Decline in venture funding for black-founded startups significantly outweighs market decline

Editor’s note: This is the first in a two-part series on the state of venture funding for Black-founded startups in the U.S., based on 2023 data from Crunchbase and its Diversity Spotlight feature. Part 2 on Thursday examines funding trends in several major U.S. metropolitan areas.

Last year, total venture funding for Black-founded U.S. startups totaled just $705 million, the first time since 2016 that the amount reached less than $1 billion, according to data from Crunchbase.

The decline in capital for Black-founded businesses has significantly outpaced the overall decline in startup funding. According to Crunchbase data, total U.S. venture funding fell by 37% last year, but funding for Black-founded startups fell by a staggering 71%.

Last year’s total investment in Black-founded startups in the U.S. was the lowest since Black-founded startups raised just $582 million in 2016. The total decline also means Black-founded startups have captured the lowest share of the venture market since at least 2016. Around crunch base.

Last year, Black-founded startups received less than 0.5% of the $140.4 billion in venture funding received by all U.S.-based startups.

In 2021, Black-founded startups received 1.4% of all U.S. venture funding. In 2022, it was 1.1%.

“Unfortunately, there’s nothing really surprising,” said Paul Judge, who along with Marcelo Claure took over the Open Opportunities Fund from SoftBank last year. The fund is dedicated to supporting Black and Latinx founders.

“The fact that we’re not moving in the right direction is certainly a problem,” he says.

same age

This number stands in stark contrast to the pledges many venture capital firms and strategic investors made nearly four years ago to increase the diversity of their venture investments following the death of George Floyd.

“At the time, people said they were going to do something, but when the recession hits, funding goes back to business as usual,” said Judge, who is also co-founder of the incubation center TechSquare Labs.

Given that 13% of the U.S. population is Black and that more than $140 billion in venture capital was involved in the U.S. last year, it is reasonable to expect Black funding to be around $18 billion. the judge said.

“The funding was less than $1 billion a year,” he said. “So there’s about a $17 billion problem. People understand money, so they need to understand it. Now we need a $17 billion solution.” Masu.”

The judge added that one way to find a solution is to show investors the revenue potential of startups with diverse leadership.

Judge said “people still don’t understand the economic rewards” of investing in startups with diverse leadership. “Minority-led companies consistently outperform.”

The judge noted that many minority-led companies have the cash efficiency and lower burn rates that investors are now looking for. Minority-led businesses are often able to stretch their funding over a longer period of time, he said.

In Open Fund’s portfolio, 57% of the firm’s companies are founded by Black people, have average annual revenue growth of 100%, and have a runway of at least two years.

decline in the dollar

The year-over-year numbers are impressive, but they’re even more dramatic when you consider that funding to Black founders totaled $4.9 billion in 2021, a record year for venture capital spending. is. Last year’s numbers show a staggering 86% decrease from 2021.

According to data from Crunchbase, every step of the way has failed when it comes to funding Black-founded startups.

Angel and seed rounds were down 51% compared to 2022, with just $148 million raised.

More pronounced reductions were seen in both early and late stage rounds. Late-stage rounds plunged 73%, raising $259 million, while early-stage rounds plummeted 74%, raising just $298 million.

The late-stage numbers mean that only 0.3% of all late-stage funding in the U.S. went to Black-founded startups.

Mark Buffington, co-founder of BIP Capital in Atlanta, an area typically hot for funding Black founders, said it’s hard to say conclusively why the numbers are down. Still, one theory is that some startups funded in the wake of Floyd’s death and the ensuing racial justice movement will prompt more VCs to consider tackling DEI than ever before. In such a tough market, the company may be struggling to raise funds in future rounds. Black founder.

“Some of the dynamics that existed downstream (pre-Floyd) that made it difficult to raise money are still there,” Buffington said, noting that networking is needed to close larger rounds. did.

This figure stands out since 82% of all rounds raised by Black-founded startups in the U.S. last year were seed or angel rounds, compared to just 3% in late-stage funding. That seems to be confirmed.

Big rounds will decrease

It’s important to note that large, late-stage growth rounds typically make up the smallest percentage of rounds, as they are usually of higher value. It is also the most difficult thing to raise them.

But last year, there was only one round of $100 million or more by a Black-founded startup in the U.S., and only three rounds of more than $30 million.

For comparison, in the last week alone, seven US-based startups raised more than $100 million.

The largest funding rounds for Black-founded startups in the U.S. in 2023 include:

These fundings seem to explain the main reason why funding for Black-founded startups has declined so dramatically: a lack of large rounds. Without such rounds, funding numbers typically decline because it is difficult to make much of a difference between seed rounds and early-stage rounds.

For example, in 2021 and 2022, a total of 17 rounds were made in Black-founded startups valued at $100 million or more.

Trading volume drastically decreased

Money speaks and gets people talking, but deal volume also paints a negative picture when it comes to getting funding for Black founders.

The number of funding rounds last year was 173, down 48% from 2022 and the lowest deal value in at least eight years. Similarly, seed/angel and early-stage funding also hit its lowest total in at least eight years.

The decline in trading volumes is no surprise to investors. James Norman, co-founder of Black Operator Ventures, said fewer deals are being closed and most people are looking to reinvest in current founders running solvent businesses.

In a down market, “it’s going to look more extreme for Black founders as well as for other founders, because there aren’t as many deals led by Black founders,” Norman said.

One important aspect of deal volume is that lower early deal volumes ultimately mean fewer companies will be ready to raise larger growth rounds at later stages. The result is that funding levels will continue to decline.

Of course, that would be consistent with what has happened over the past two years.

Another factor?Consumer startup funding slows down

A slowdown in investment in many consumer-facing sectors, from e-commerce to the app economy, may be another factor in the recent decline in funding for Black-founded startups. There is.

Over the past three years, some of the most high-profile and highly funded startups with Black founders have been consumer-facing companies. But most companies last raised capital more than two years ago.

Also:

• Calendarly, a scheduling app founded by Atlanta entrepreneur Tope Awotona, has raised $350 million so far. But his most recent and major funding round came just over three years ago.
• The lingerie brand Savage But the El Segundo, Calif.-based company hasn’t raised a known round since its Series C two years ago.
• Citiblock Health, a value-based healthcare provider led by physician and co-founder Toyin Ajayi, was the largest recipient, with $891 million in known equity investments. However, the Brooklyn-based company raised its most recent disclosed size of funding ($400 million in Series D funding led by SoftBank) in September 2021.

Several well-funded consumer startups with Black founders have also failed to raise new rounds in more than two years. This includes New York-based barbershop app Squire, backyard cottage purveyor Gardena, California-based Cover, and San Francisco-based Chipper Cash, which provides payment card and money transfer services in multiple countries in Africa. It will be done.

Notably, while startup investment across the U.S. declined significantly last year, not all sectors have followed the same pattern. Some areas, such as AI, are heating up significantly. Other companies, such as biotech and robotics, are also down, but are still seeing significant deal flow.

Meanwhile, many once-popular sectors, such as consumer apps and direct-to-consumer e-commerce, are experiencing even steeper declines. Black-founded businesses operating in these sectors have not been immune to the effects of this broader recession.

— Joanna Glassner contributed to this article.

methodology

Funding amounts and counts for the most recent year were collected through February 23, 2024.

The data in this report comes directly from Crunchbase and is based on reporting data provided by Diversity Spotlight Partners, Venture Partners, community networks, and news sources. The data in this report focuses on the U.S. market for businesses founded by underrepresented minorities, namely Black/African Americans.

Crunchbase’s dataset is constantly growing, but there are gaps. A company may not have a founder listed or may not have updated Diversity Spotlight data on their Crunchbase profile. We believe we are missing out on companies, especially in the early stages of fundraising.

If you notice missing data, please contact spotlight@crunchbase.com or check with your company email to update your company’s Diversity Spotlight tag directly on-site.

Crunchbase, like all databases of private market transactions, has a documented pattern of reporting delays. Data for 2023 will increase over time compared to previous years. As data is added to Crunchbase over time, some of the numbers in this report may change.

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Illustration: Dom Guzman