Arlan Hamilton remembers what she thought upon learning that roughly 90 percent of U.S. venture capital funds go to companies led by White men: This isn't just unfair--it's a missed opportunity.
"The people I've been surrounded by have been from so many diverse backgrounds," Hamilton, the founder of Los Angeles-based VC firm Backstage Capital, said on Thursday at the 2021 Inc. Vision Summit. "All of these types of people, and they're not being represented."
Hamilton, a Black gay woman, launched Backstage in 2015 to invest in early-stage startups led by underrepresented founders. Since then, she's crossed paths with Steve Case, the AOL co-founder who created the Rise of the Rest seed fund three years ago to increase geographic diversity in startup funding. Case's mission is similarly rooted in an unfortunate statistic on startup funding: Around 80 percent of U.S. venture capital funds go to companies based in California, New York, or Massachusetts.
"Just from an investment return standpoint, we're missing out on some of the great entrepreneurs building some of the great companies in potentially some of the great industries of the future," Case said during a Vision Summit virtual panel with Hamilton about the future of U.S. startup funding.
Put it all together, and you start to see why the two investors want to solve the national problem of access to capital. Here are three of their top takeaways.
1. Seed funds are crucial.
Hamilton and Case both use seed funding to nurture successful startup ecosystems across the country. "Every Fortune 500 company starts as a startup," Case said. "Before every growth round, there's a venture round. And before that, there's a seed round. If you're not seeding more, getting more shots on goal, you're going to see less venture and less growth opportunity."
Seed rounds outside the coasts typically involve relatively low dollar figures compared with those in Silicon Valley. That's a feature, not a bug, said Hamilton: Startups in cities with lower costs of living can get significantly more bang for an investor's buck.
"If I had to choose between only investing either in the coastal cities or the rest of the country, the same way I'm choosing to invest in underrepresented and underestimated founders, I would choose the rest of the country," Hamilton said. "It's such a no-brainer, in my view."
2. Investors everywhere need a new mindset.
Case told a story about a founder near Raleigh, North Carolina, who had different pitch decks for local investors and Silicon Valley investors. The local deck, full of spreadsheets and data, focused on a path to profitability. The Silicon Valley deck centered on the big idea, a vision of what the startup could become--which the founder said was all those investors cared about.
That attitude is common: Many venture-backed startups use giant fundraising rounds to chase hypergrowth and market share, leaving profitability for later. But underrepresented founders often need to build differently, Hamilton noted, prioritizing revenue, earning investors' trust, reinvesting profits in the company, and growing sustainably.
The right mindset for investors, according to Case, falls in the middle. While Silicon Valley investors can lose sight of the present, investors elsewhere can worry too much about why a startup might fail. "Believe a little bit more," Case said. "Just imagine: What if this really ended up being a huge company?"
3. Real progress requires long-term commitment.
Three years ago, only 34 Black women founders had ever raised at least $1 million in venture capital, according to data from Digitalundivided, a Newark, New Jersey-based startup aimed at promoting economic growth in Black and Latinx communities. In 2020, that number jumped to 93.
Progress, right? Hamilton is wary. Much of the recent attention on Black female entrepreneurs, she said, stems from corporate responses to last year's Black Lives Matter protests--and it's too early to gauge whether the momentum is sustainable. "A hundred [Black women] can fill one side of one room. I'm not excited about that," Hamilton said. "There's a lot to be done, and there's a lot of respect that needs to come our way faster."
The $1 million benchmark can also be misleading. Startup founders need investors who can support and even mentor them, and investors need to put in that work over time, Case said. Writing the check should be the beginning of the journey, not the end.
"I hope that one day, Backstage is put out of business because we no longer have to exist in the world," Hamilton said. "Because there's no longer this difference between unrepresented and not. There's just represented."