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Black entrepreneurs hit with heavy VC funds drop in 2023

Black entrepreneursBeing an entrepreneur has never been easy, but for people of color it could be particularly challenging.

Black entrepreneurs have had trouble obtaining funding throughout the years.

Instead, a lot of people rely on venture capital investment, which is only available to diverse entrepreneurs.

While seeking VC funding over the years, Black entrepreneurs and Black-led enterprises have encountered prejudice, despite the fact that many of them were successful.

Annually, Black entrepreneurs generally receive less than 2% of total VC financing.

However, the percentage of Black women-owned enterprises is barely 1%.

VC funding drop

Following the murder of George Floyd in 2020 and the accompanying racial justice, Black entrepreneurs and Black-led businesses witnessed historically massive spikes in terms of attracting VC funding in 2021.

The majority of the profits were erased by the market’s decline and the movement’s waning momentum by the end of 2022.

According to Crunchbase data, overall VC investment dropped 36% last year despite rising interest rates and inflation.

The largest year-over-year decrease for Black entrepreneurs in the previous 10 years, however, was suffered by Black-owned businesses, which saw a decline of 45%.

Kyle Stanford, a senior analyst at Pitchbook, said:

“There were a lot of political and cultural strife problems in 2020 and early 2021 that created a higher focus on Black and diverse founders.”

“No one wants that to be the reason why they focus on investing in any group, but that did put a lot of focus on the problems that the VC has had investing in anyone outside of a straight white male.”

Diversified businesses often suffer more from VC slowdowns as a result of businesses turning to the circumstances of economic upheaval, according to Marlon Nichols of MaC Venture Capital.

“We’ve always invested in white men and that’s what we’re going to do right now. That’s where we’re comfortable,” said Nichols, a Black entrepreneur.

“That’s where we know and believe that we’re going to get the return.”

“This diversity thing is cool, we’ll pick it back up maybe, you know, once we’ve weathered this storm.”

The Honey Pot Company

Beatrice Dixon is a Black entrepreneur and the co-founder and CEO of the vaginal wellness brand The Honey Pot Company.

It was difficult for her to launch her brand across 1,100 stores.

Dixon had a Target deal by 2016, but she still had to find out how to go beyond making her products at home.

She found the answer from the New Voices Foundation, a nonprofit that supports female entrepreneurs of color.

With the help of friends and family, she was able to relocate the business, leave her job, and launch her brand in Target stores in 2017.

Since then, it has been a standard in retailers.

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“It was really hard, man, we weren’t having any luck,” said Dixon. “I don’t know what would have happened if we didn’t get that money.”

“It was hard. Us being Black-owned business founders, was it harder? Sure, it probably was,” she continued.”

“I think every time we raised money, we had trouble doing it, you know, but I think that the important context to put there is that anybody that raises money, it’s not going to be easy.”

Although Nichols doesn’t exclusively invest in businesses led by people of color, he is more likely than other investors to do so since MaC Venture Capital is managed by a diverse staff rather than the more typical all-white men’s team.

“The investors are primarily white and male and usually come from affluent communities, which means that they have very specific experiences and have been exposed to very specific things and are comfortable with very specific things,” said Nichols.

Many companies think it is riskier to invest in entrepreneurs from different backgrounds since these people come from a norm to which they are not accustomed, according to Ladi Greenstreet, CEO of Diversity VC.

Diversity as a priority

Following the 2020 murder of George Floyd, central banks and financial institutions declared that they would promote diversity.

Contrary to what they said, the funding reduction in 2022 seemed to show that the promises were solely for short-term charitable endeavors rather than long-term investments.

“When you take venture capital financing the expectation is that, you know, you have a partner now, if you reform, your partner is going to continue to back you, they’re going to help you to raise that next round of funding, right?” said Nichols.

Over the first several years of operation, White-led teams do not anticipate its beneficiaries to be especially extraordinary in order to earn further funding.

The higher bar for Black-owned enterprises was underlined by Marion Nichols.

“For most of these Black founders, that’s exactly like the expectation, you’ve got to be extraordinarily exceptional in order to get additional capital,” explained Nichols.

“And if you’re truly treating this like all investments that you make, then that shouldn’t be the case.”

A gamble

SoGal Ventures is a VC firm committed to aiding women- and minority-owned businesses.

Under the leadership of its co-founder Pocket Sun, it has aided a number of businesses that have grown to be valued over $1 billion.

“From a financial investment perspective, this remains a huge blue ocean for people to dive in,” said Sun. “Venture capital is a very privileged and exclusive industry, and has always been that way.”

“And it has such disproportionate decision-making power on the future of technology, the future of innovation, the future of quality of life in many ways.”

According to John Roussel of Colorwave, investing in diverse teams may enhance investor returns even if it is seen as a moral imperative.

“And somehow, we’re still stuck in this situation where we’re trying to convince people of that,” said Roussel.

“It really takes, you know, strong players taking a lead and showing people that there is opportunity here and there is generally the same success rates regardless of someone’s skin color.”

“Clearly, it’s safe to bet on Black business,” said Beatrice Dixon, pointing to her success.

“My skin color shouldn’t be part of the conversation, period. And yet, it still is, right?”

Image source: Black enterprise

Opinions expressed by Market Daily contributors are their own.