When it comes to pitch presentations for startup investments, venture capitalist Mitch Brooks has noticed a blind spot when he's talked with larger firms, one that sparks the same questions over and over.
They'll ask what schools the company's team and founders went to, where they came from. Brooks' response oftentimes? Tell me how that's relevant.
What follows, he said, would frequently be stumbles, excuses and vague explanations from investors of "that's just what we do" or "that's just how we look at things" when they evaluate prospects. It aligns with a new study that Brooks said shows just how much investors fall into patterns for what they look for in founders to back — and just how negatively it affects founders who don’t fit the mold, disproportionately those of color.
“As an investor, if you're looking for an ideally educated person, who lived in Long Island or who lived in California and Silicon Valley, what we know is that there are some implications to that,” said Brooks, founder and general partner of D.C. early-stage investment firm High Street Equity Partners. “In order for people to come from those backgrounds, that means their parents had to be in a position to come from those backgrounds or put them in those backgrounds. And so you start to look at what's behind the pattern matching.”
A new report from DocSend, a secure document-sharing platform, and its parent company, digital storage company Dropbox Inc.(NASDAQ: DBX), on the funding divide between white and diverse founders illustrates where many venture capitalists may let their bias cloud their judgment. The report surveyed 205 startups at the pre-seed and seed stages in 2022, while also using DocSend's data on company pitch decks.
It found, in 2022, diverse teams raised 33% less money on average than all-white teams, and all-female teams raised 36% less than all-male teams. Add a woman of color to an all-female team, and it saw 33% fewer investor meetings in 2022 than their peers, while raising the least amount of funding, per the report.
While data on people of color, and specifically Black founders, getting disproportionately small shares of the venture pie isn't unique — Crunchbase data showed Black founders raised only 1%, or an estimated $2.25 billion, out of last year's $215.9 billion in total U.S. venture capital — this study illustrated a correlation between investors' analysis of pitch decks and funding outcomes.
When they were looking at pitch decks of diverse founding teams, investors spent 25% more time on the sections describing the team, and 28% longer examining the "traction" sections, 67% longer on "market" sections and 55% longer on the "competition" section when compared with their activity on pitch decks from white teams.
"These discrepancies suggest that for diverse teams, investors may have focused on whether companies had the right group of individuals to create traction in a market that would help the company stand out from the crowd," the report read.
It speaks to some pattern-matching, or using past patterns and experiences to inform future decisions, according to Brooks, who is quoted in the study as well. Investors will focus more on the team and market for diverse founders, and more on the product itself for nondiverse founders, he said.
Myles Powell, co-founder of McLean frozen food brand Myles Comfort Foods, recently closed a $1.05 million seed round that he started raising in 2021. During fundraising, he found that investors had focused most on two slides of his deck: one that described his company's value proposition, and the another on his current investors, a sparse list that he said seemed to make them particularly nervous.
"No one wants to be the first," Powell said. "You come to the table and say, 'Hey, I haven't raised much money,' it's really difficult for someone to trust you with theirs."
Such investor patterns become a bigger problem in an environment where venture firms are slowing down their investments due to inflation or economic dips, said Andy Will, a principal at D.C. Zeal Capital Partners, another D.C. venture firm that focuses on underserved founders and just raised its second fund.
“While the macroeconomic environment has deteriorated, venture capital funds still sit on large sums of dry powder,” Will said. “Today, many investors are starting to reenter the market at the seed stage, Series A stage. The problem is that most investors are retreating to their historical pattern-matching that created these massive inequities in the first place.”
The study's findings are perhaps more pertinent to Greater Washington, where D.C. alone boasts the second-highest rate of Black-owned businesses in the nation with 7%, behind only Atlanta's 7.4%, according to LendingTree's analysis of 2020 data from the 2021 U.S. Census Bureau Annual Business Survey.
While the study didn't break down figures by the D.C. region, it found that in the Mid-Atlantic — which includes Delaware, New Jersey, Virginia, West Virginia, Maryland, Pennsylvania and D.C., but not New York so it wouldn’t skew the numbers — diverse teams and all-female teams may have raised more funding than all-white teams, but those dollars took longer to raise for both categories. And diverse teams had fewer meetings on average.
“Our data is indicating, alongside these qualitative anecdotes, that investors are more skeptical of all-female teams offering technical solutions or working in markets for other women that many investors who are often white males don't necessarily understand,” said Justin Izzo, a DocSend senior data and trends analyst. "This extra scrutiny on the teams or, for example, on the market size section, alongside the fact that they raise less money, kind of indicates negative scrutiny.”
Here's the Mid-Atlantic breakdown from the study in 2022:
- For all teams, Average Meetings Held: 58, Average Amount Raised: $1.6 million, Average Time Spent Raising: 16 weeks.
- For all male teams, Average Meetings Held: 48, Average Amount Raised: $1.9 million, Average Time Spent Raising: 14 weeks.
- For all-female teams, Average Meetings Held: 64, Average Amount Raised: $1.2 million, Average Time Spent Raising: 18 weeks.
- For Mixed-gender teams, Average Meetings Held: 60, Average Amount Raised: $1.7 million, Average Time Spent Raising: 16 weeks.
- For Teams with minority members, Average Meetings Held: 54, Average Amount Raised:1.8 million, Average Time Spent Raising: 17 weeks.
- For Teams without minority members, Average Meetings Held: 62, Average Amount Raised: $1.5 million, Average Time Spent Raising: 14 weeks.
This is the data nationally in 2022:
- For all male teams, Average Meetings Held: 48, Average Amount Raised: $1.3 million.
- For all-female teams, Average Meetings Held: 64, Average Amount Raised: $700 thousand.
- For mixed-gender teams, Average Meetings Held: 60, Average Amount Raised: $1.3 million.
- For all-male teams without minority members, Average Meetings Held: 54, Average Amount Raised:1.6 million, Average Time Spent Raising: 15 weeks.
- For all-female teams without minority members, Average Meetings Held: 62, Average Amount Raised: $1.2 million, Average Time Spent Raising: 12 weeks.
- For mixed-gender teams without minority members, Average Meetings Held: 45, Average Amount Raised: $1.8 million, Average Time Spent Raising: 17 weeks.
- For all-male teams with minority members, Average Meetings Held: 54, Average Amount Raised:1.3 million, Average Time Spent Raising: 16 weeks.
- For all-female teams with minority members, Average Meetings Held: 33, Average Amount Raised: $600 thousand, Average Time Spent Raising: 15 weeks.
- For mixed-gender teams with minority members, Average Meetings Held: 50, Average Amount Raised: $1.1 million, Average Time Spent Raising: 20 weeks.
