Five years ago, following the murder of George Floyd, Black-founded startups briefly experienced a surge of attention from venture capitalists (VCs). In the two years after his death, the share of VC dollars directed to Black businesses rose by 43%. Yet this surge proved short-lived, according to new research from Cornell University.
Matt Marx, professor at Cornell’s Dyson School of Applied Economics and Management, explained that the most significant change came from investors who had never backed a Black entrepreneur before May 2020. “It’s not so much that investors already supporting Black founders doubled down,” Marx noted. “It was more than those previously absent from the conversation suddenly appeared on the scene.”
This fleeting enthusiasm, argue Marx and his co-author Qian Wang, amounted to tokenism. In their study Minimum Viable Signal: Venture Funding, Social Movements, and Race, published in Management Science, they suggest that many investors sought to burnish reputations rather than commit to long-term structural change. As evidence, most VCs who entered the space after 2020 funded just a single Black business and rarely engaged deeply, such as by taking a board seat.
A companion paper, Funding Black High-Growth Startups, forthcoming in the Journal of Finance, reveals more profound structural inequities. Analysing PitchBook data on 150,000 founders and 30,000 investors between 2000 and 2023, the researchers found that Black-owned startups raised only about one-third as much capital in their first five years compared with similar non-Black firms. Even when controlling for industry, year, and state, the gap persisted.
The research points to “screening discrimination”: the tendency for VCs to make decisions based on perceived group differences rather than actual abilities. Interestingly, Black-founded startups perform better when backed by Black VCs, suggesting that shared networks and market knowledge enable more accurate assessments. Marx stressed this does not imply taste-based discrimination or overt racism, but rather the challenges of network exclusion and information gaps.
Accelerators such as Techstars and Y Combinator offer a partial remedy. Because entrepreneurs can apply directly rather than rely on introductions, the funding gap between Black and non-Black founders narrows significantly. “By comparison to venture capital, the gap is way lower,” Marx observed. “You don’t have to already be in the club.”
Ultimately, the studies highlight both the fragility of post-BLM commitments and the ongoing challenges faced by Black founders. While the short burst of attention was significant, without structural shifts in how networks operate and how investors evaluate opportunity, funding disparities are likely to persist.
More information: Matt Marx et al, Minimum Viable Signal: Venture Funding, Social Movements, and Race, Management Science. DOI: 10.1287/mnsc.2024.06410
Journal information: Management Science Provided by Cornell University