black startup entrepreneurs still received only a tiny fraction, 1.2 percent, of the record $147 billion in venture capital invested in U.S. startups during the first half of this year, Crunchbase numbers show. That compares with more than 13 percent of the U.S. population that is black or African-American.
Early-stage leads
Still, investment in black-founded startups as a percentage of overall U.S. venture funding has doubled since 2020, when it was a meager 0.6 percent.
Most promising is that early-stage funding has led the way in 2021, with the largest share of venture capital investment to black-founded companies in The Series A and Series B stages.
Several of those early-stage funds were very large Series A and B investments, such as a $350 million round to Atlanta-based scheduling platform calendly, a $115 million investment in Southern California-based fashion brand savage X Fenty and $85 million to New York-based agricultural technology company Gro Intelligence.
In total, Crunchbase’s numbers show that 35 black-founded companies raised Series A or B rounds in the first half of 2021, including 10 transactions of $20 million or more.
While early-stage venture funding lays the groundwork for the next cohort of successful startups, later-stage rounds and successful exits provide the kind of validation that traditional venture investors look for when placing their next bets.
“I hope we’ve set an example as good capital managers for traditional venture funds,” Moore said. In April, Rocket Lawyer raised a $223 million growth round led by Vista Credit Partners that he said represented a strong return on investment for early investors in the company, including GV, Morgan Stanley, August Capital and others.
“We’ve proven that a company with a team that is truly dedicated to a mission can succeed with a black founder and CEO, but it takes the whole ecosystem to do it,” he said.
This year also marked the first public market debut for a venture-backed company in the United States with a black founder and CEO: real estate brokerage Compass,led by Robert Reffkin,went public in April and was valued at $8 billion after the stock’s first day of trading, although that figure has recently fallen to around $5 billion.
A catalyst
Floyd’s May 2020 murder at the hands of a white police officer sparked widespread cries for racial justice, as well as a call for better access to capital and economic opportunity for black Americans.
Racial inequality in the United States is deep and generations old. The average white household in the country is estimated to be 7.8 times wealthier than the typical black household, $188,200 versus $24,100, and black Americans hold only 4 percent of the nation’s wealth.
The contrast is even starker when it comes to who receives venture funding. That’s important because venture capital is the lifeblood of the startup ecosystem, which increasingly serves as a gateway to wealth and prosperity in the United States.
Startup entrepreneurship “is not easy for anyone, regardless of race or gender,” Moore said. “Invention, let alone commercializing an invention at scale, is not easy for anyone. We have to always remember that, and then think about the fact that it’s not going to be easy for anyone, but how do we at least level the playing field so that everyone can have an equal opportunity?”
Last summer’s racial reckoning led many venture investors to increase commitments to fund black founders, and the numbers seem to indicate some results, at least in the short term.
While only $442 million was invested in black-founded startup founders in the first half of 2020, Crunchbase data shows it increased to $589 million in the second half of the year. That momentum continued into 2021, with at least $1.8 billion invested in the first half of this year.
One of the venture funds launched after Floyd’s death was SoftBank Group’s SB Opportunity Fund, a $100 million investment vehicle that backs founders of black, Latino and Native American startups.
The fund came together within 48 hours once the firm decided to act, according to Tonya Williams,a director of the fund, and it was “really in response to the public outcry at the time, and the protests and the scrutiny that a lot of companies and individuals are going through thinking about systemic racism and the effects of it on personal lives.”
Approximately half of the fund has already been invested in 50 U.S. companies, including 27 founded by black entrepreneurs. Most of these have been seed-stage investments.
Williams said SoftBank believes its vast network in the startup world can help those companies further accelerate their growth. Some of the fund’s portfolio companies are already planning another financing, just eight to 10 months after raising.
Black-led Base10 Partners raised a $250 million Breakthrough Initiative fund, announced in March, to invest in high-growth stage companies. The fund is set up to help historically black colleges and universities, which generally do not have large endowments, and organizations focused on supporting diverse talent. To date, five HBCUs are registered as LPs, according to Luci Fonseca,who recently joined the fund. The firm does not charge fees or carries from hbCUs that invest in the fund, but it does from other limited partners. It also donates another 50 percent of its funds to hbCU.
The goal is to provide for students in the future.
“They’re serving primarily low- and middle-income students, right, so there’s a lot of support they have to provide for their students,” said Fonseca, speaking about HBCUs punching above their weight given how small the endowments are for these universities. “Our hope is that we’ll have the capital back to the schools, you know, three or four five years from now versus 10.”
‘Representation and autonomy’
Many of the people we spoke with for this article said that a key to greater racial parity in early-stage investing is greater diversity among VCs: the more black investors writing checks, the more investment in black entrepreneurs.
“It’s a natural thing to invest and want to work with things and people we have a lot of common ground with,” said Marlon Nichols,co-founder and managing partner of MaC Venture Capital and former chief investment officer of Intel Capital.
His Los Angeles- and Palo Alto-based firm, founded by a majority black team, raised its inaugural $110 million seed fund earlier this year.
MaC Venture is not focused solely on investing in people of color, Nichols said, but seeks to back startups working on overlooked problems that can lead to big “cultural shifts,” whether they are enterprise or consumer-facing technologies. The fund has invested in approximately 36 companies since it began deploying capital in July 2019.
Many of the startup founders it has backed are black, brown or female.
“Generally, the best people to create solutions, or see challenges, or look for opportunities, are people who have lived through or have significant experience with those challenges and the underlying opportunities,” Nichols said. “If we take a look at black culture or Latino culture and try to address some of their biggest pain points, we would be idiots to ignore entrepreneurs who come from those communities.”
Diverse founders tend to seek out the company, Nichols said, “They know we’re going to take a good, hard look, a real look, at what they’re building and who they are and have an understanding of their experiences.”
Black representation in the VC ranks increased slightly in the past year, from an estimated 3 percent of investors to 4 percent this year, according to BLCK VC,an organization that aims to help double the number of black venture investors by 2024.
“While 1 percent may not seem significant, I can tell you as an investor leading and working in this community, as a black man operating in this community, that 1 percent is something we all feel,” said BLCK VC co-founder Frederik Groce,speaking last month at a virtual panel discussion hosted by the group.
While those single-digit percentages are still too small, the industry is showing “changes happening at its core,” said Groce, who is also a partner at Palo Alto-based Storm Ventures.
The percentage of junior-level venture investors in the U.S. who are black has increased from 5 percent to 7 percent in the past two years, he said, representing a growing class of future partners who will be more diverse than their predecessors.
Among BLCK VC’s programs are its Black Venture Institute,which helps black executives become angel and venture investors, and Breaking Into Venture,a nine-week program to help early-career professionals enter the VC industry.
“I’m convinced that it’s really about representation and autonomy,” Nichols said. “So not just hiring, but giving people like me the power to really make a difference.”
Black-led mega-funds emerge
It was just three years ago, in 2018, when Base10 Partners and material Impact Fund were the first two black-founded venture firms to raise funds above $100 million.
This year alone, Reach Capital, Harlem Capital Partners and MaC Venture Capital, all firms with black partners, have raised funds above $100 million for the first time.
“The biggest change has been that downstream capital is moving at a pace we’ve never seen for people of color,” said Henri Pierre-Jacques,co-founder and managing partner of New York-basedHarlem Capital.
Five years ago, he was surprised when a black founder raised a $6 million round, he said. Now companies are raising multiple $100 million rounds.
The firm, founded in 2015, invests in black, Latino and women founders and has completed its 28th investment since its first fund. It is now preparing to deploy its second fund in 40 to 45 companies with $1 million to $2 million checks for about 10 percent to 15 percent ownership.
Pierre-Jacques expects deal flow in 2021 to double compared to last year, and expects to close another three deals this year on top of the 15 investments made mid-year.
The firm raised $30 million from corporations such as PayPal,Bank of America, Foot Locker and Apple for its March 2021 Fund II announcement of $134 million, he said. The fund was raised in five months.
Role of corporations
Increasingly, U.S. corporations are playing a role in funneling money to such diverse funds and, in turn, to diverse funders, with Apple, Bank of America, PayPal and eBay making commitments in the past year to invest millions of dollars in various fund managers.
“It’s really helpful if you’re raising a $30 million fund, and corporations come in for $15 million on their first close,” Pierre-Jacques said.
Much of the new interest in investing in black-led funds is also coming from limited partners chasing returns, said MaC Venture’s Nichols. His firm’s inaugural fund is performing in the top 2 percent for its vintage, he said.
“Scarcity drives value in many ways,” he said. “And if traditional LPs are starting to see competition from places where they hadn’t traditionally seen competition, that FOMO will start to get absorbed and they won’t want to miss out on the next Sequoia that happens to be a black-led fund.”
“It’s still not significant enough.”
While the numbers of black founders and funds are moving in the right direction, they are still far from representative. Many industry leaders worry that nothing has fundamentally changed, that a year from now, we’ll be back to having the same conversations.
Crucially, they say, Silicon Valley’s incumbent class of mostly white, mostly male investors needs to expand its horizons and start writing more checks to startup founders who are not like them.
“We want to make sure that the next leaders of the U.S. tech ecosystem reflect the diversity of our nation,” BLCK VC co-founder Sydney Sykes said at the group’s event last month. “And that means we need to have more black entrepreneurs. Still, only about 1 percent of venture-backed founders are black. That change is still not significant enough. We believe that institutional changes are the result of changes in our networks. Are the people we interact with today, the entrepreneurs we fund, the friends we interact with, are they different from a year ago? I don’t know if that’s true yet.”
