Diverse Approaches To Early-Stage Fundraising For Underrepresented Founders

Early-stage fundraising for underrepresented founders is far more challenging than for mainstream entrepreneurs. Despite the hype around supporting minority ventures post-George Floyd, founders have come to expect to face more difficulties.

The under-represented segment comprises brown, black, colored people, immigrants, indigenous, and women founders, not to overlook LGBTQs. These entrepreneurs invariably face limited networks, bias, and systemic inequalities or unequal access to opportunities and resources.

These challenges not only make it harder for them to get their startups off the ground. But they also face difficulties when pitching for and accessing funding and exiting their companies.

Let’s Check Out These Statistics

Statistics clearly indicate that there is a clear bias toward white founders regardless of the startup stage. In 2022, white male founders attracted more than $210M in total funding when they exited.

On the other hand, the average funding underrepresented founders received only 43% of that amount or $91.1M. Further, women-founded ventures got only 1.9% of the available venture capital. Black and Latino entrepreneurs attracted just 1% and 1.5% of the aggregate US venture capital, respectively.

The last few years have seen venture capital investment drop across the board for all industries and segments. Several factors contributed to this phenomenon, such as rising interest rates, inflation, and indicators of recession.

However, experts estimate that the VC market is likely to pick up in 2024 and reach $1.3T. By 2029, it should touch the $1.94T mark. As a rule, the market has very few fund managers geared toward diversity and supporting underrepresented founders.

Typically, these emerging funds are worth $100M or lower with less than $1B in AUM or total assets under management. However, historically, they are more inclined to invest in diversified portfolios because of their higher return incentives.

And that’s not all. As of 2021, the US had $82T assets under management (AUM). But just 1.4% of them were under women or BIPOC managers. It is an accepted fact that capital from asset managers is likely to divert toward founders that match their demographics.

The overall economic landscape influences early-stage fundraising for underrepresented founders in a big way. The downturn of 2022 resulted in black-founded startups getting only $324M by mid-2022. Compare these figures against the reduction of $850M to $1.2B across the five quarters to mid-2022.

The numbers clearly indicate the disparity in investor opportunities for minority-class founders.

Lack of Access to Capital and Resources

Statistics clearly indicate that, on average, white families have 6 times the wealth of Hispanic families. They are also likely to be 13 times wealthier than the average black family.

Founders relying on their communities and friends and family for funding will have fewer resources to tap into. Falling short of personal savings makes bootstrapping almost impossible.

Cold emailing and outreach are also not that effective for diverse founders. Building relationships with investors is more challenging without warm introductions.

Underrepresented founders also lack exposure to networks of peer groups and training programs that they can leverage to build companies.

Minority founders may get offers of mentoring and support programs. However, getting ahead is a long road without monetary and social capital, long-term contracts, and practical assistance with building the business.

Challenges Faced for Early-Stage Fundraising for Underrepresented Founders

Lack of Training, Know-How, and Pitching Skills

Underrepresented founders not only face disparity when raising funding, but they must also deal with a lack of VC support. Entrepreneurs talk about how they send out their pitches to VCs and request feedback and direction for improvement.

However, the responses they received were more often than not confusing and complicated. To overcome this challenge, founders need the right tools and information for their pitches to make the right impact.

The first step in the right direction is to reach out to networks dedicated to diverse groups. Typically run by people from underrepresented communities, they provide the necessary know-how for developing concepts and designing pitches.

For instance, communicating the value of the business proposal by backing it with credible data to make the pitch compelling.

Difficulty in Connecting with the Right Investors

Connecting with the right investors that particularly support underrepresented founders raises their chances of getting funding. Some great examples include Day One Ventures, a venture capital fund with investors like General Catalyst, Andreessen Horowitz, and NEA.

Bessemer Venture Partners, Greycroft, USV, and Kleiner Perkins are other entities offering funding and hands-on support. These VCs also provide networking opportunities for entrepreneurs to connect with other investors, top venture capitalists, and potential customers.

Founders can also take advantage of mentorship, coaching, and training in advertising, marketing, and communications. Connecting with industry-specific advisors is another benefit. This support enables them to raise capital to scale their companies quickly and gain traction.

Other than assisting early-stage fundraising for underrepresented founders, these VCs back talent that has gone through disheartening layoffs. By offering invaluable capital, VCs promote the next generation of industry-disruptive innovators.

These founders typically need only a launch pad to get their ideas off the ground. In addition to small sums of money of up to $100,000, investors also offer hands-on support and weekly follow-ups. Day One selects the top-performing startups in their portfolio at the end of six months.

Founders received $1M checks and assistance with leading their seed rounds. Several accelerator and incubator programs are also open to supporting diverse founders, providing learning programs and other assistance.

Yet another example is Visible Hands, which provides pre-seed funding to underrepresented founders building tech-driven startups. This fund recently launched its accelerator program for a second cohort of 54 diverse founders.

This program offers a 14-week training workshop along with an initial investment worth $25,000. Participants have the opportunity to attract further investment from the VC firm and network with peers and other underrepresented founders from their vertical.

Unimpressive Teams

The team is one of the key slides in a compelling pitch deck. Investors are likelier to bank on the core talent that drives a startup. A well-rounded founding team with excellent skill sets is a draw for funding. Data and the business concept are not always the deciding factors when investing.

However, startups with more women and underrepresented sections of the community in their team also fall short when fundraising. Statistics show that teams with only women are 25% less likely to attract funding than teams with all men.

Startups driven by a minority workforce may raise up to 29% less funding than teams with all-white talent. These numbers suggest that investors have less confidence in such teams or the metrics and other information their pitches offer.

Founders can get around this problem by elevating the other slides in their pitches to project credible metrics and numbers. These numbers indicate the market potential and how the founders intend to monetize their ideas.

Designing a robust business plan that can indicate traction is an effective strategy for early-stage fundraising for underrepresented founders. They can also expect to get called in for around 158% more meetings with investors than their all-white counterparts.

Gender and Racial Bias

Gender, ethnicity, and cultural biases play an important role in shaping investor perceptions. Diverse founders often talk about how investors disregard their pitches or doubt their capabilities based on appearances and skin color.

Underrepresented founders also face a lack of confidence in their expertise from stakeholders, co-founders, investors, and customers. The quality of products and services they offer and after-sales service also lacks credibility.

Aggressive advertising and marketing strategies can help resolve this issue. Founders can also consider giving out free samples and providing demos of working prototypes. Posting videos on social media channels to introduce the product and happy customers can help attract audience interest.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Strategies Underrepresented Founders Must Adopt

Connect with a Robust Network

Building and connecting with a robust network of diverse founders is an effective strategy. Startup owners should reach out to and connect with underrepresented people like themselves who have valuable experience and information.

Exchanging ideas and approaches to not only attract funding but also build the business from the ground up works well. Also, include advisors and mentors who are open to sharing insights into the specific business ecosystem for better navigation techniques.

Diverse founders can also consider engaging and communicating with other entrepreneurs who can offer information about current industry trends. Founders who have successfully raised funding can offer tips on the strategies that work well.

In-depth data on shifting expectations can help deliver a compelling message highlighting the viability of the project they’re pitching. A robust network can also act as a support system and help build relationships with potential investors. Peers can lay the groundwork before you deliver pitches.

Building trust and credibility within the sector can be a crucial asset for founders who have yet to demonstrate traction.

Underrepresented or mainstream, all founders should put together a list of the types of investors for startups they can approach. Check out this video, where I have specified your options and how to get their support.

Consider Crowdfunding and Funding from Family and Friends

When looking for early-stage fundraising for underrepresented founders, venture capital need not be the only option. Entrepreneurs should consider other options like crowdfunding and approaching high-net-worth individuals or angel investors.

Founders from historically marginalized communities can start off by launching a crowdfunding drive where they connect with small investors. The first step is always reaching out to family and friends for small amounts of capital.

For the crowdfunding campaign to be successful, founders should remember to set realistic and attainable goals. Present quantifiable milestones in the pitch that resonate with the supporters.

Next, founders must create and deliver simple-to-understand messages explaining what the company is all about. Talking about the product range and the value it delivers is the right strategy to adopt. Leveraging social media for the success of the campaign is an effective move.

Not only can diverse reach out to audiences from their community, but also advertise or run an entire business. Facebook is one such platform where founders can test their products on real customers and get their feedback.

Not only can they experiment with the business idea without investing too much money, but they can use the feedback. Understanding what the audience is looking for and if they like the product can prove to be valuable insights.

Developing more products or making improvements is easily done. Testimonials, recommendations, and reviews build brand value that can attract funding for the business.

Approaching angel investors is also a great strategy for early-stage fundraising for underrepresented founders. These investors are always on the lookout for interesting projects to back. And the ideal way to connect with them is at networking events.

Having an elevator pitch ready is a practical strategy for all founders, including minority startup owners.

On the Flip Side!

Despite the myriad challenges and unpredictable markets, underrepresented founders have one crucial position going for them. They are highly resilient and dedicated to their business ideas. Having less capital and fewer resources instills a lean mentality.

Such diverse founders are capital-efficient and less inclined to take unnecessary risks. They are steadfast in the face of adversity and have what it takes to get their new ventures off the ground.

Since these entrepreneurs come from different cultural backgrounds and locations, they bring a fresh perspective to their business landscape. They are innovators, bringing disruptive solutions that appeal to new, emerging markets.

Early-stage fundraising for underrepresented founders can be more challenging than conventional entrepreneurs. But more investors are taking an interest in this new class of startup builders, their unique ideas, and the impact that they can have on tomorrow’s world.

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