We’re going to dive into the issues and opportunities facing Black and Brown led businesses in the venture capital space, and we’re going to celebrate some companies making Black history today.
A recent report and study by 1863 Ventures, a Washington, D.C.-based accelerator and VC fund client of ours run by a Black woman, Melissa Bradley, has found that it costs up to $250,000 more for Black and Brown-led businesses to start the same companies as their white peers. Why? The first reason is the cost of capital. Historically, financial institutions continue to charge Black and Brown led businesses higher interest rates with the same credit profile. Reason number two is that loan rates are higher for Black and Brown entrepreneurs than they should be based on the data. Reason number three is that Black and Brown entrepreneurs receive lower acceptance rates to accelerators. That extends the pathway to launch, which inevitably leads to higher costs. In more expensive tech development, Black and Brown led businesses often don’t have the social networks to tap into to access subsidized tech development. Subsidized tech development is when you pay someone with stock options.
Another report, authored by Lisa Cook, the first Black woman to be appointed to the Federal Reserve Board of Governors, found that Black startups get just one-third of the venture capital investment as their white peers. This study controlled for things like where a founder went to school or whether or not the company had a patent, so it was able to distill true bias. This bias manifested itself in two key and disturbing ways. The first – Black and Brown led businesses receive lower valuations from investors, and number two, they receive less money. These issues appear to dissipate in the later stages, which means that as these companies prove themselves and mature, investors tended to invest in them the same way they would invest in white-led companies.
If institutionalized racism and structural biases were removed, there are many opportunities to be gained. Citi GPS has found evidence that the following positives would have been realized in the United States if these barriers had been removed 20 years ago:
- $2.7 trillion additional income for Black Americans
- 770,000 additional Black home owners
- 6.1 million additional jobs annually in the United States
- $218 billion boost to the U.S. economy
It’s clear that removing the barriers of structural racism and inequality would be good for everyone.
We’ll close by highlighting three companies that are making Black history today. Virginia-based Somatus, a kidney-care company reaching over 150,000 patients nationwide, last year closed a $325 million Series E investment at valuation exceeding $2.5 billion. New York-based Esusu Financial, a company that helps clients build credit-worthiness by capturing their rental payment data. Esusu closed a $130 million Series B round at a $1 billion valuation. Atlanta-based Calendly closed a $350 million investment last year at a $3 billion valuation. Calendly is a software-scheduling app. Somatus, Esusu, and Calendly all achieved unicorn status. In venture capital-speak, unicorn status is achieved by companies that have at least a $1 billion valuation.
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