Only a few Black-led companies have reached unicorn status.
(Bloomberg) — It’s a complicated time to be a Black entrepreneur. Some Black founders in recent years have created formidable startups with towering valuations. But there are still shockingly few large VC-backed startups with Black leaders, and recent months’ chaos in the venture capital market has taken a disproportionate toll on their companies—wiping out diversity gains in fundraising.
On the heels of the Black Lives Matter movement, Black entrepreneurs raised record amounts of venture funding. In the second quarter of last year, they took in $866 million according to Crunchbase data, almost double the previous year’s US total. But in the second quarter of this year, Black-founded companies raised just $324 million, a 63% drop. Meanwhile, the decline in the VC industry as a whole was not nearly as stark: PitchBook data shows that overall VC funding in the US fell by just 23% in the same period.
The precipitous decline in funding for Black founders—they have raised just 1.2% of venture capital dollars so far this year—means fewer opportunities for entrepreneurs to break out in an industry with a history of diversity problems. Of the more than 1,000 unicorn startups with valuations of at least $1 billion, only a handful have at least one Black founder or senior executive listed on their website, Bloomberg found in an analysis of companies compiled by CB Insights.
In the US, the percentage of funding going to Black founders has never exceeded 3% since Crunchbase started tracking the numbers. The situation is even more startling in the UK. Between 2009 and 2019, less than 0.25% of venture capital went to Black entrepreneurs, according to a report by Extend Ventures. The group also found that only 38 Black founders raised money in the country during the entire decade, an outcome Extend Ventures described as the smallest of any ethnicity.
But there are some Black-led startups that have managed to break out nonetheless, success that experts hope could propel the industry toward greater diversity.
For example, the UK’s first Black-owned unicorn, cross-border payments company Zepz, announced it had cleared the billion-dollar threshold last year. It’s now worth $5 billion and planning a public offering. When African immigrant Ismail Ahmed founded Zepz in 2010, “there were far fewer fintech businesses and probably none by African migrants,” he said. “These factors combined made our entry challenging.” But Zepz’s remittances business took off, and it’s now one of Europe’s most valuable companies. The second Black-led company in the UK to reach unicorn status was digital motor insurer Marshmallow, now worth $1.25 billion.
Paula Groves, chief investment officer at London-based Impact X, which aims to fund underrepresented founders in Europe, said she hopes that Zepz and other companies like it signal the beginnings of a trend, despite the tumult in the market. “My hope is now that Marshmallow and Zepz have broken that billion-dollar valuation barrier, suddenly all these Black entrepreneurs can follow suit very quickly,” Groves said.
Groves lamented the scant progress the industry has made over time. “In 2001, less than 4% of venture capital dollars were allocated to women entrepreneurs and less than 1% of venture capital dollars were allocated to entrepreneurs of Black descent, and those numbers haven’t changed,” she said. “It’s quite disheartening if you look at it for too long of a time.” But Groves believes that if Black founders get the cash they need to launch their businesses, the companies could achieve much bigger growth in the future.
In the US, Cityblock Health Inc. is now worth about $6 billion. Chief Executive Officer Toyin Ajayi said the road was difficult, even though she was fundraising alongside a White co-founder. “Being a physician, being a Black woman, I was constantly in rooms where no one looked like me in the deal process or had a similar background to me,” Ajayi said. “I’m pretty sure they didn’t know anyone with a similar background to me in their network.”
“We’re nowhere near closing the gap,” Ajayi said. “But at least people are talking about this and focused in the right direction.”
Ajayi said she saw increased investor interest in the second half of 2020, as the Covid-19 pandemic and the Black Lives Matter movement highlighted the need for equality, both within health care and in society at large. “Folks that were indifferent to their association with me were now putting my name on newsletters, talking about companies they’ve invested in with a lot of diversity to them,” Ajayi said.
Erika Brodnock, co-founder of Extend Ventures, said Black founders are more likely to be viewed as risky by investors—prejudices that could exacerbate inequality during the downturn. In some cases, investors are committed to diversity in theory but hesitant to back individual companies. Said Brodnock: “We don’t need mentoring, we need contracts, we need cash, and we need contacts.”
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