We Aren’t Seeing the Best Innovators
Why the “friends and family” round has to go
The myth of the “entrepreneurial gene” rests on the idea that some individuals are more inclined to become successful entrepreneurs than others based on their lineage. If you think this sounds like BS, you’re right. The assumption that entrepreneurial spirit is passed down through family and genetics ignores the social and environmental factors that play a far more fundamental role in an individual’s choice of — and access to opportunities in — specific professional paths. Ultimately, when it comes to entrepreneurial success, especially in the sense of venture-backed start-up success, what matters is not genes but access to resources and capital.
Entrepreneurs create jobs, cycling wealth and opportunities back into their communities. They foster a culture of innovation and build solutions to problems. As venture capitalists (VCs) — and as consumers — we want the best innovators creating the companies and solutions that shape our lives and the world around us. You might not be surprised to hear, though, that we are not seeing all of the best innovators. A large segment of society is completely overlooked or — as Arlan Hamilton, founder and managing partner of Backstage Capital, says — underestimated.
We’re Not Seeing the Best Innovators
Though the VC community has publicly acknowledged the problem for years, female, Black, and Latinx founders still receive less than 3% of total VC funding in the US. These stats are disproportionate and illogical when compared to the bigger picture. Consider: Women start companies at twice the rate of men, yet they only account for about 16% of tech founders. And Black female founders are the fastest-growing group of entrepreneurs in the US, but they receive only 0.2% of all venture funding.
We are not seeing the best innovators; we are only seeing the best white, male innovators.
Contrary to the reigning opinion of many white, male VCs, this isn’t a pipeline problem; it’s a network problem.
Diverse founders with fantastic ideas and capabilities exist. So why aren’t they being seen?
The “invisibility” of underestimated founders is due, in part, to an entrenched implicit bias in venture capitalism that stems from the “Old Boys Club” nature of the industry (you can find my take on that here). This is compounded by a systemic disparity in resource and capital allocation. Those who don’t have access to financial, network, and knowledge capital are at a serious disadvantage in the innovation economy.
Because of this, innovations that matter most to our communities, that are also massive market opportunities, are not getting funding. But hey, at least we have plenty of social networking and exploitative gig economy apps.
If you’ve read any of my previous articles, you know there is a lot to unpack in VC’s diversity (or lack thereof), but I do believe consistent wins — no matter how small — eventually add up to big wins. So let’s start with breaking down the barrier of that elusive first round of capital vitally important to almost every start-up’s success: the friends and family (F&F) round.
The F&F Assumption
The F&F round is typically the first fundraising attempt made by founders, during which early financing (generally between $10,000 and $150,000) is obtained from their own savings and networks of friends and family. This initial funding allows start-ups to begin proving their business models and developing their technologies. It enables them to hire employees, secure office spaces, and purchase critical resources needed to launch their companies. According to Fundable, nearly 40% of funding for new businesses comes from friends and family.
So, the founder’s journey is, from the outset, framed by the assumption that they have a network of people with capital to spare. This presents a huge, glaring barrier to entry for the under-resourced.
Yet the assumption pervades; the F&F round is commonly prescribed to founders by VCs, advisors, and angel investors as a necessary stepping stone to securing institutional capital.
The notion that founders can raise their first round of funding from friends and family is born out of investor bias. Investors, by and large, have access to networks, capital, and knowledge. VC investors are also overwhelmingly white and male — the demographic with the biggest stronghold of intergenerational wealth and influence and, therefore, access to capital. For reference, only 5% of VC partners are women with only 0.2% being LatinX women and 0.2% being Black women.
Additionally, Black and Latinx populations have historically been denied equal opportunities for wealth accumulation in the US. According to data from a Brookings report, in 2019 the median white household held 7.8 times the wealth of the median Black household ($188,200 vs. $24,100). Black and Latinx founders also face a persistent lending bias, as well as a number of systemic barriers to wealth accumulation in areas like homeownership, inheritance, and education. These factors inhibit founders of color when they seek to access capital, tap into networks, and appeal to the myopic, unconscious bias of most investors.
As for female entrepreneurs, women in the US couldn’t even apply for business loans without a male cosigner before 1988. While the situation for white females is the most improved of all underestimated founders, research shows that women still disproportionately self-finance their businesses — putting them and their businesses at a serious disadvantage in achieving the rapid growth expected for most technology companies. Likewise, women tend to have lower levels of financial confidence hurting their liklihood of raising from a friend of family member.
Introducing the Launch Round
Words are powerful, and the words we use have consequences. Titling that first infusion of capital as the “friends and family” round is an unnecessary barrier to entry for underestimated founders. With the focus placed on friends and family as the required source for initial capital, too many underestimated founders arrive at the threshold of entrepreneurship only to find they have to break down the door to get in. If we open up the language we use, we can symbolically hold open that door in invitation.
Let’s start opening that door for ALL entrepreneurs by ridding ourselves of the inherent systemic bias embedded in the traditional nomenclature of VC and start calling this first round of capital what it really is: The Launch Round.
Let’s stop basing an individual’s ability to become a start-up CEO on their access to an existing network of well-off connections and instead base it on their potential. Because by keeping the underestimated entrepreneurs underfunded, it’s not just founders who are missing out: businesses, consumers, and the VC community are as well. Diversity is more than a buzzword; it’s a strategic, competitive advantage for businesses. And by changing the nomenclature to be inclusive — rather than exclusive — we take a small step that drives big impact for those underestimated founders working their asses off to bring innovative companies to market.
Let’s open up our language, open the door to entrepreneurship, and tell underestimated founders, “Welcome. We want you here.”
Launch Round Resources
To support entrepreneurs through the Launch round, there’s a growing number of early-stage funding options and diverse investor ecosystems. There are accelerator programs such as Texas-based DivInc, crowdfunding options, VC funds and angel groups focused on being there at the launch phase like Backstage Capital , public small business grants, private start-up grants such as Oceans Alliance and the Bill and Melinda Gates Foundation, and conferences and community orientated resources. Please comment with any organizations helping founders through the Launch phase so we can continue compiling and sharing resources.
A special thank you to Gabi Skoff whose research is key to helping me communicate my ideas and Vera Shaw | Rice MBA '22 whose artistic insight helps us all visualize a more inclusive world.
