By: Brandon Garner
In the world of entrepreneurship, the ability to secure funding is pivotal to having a successful startup phase. Obtaining funding can be done in many different ways, but arguably the most common way to obtain funding particularly during the startup phase of a business is through Venture Capital.
The concept of Venture Capital(VC) is, at its core, when a business seeks an investment in their company, during the startup phase in exchange for equity or stock in the company(think Shark-Tank). While risky, Venture Capital is beneficial for businesses that can’t easily access loans from banks or enter into capital markets directly. For many entrepreneurs, VC serves as a critical source of funding, but for the Black entrepreneur who already faces various challenges in the startup phase, securing VC is extremely difficult because of implicit bias in investment decisions. But what exactly is implicit bias?
Implicit Bias During the Pitch Phase
Implicit bias can be defined as a form of bias that occurs automatically and unintentionally, that nevertheless effects judgments, decisions, and behaviors. Due to its “under the radar” nature, implicit bias easily sneaks its way into society through microaggressions, seemingly normal yet veiled instances of racism that occur every day.
Unfortunately, microaggressions and implicit bias are extremely prevalent challenges faced by the black Entrepreneur in obtaining VC, particularly during the “pitch phase.” In July 2022, People Of Color In Tech, interviewed one first-time Black entrepreneur who recalled her experience with a white investor, stating he suggested she “try not to use the word minority, and instead use ‘underprivileged’ or ‘underserved,’ because if you say minority, investors will make certain assumptions.” In a separate Seattle Times article, one Black tech startup founder said a Venture Capitalist had asked them to “tone down the Black in the business.”
Impact of Implicit Bias by the Numbers
In some cases, Black entrepreneurs have become so desperate for funding that they’ve resorted to bringing along white friends to pitch meetings in order to make the investor more comfortable, even if the friend has no affiliation with the company. Sadly, even this trend does not eliminate the fact that Black entrepreneurs face almost insurmountable pressure to obtain VC in the face of implicit bias.
In 2022, out of 215.9 billion dollars in VC allocated in the U.S., Black founders raised an estimated 2.254 billion, a disgraceful 1% of funding. Additionally over the past 5 years, Black entrepreneurs have raised just 1/3 as much VC as their white counterparts have raised.
Given this blatant racial discrimination, one would believe that Black entrepreneurs would seek legal justice through the court system to correct this horrible wrong, but Venture Capitalists (who are overwhelmingly white males), are unfortunately not subject to any specific laws regarding discrimination. In fact under current legislation, Black entrepreneurs can’t file discrimination lawsuits without having concrete evidence that they were racially discriminated against.
How Did We Get Here?
This extreme burden of proof on the plaintiff stems from the 2020 decision handed down by a 9-0 majority in the Supreme Court case Comcast Corp. v. National Association of African American-Owned Media. Without getting too legalistic, here is a brief summary: In 2016, Entertainment Studios founder Byron Allen filed a suit against Comcast Corp alleging that Comcast had racially discriminated against him in refusing to carry his network channels. Allen sued under §1981 of the Civil Rights Act of 1866, which prohibits discrimination on the basis of race, color, and ethnicity when making and enforcing contracts. In siding with Comcast, the Supreme Court decided that because Allen could not concretely prove there was racial bias in Comcast’s decision to not carry his channels, he was not entitled to protection under §1981.
According to Erwin Chemerinsky, a lawyer for the National Association of African American-Owned Media, the ruling leaves far too many loopholes for Venture Capitalists, and hardly any legal protection against discrimination. In imposing a higher burden of proof, the Supreme Court has largely ignored the idea that racial conduct is a result of implicit bias rather than outright racial conduct. In fact, the Supreme Court decision has made it clear to entrepreneurs alleging racial discrimination that without a “smoking gun” of concrete evidence of racial discrimination their claim will not be supported in court. Without an improbable statement from an investor stating that “I discriminated against you and I’m not investing with you because of your race,” it’s almost impossible for a Black entrepreneur to seek justice for discrimination in courts.
Solutions Looking Forward
After Allen, is there any way to tackle implicit bias in VC? Perhaps the answer lies in increasing Black representation at the senior levels of investment firms. In a 2018 survey of the top 102 Venture Capital firms, out of 713 senior-level executives, only 7 were Black men, and 0 were Black women. Increased Black representation in investment decisions would make a major impact; it would lead to more Black entrepreneurs finding funding opportunities with those investors who look like them.
One final solution would be more challenges to the Supreme Court’s ruling in Allen, hopefully leading to a legislative overhaul that will give more protection to Black entrepreneurs trying to obtain VC. Still, two things are clear: a strong and impactful change must be made if Black entrepreneurs are to gain equality in obtaining Venture Capital and, by all accounts, this change is long overdue.
This post has been reproduced and updated with the author’s permission. It was originally authored on February 3, 2023 and can be found here.
Sources:
https://bleumag.com/2020/07/27/venture-capitalists-implicit-biases-cannot-be-challenged-in-court/
https://diversity.nih.gov/sociocultural-factors/implicit-bias
https://www.svb.com/startup-insights/vc-relations/what-is-venture-capital
https://www.washingtonpost.com/technology/2020/06/10/racial-gap-vc-firms/
