Written By Kevin Moore, founder and managing partner at Serac Ventures, and Darrel Frater, senior associate at Serac Ventures
As Black VCs, we have a lot of conversations with underrepresented founders and founders who lack traditional inroads into the venture capital industry. In recent conversations, one trend continues to emerge: fundraising is more challenging than ever, starting at the top of the funnel with Limited Partners (LPs).
Why has it become even harder for underrepresented founders? Why are they continuing to be overlooked by VCs? And why aren’t VCs able to get the money they need to fund diverse founders?
Although the funding process has always been difficult for women founders and POC-led teams, there was once a glimmer of hope of addressing the issue. After George Floyd’s murder in 2020, VC firms across the United States pledged to face the diversity problem, with many implementing DEI programs and leadership within their companies. However, only a couple of years later, in 2022, only 1% of VC funding went to Black founders, signaling that those promises were short-lived. Here are the five reasons VCs overlook underrepresented founders and how founders, VCs, and LPs can combat them.
They Can’t Relate
Investors spend less time on underrepresented founders’ product slides, 45% less time than teams without minority members. Diverse founders are creating products that white-male VCs don’t necessarily understand or maybe don’t feel connected to. In this macroeconomic climate, VCs are playing it even safer and will not invest in something that doesn’t immediately resonate as a solution to an existing problem with a market to back it. If the problem itself doesn’t evoke empathy, it will be hard to connect with the solution.
While it may seem simple, it’s important to find investors who will relate to the product you’re building. Look at their past investments and interests that align with your product idea. This will help narrow down a list of people most interested in hearing about your product, making the funding process more efficient for both sides.
Structural Barriers
In society writ large, BIPOC and women face general structural barriers to success. When something has been done a certain way for a long time, progress takes time.
Continued conversations and attention to structural barriers within VC can help move the needle forward. We need to have conversations on diversifying teams and why it is important to fund underrepresented founders.
California is the first state to bring attention to discrimination in VC. In October 2023, California passed a bill (SB54) that will require VC firms to report on their number of investments in diverse founders. Going into action in March 2025, VC firms will have to annually survey the companies in their portfolio for demographics, including race, ethnicity, disability status, and gender identity. The data will be put into a public database for any interested parties to see.
General network effects
Because of the structure of VCs, there are general network effects that add to the strain of structural barriers. VCs typically invest in their networks and if you have a network that isn’t diverse, it perpetuates bias. The reverse is true as well, where underrepresented founders don’t necessarily have investors and other important stakeholders in their networks.
Networking does not have to be transactional—think of it as building a community. It’s important to build relationships with allies and diversify your network. Attend industry events and conferences to engage with VC leaders and expand your professional circle. Even though an investor or founder may not be the right fit for your business right now, there’s no reason things can’t change in the future. No fund or organization alone can fill the gap; we need to collaborate to create real change.
Pattern Matching
Ultimately, VCs learn from decisions made throughout their careers, leveraging experience to help make business decisions.
Now that we’re no longer in the booming market, many pre-pandemic investor habits are cropping back up, including “pattern matching.” Even though VC is an outlier business, VCs look for certain founder profiles, backgrounds, and heuristics that justify success, often mimicking old patterns that are difficult to change. Investors spend more time on historically underrepresented founders’ team slides, an average of 42 seconds — but why? Investors are much quicker to say yes to a founder with a Stanford, Harvard, or MIT background, the three top schools for funded founders.
Be deliberate in pitch deck presentations to specific investors. Do your research and make sure the investors you’re engaging with align with you and your company — know their portfolio, beliefs, etc. Investors should also be aware of their pattern matching and how it can limit diversity and investment opportunities for their funds, limiting chances to outperform peers.
For underrepresented founders looking for capital, build a strong business that solves a key pain point to attract talent and capital. Think big. Very talented founders tend to be trapped in their small ecosystem. Think creatively, be disruptive, be resourceful. Be able to build with what is at your disposal.
Addressing the Root
The fundraising problem starts at the top of the funnel, with LPs with a lot of institutional money. Some want to invest in diverse, emerging managers, but their minimum check size is so large that they are often relegated to using intermediaries.
In recent years, there has been an exponential increase in the number of emerging managers targeting diverse founders, but the capital bottleneck prevents money from reaching them. One of the problems is that the intermediaries who are hired to allocate to emerging managers use the same due diligence framework to assess emerging managers as they do established managers. No one should ever lower their due diligence standards, but they can adjust them to consider aspects that contribute to that manager’s long-term success.
If emerging managers who have a stated mandate to back diverse founders are unable to raise institutional capital because of capital bottlenecks, this has a significant negative effect on the underrepresented founders they want to back.
Solving the funding gap for underrepresented founders is a complex problem. Some may argue that it’s a lot easier for newer, emerging VC firms to establish from the onset a strategy to include underrepresented founders than it is for older, established firms. Herein lies the irony. While it’s easier for newer firms to have a more inclusive investment mandate, they don’t have the resources or influence to change the funding gap challenges the VC industry faces today.
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