Underrepresented venture capital managers and entrepreneurs could get a boost from a new state program this year included in the governor's budget proposal.
Gov. Gavin Newsom on Monday proposed allocating $200 million to underrepresented venture capital managers, entrepreneurs and business owners.
The program would be administered by the state's Infrastructure and Economic Development Bank, also known as the IBank. The focus would be regions that are economically disadvantaged or have limited access to venture funding and climate equity and justice programs.
The program is a new initiative under the State Small Business Credit Initiative, part of the American Rescue Plan Act that President Joe Biden signed last year. The Treasury Department allocated $10 billion for the small business initiative and California expects to receive $1.2 billion of that with a portion going to the IBank for the venture capital program.
While the exact details of the program are still under development, venture capital firms would need to apply for the funds, which will be distributed as investments, not grants. Angel investors will not be eligible to participate, and startups cannot apply for funding directly through the IBank. Founders will have to go through venture capital firms.
The IBank expects the program to kick off in the second half of 2022, pending U.S. Treasury Department approval.
In addition to prioritizing underrepresented investors and founders, the IBank confirmed to me that program will also target regions outside of the Bay Area, Los Angeles and San Diego. More than 90% of all venture capital investments within the state have been in those three regions over the past decade. Bay Area startups alone have taken 75% with Los Angeles next at 12% and San Diego at 5%.
There's more money than ever being invested in startups, but still only a small fraction goes to companies run by founders who identify as female, people of color or LGBTQ.
Investors poured $330 billion into North American startups last year, nearly doubling over 2020's record-breaking numbers, according to Crunchbase. And Bay Area startups were on track to raise around one-third of that by the end of 2021.
All-female founding teams seem to be stuck at around 2% of funding, despite the actual value of their fundings increasing. Nationally, their overall share of funding dropped to a five-year low in 2021, according to Bloomberg.
Startups with Black and Hispanic founders received 3.5% of all funding nationally last year through mid-December, according to Reuters. That's a 40% increase over 2020 but still far below their percentage of the population. Florida and Georgia had the most significant increases in deal flow to startups founded by people of color. In California, they saw the values of their transactions increase but the actual number of deals decreased 30%.
Meanwhile, partners at venture capital firms were 78% white and 84% male on average across the country, according to a 2020 study by the National Venture Capital Association.
While $200 million is a relatively small amount of funding in the world of venture capital, where major firms often operate funds in the multiple billions, the new state program has the potential to create a meaningful impact, Carmen Palafox told me. She's a partner at the L.A.-based firm MiLA, a co-founding partner at 2045 Ventures and on the board of Latinx VC.
"Ideally, the program can open additional avenues for capital that extend the current allocation to fill the gaps in funding to underrepresented and underserved funders and founders," Palafox told me via email. "These gaps are significant, persistent and well documented by leading organizations including ours. There is a pipeline of talented and qualified fund managers in our community that should access these funds. Whether or not they can will depend on the process and requirements for underrepresented VC managers to access the capital."
The state's new venture program will need to track and measure the impacts of its investments in order to have the greatest impact on underrepresented founders, Gaingels Managing Director Lorenzo Thione told me.
Gaingels is a venture capital firm and investor network based in New York that is dedicated to supporting LGBTQ founders.
"If you don't measure it, you can't fix it," Thione said via email. "That the capital exists and is stated for this purpose is a good thing, but how the program is administered is where all the questions remain."
Funding underrepresented investors and entrepreneurs could pay wider economic dividends. For example, there's untapped potential for LGBTQ entrepreneurs, according to data that's tracked by the San Francisco-based organization Startout.
Nationally, LGBTQ entrepreneurs have the potential to create more than 400,000 additional jobs, according to data that Startout has compiled since 2000. The greatest opportunity zones exist outside of the Bay Area and New York City.
