Diversity and Inclusion

Black women lack access to VC funding. Here's what we can do

We need to foster a more inclusive business environment when it comes to VC funding.

We need to foster a more inclusive business environment when it comes to VC funding. Image: Unsplash

Lindiwe Matlali
Chief Executive Officer, Africa Teen Geeks
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Diversity and Inclusion

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  • Venture capital (VC) funding for Black-owned businesses declined sharply in 2022, with women receiving an even more disproportionately small share.
  • Support for Black entrepreneurs often ebbs and flows in response to tragic events, doing little to address the systemic challenges that they face.
  • We need to adopt a proactive and sustained approach to supporting female Black entrepreneurs in order to foster a more inclusive business environment.

Awareness of the need for diversity and inclusion within the business world has grown in recent years, particularly when it comes to venture capital (VC) funding for minority entrepreneurs.

However, recent data suggests that the support for Black-owned businesses, especially those led by Black women, has been declining. This decline seems to be linked to a reactive approach where support for Black businesses and causes are driven by tragedy or response to trauma, rather than a proactive and sustained effort.

In the wake of George Floyd's death in 2020, for example, companies across the United States pledged donations to Black organizations and vowed to support Black-owned businesses.

This tragedy served as a catalyst for increased financial support for Black entrepreneurs, with a reported $850 million to $1.2 billion in VC investments directed towards Black-founded startups in 2020.

Drop in venture capital funding for Black-founded firms

Unfortunately, as the headlines faded and the nation's attention shifted, this surge in support appears to have waned. Venture capital investments in Black-founded startups plummeted by 45% in 2022.

This decline is particularly concerning for Black women entrepreneurs, who often receive a disproportionately small share of VC funding. In 2021, Black woman start-up founders received just 0.34% percent of the total venture capital spent in the US.

The ebb and flow of support for Black businesses in response to tragic events highlights a problematic pattern. A study by the Kauffman Foundation found that Black entrepreneurs are less likely than their white counterparts to receive VC funding, even when they possess similar levels of education and experience.

This demonstrates that the commitment to uplifting Black entrepreneurs is often fleeting, with support diminishing once the tragedy or trauma is no longer in the headlines. This reactive approach does little to address the systemic barriers that Black business owners, particularly Black women, face when seeking VC funding.

To bring about lasting change and create an environment where Black entrepreneurs can thrive, it is crucial to adopt a proactive and sustained approach to supporting Black-owned businesses.

Systemic barriers to VC funding also need addressing

This requires not only increasing VC funding for Black founders but also implementing policies and programmes that address systemic barriers and create a level playing field for all entrepreneurs.

One such programme in the UK, the Black Business Network, found in a 2022 report that a call to improve financial representation in the finance industry, as well as ring-fenced financial support for Black businesses, are two measures that could make an impact.

The role of government in promoting inclusivity should not be understated, as governments have the power to shape the business environment through policies and regulations that encourage diversity and equal opportunities for all entrepreneurs.

A study by the National Bureau of Economic Research highlights the potential of targeted government policies to improve access to capital for minority-owned businesses.

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This suggests that a public subsidy for investors could help compensate for the financial hurdles many start-ups experience, particularly those that are not benefitting from being part of a major entrepreneurship hub.

Angel investor tax credits are also put forward as a way to offer a financial lifeline to these start-ups, without the need for governments to identify which start-ups deserve subsidies.

Policies to reverse decline in VC funding for Black women

Two key policy recommendations that could address the decline in VC funding for Black women and promote inclusivity are:

1. Implement tax incentives for VC firms that invest in minority-owned businesses

Governments can introduce tax incentives to encourage VC firms to invest in minority-owned businesses, particularly those led by Black women. These incentives could include tax breaks or tax credits for VC firms that meet specific diversity investment targets, thereby motivating the industry to prioritize inclusivity in their funding decisions.

2. Establish government-backed funds to support minority-owned businesses

Governments can create dedicated funds that invest directly in minority-owned businesses, ensuring a consistent flow of capital to these enterprises. These funds could be managed by a combination of public and private sector experts, with a mandate to prioritize investments in businesses led by Black women and other under-represented entrepreneurs. This would not only provide much-needed financial support to these businesses, but also help create a more inclusive and diverse entrepreneurial ecosystem.

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The decline in VC funding for Black women highlights the need for a proactive and sustained approach to supporting Black-owned businesses, and both the private sector and the government have critical roles to play in fostering an inclusive business environment.

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Diversity and InclusionGender Inequality
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