Black entrepreneurs have historically faced disparities in securing VC funding and typically receive less than 2% of overall dollars each year.
In the aftermath of the George Floyd racial justice reckoning, firms pledged to make diversity a top priority, and Black founders saw historic year-over-year gains in securing VC funding.
By the end of 2022, adverse market conditions led to a 36% drop in overall VC dollars, but Black entrepreneurs saw a 45% decrease in financing.
Bea Dixon, the CEO and co-founder of The Honey Pot Company
Courtesy: Honey Pot Company
In 2016, Beatrice Dixon had finally secured a deal with Target to carry her line of feminine care products. But she had one problem: She was still making them in the kitchen of her Atlanta home, and she needed to scale up — fast.
The CEO and co-founder of The Honey Pot Company, a vaginal-wellness brand, was faced with the “impossible” task of launching in 1,100 stores and needed funding to bring on manufacturers so she could deliver on the retailer’s orders.
She managed to secure that crucial round of financing from a fund devoted to supporting women entrepreneurs of color and was able to quit her job, move operations out of her kitchen and launch in Target stores nationwide by 2017.
Some six years later, Dixon’s products are a staple in retailers across the country.
“It was really hard, man, we weren’t having any luck,” Dixon told CNBC in a recent interview about the struggles she faced securing investors. “I don’t know what would have happened if we didn’t get that money.”
Dixon is one of many Black entrepreneurs who struggled to secure funding for their businesses and relied on venture capital financing earmarked for diverse founders. While Dixon and many others have ultimately succeeded, Black-led businesses and Black founders have historically faced disparities in securing VC funding.
Overall, Black entrepreneurs typically receive less than 2% of all VC dollars each year while companies led by Black women receive less than 1%, according to data from Crunchbase.
In the wake of the police murder of George Floyd and the racial justice reckoning that followed, Black founders and Black-led startups saw historic gains in securing VC funding in 2021. However, as momentum around the movement fizzled and market conditions worsened, a lot of those gains were lost by the end of 2022.
While overall VC funding dropped by 36% in 2022 as inflation and interest rates surged, financing for Black businesses saw a steeper drop of 45%, according to the Crunchbase data. That drop is the largest year-over-year decrease Black entrepreneurs have seen over the past decade.
“There were a lot of political and cultural strife problems in 2020 and early 2021 that created a higher focus on Black and diverse founders,” said Kyle Stanford, a senior analyst at Pitchbook. “No one wants that to be the reason why they focus on investing in any group, but that did put a lot of focus on the problems that VC has had investing in anyone outside of a straight white male.”
Marlon Nichols, the co-founder and managing general partner of MaC Venture Capital, said diverse businesses tend to take the brunt of VC slowdowns because firms typically resort to the status quo in times of economic uncertainty.
“We’ve always invested in white men and that’s what we’re going to do right now. That’s where we’re comfortable. That’s where we know and believe that we’re going to get the return,” is how Nichols, who is Black, described the decisions made by some firms. “This diversity thing is cool, we’ll pick it back up maybe, you know, once we’ve weathered this storm.”
So-called ‘risky bets’
In 2014, Dixon was working at Whole Foods and suffering from an ongoing case of bacterial vaginosis that she wasn’t able to shake. Then, she said, her late grandmother came to her with a solution — in a dream.
“She just told me that she had been walking with me and seeing me struggle and she knew how to fix it, and she basically hands me a piece of paper that has a list of ingredients on it and she tells me to memorize what’s on the paper,” Dixon said, recalling the dream of her grandmother. “I made it within a couple of days, and, basically, this formula actually healed me.”
The mixture, which included ingredients such as lavender, apple cider vinegar, grapefruit seed extract and rose, worked for family and friends, too, Dixon said. Using a $21,000 loan from her brother, she began selling the product and displaying it at trade shows and expositions.
Honey Pot Company products
Courtesy: Honey Pot Company
Using her connections at Whole Foods, she got the product on the shelves of the store but wasn’t able to seriously scale up and attract outside investors until she secured the deal with Target.
“It was hard. Us being Black-owned business founders, was it harder? Sure, it probably was,” said Dixon. “I think every time we raised money, we had trouble doing it, you know, but I think that the important context to put there is that anybody that raises money, it’s not going to be easy.”
While he doesn’t invest exclusively in diverse businesses, Nichols said he’s more likely than some venture capitalists because MaC Venture Capital is led by a diverse team unlike other firms that are typically run by white men.
“The investors are primarily white and male and usually come from affluent communities, which means that they have very specific experiences and have been exposed to very specific things and are comfortable with very specific things,” said Nichols, whose latest firm opened in 2019.
To many firms, investing in founders from diverse backgrounds is considered a riskier bet because the entrepreneurs differ from the norm they’ve become accustomed to, said Ladi Greenstreet, the CEO of Diversity VC, which works to tackle systemic bias within venture capital.
In the aftermath of Floyd’s murder in May 2020, many major banks, corporations and investment firms pledged to change that — and make diversity a top priority moving forward.
However, the steep funding drop-off Black founders saw in 2022 indicates some of those promises may have been short-lived charity plays rather than investments that firms actually believed would bring in strong returns.
“When you take venture capital financing, the expectation is that, you know, you have a partner now, if you perform, your partner is going to continue to back you, they’re going to help you to raise that next round of funding, right?” said Nichols.
For white-led teams, there’s no expectation that recipients have to be “extraordinary” in their first two years of operations in order to get follow-on funding, but the bar is far higher for Black entrepreneurs, said Nichols, whose firm manages about $450 million in assets.
“For most of these Black founders, that’s exactly like the expectation, you’ve got to be extraordinarily exceptional in order to get additional capital,” he said. “And if you’re truly treating this like all investments that you make then that shouldn’t be the case.”
‘Huge blue ocean’
Pocket Sun is the co-founder and managing partner of SoGal Ventures, a VC firm devoted to supporting women and diverse entrepreneurs. Since the firm opened in 2016, it has seeded multiple unicorns, or startups that grew to have valuations over $1 billion. The businesses include Function of Beauty and Everly Health.
“From a financial investment perspective, this remains a huge blue ocean for people to dive in,” said Sun.
“Venture capital is a very privileged and exclusive industry, and has always been that way. And it has such disproportionate decision-making power on the future of technology, the future of innovation, the future of quality of life in many ways,” said Sun.
While investing in diverse teams can often be seen as a moral imperative and something that’s done because it’s the right thing to do, studies have shown it can lead to higher returns for investors, said John Roussel, the executive director of Colorwave.
Honey Pot Company products
Courtesy: Honey Pot Company
“And somehow, we’re still stuck in this situation where we’re trying to convince people of that,” said Roussel, whose organization connects early stage founders to mentors and capital. “It really takes, you know, strong players taking a lead and showing people that there is opportunity here and there is generally the same success rates regardless of someone’s skin color.”
Dixon, the founder of The Honey Pot, pointed to her own success as an example. “Clearly, it’s safe to bet on Black businesses,” she said.
Products from the company are now in 4.6 million homes, nearly double the number from two years ago. They are also sold nationally in retailers such as Walmart, CVS, Walgreens and more. The Honey Pot didn’t share its current valuation or how much it makes in annual sales.
Dixon called on investors to put their biases aside and see companies for their basics: balance sheets, innovation strategies and business goals, not the skin color of its teams.
“My skin color shouldn’t be a part of the conversation, period,” she said. “And yet, it still is, right?”
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