The State of Seed Stage Funding to Underrepresented Founders

By Amber Quiñones & Drew Silverman
August 22, 2023

Founders at BBGV Accelerate, our inaugural summit dedicated to arming underrepresented early-stage founders with the operating tactics to scale.

Since 2014, BBG Ventures has been dedicated to backing overlooked founders—first women, and increasingly racially diverse founders—who are impatient to move the world forward and uniquely qualified to build transformational products for the next generation of consumers, workers, patients, students, and citizens.

Nearly a decade into our work, we’ve found that progress has been slow, considering how chronically underfunded “diverse founders” still are in the VC ecosystem. The stats are staggering: in 2022, women-only led companies received just 1.9% of VC funding (this has stayed between 1.9% and 8% over the past 10 years, generally hovering between 2–3%); all Black-founded companies (irrespective of gender) received only 1% of VC funding; and Fast Company estimates that the combined share of Latina and Black women founders’ venture capital was only slightly over 1%. In contrast, companies with all-white male founding teams received 86.3% of venture dollars at the seed stage.

VC-backed startups are still disproportionately run by men (89.3%) and white people (71.6%), as reported by Diversity VC; however, founding teams with greater gender and ethnic diversity achieve 30 percent higher returns for investors upon exit than their white male founder counterparts.

Image Source: TechCrunch, “Women-founded startups raised 1.9% of all VC funds in 2022, a drop from 2021”, 2023

At a time when VCs focused on underrepresented founders have come under attack, we continue to back not just gender diverse but also racially diverse founders. Our thesis is grounded in the confidence we have that gender and ethnically diverse teams will continue to outperform homogeneous teams and will be uniquely suited to build products that captivate the dominant consumer in America — who is increasingly woman- or nonbinary-identifying and non-white.

With that, we’re launching this first report on Seed Stage Funding to Underrepresented Founders to:

1. Illuminate how the early-stage funding ecosystem in the U.S. is performing for underrepresented and diverse founders—defined for this report as including women-, non-binary-, and BIPOC-identifying individuals;
2. Offer a roadmap to both our check-writing friends in VC and underrepresented founders seeking early-stage funding; and
3. Lead by example and with transparency by diving into BBGV’s own diversity stats.

Our goal is to shine a light on some of the key qualities that enable VC firms to not only count women & BIPOC founders among their ranks, but to genuinely include and support them to strong exits. We also aim to help underrepresented founders identify the investors who truly “walk the walk” on backing founders with new perspectives in the tech ecosystem.

The TL;DR

• Very few seed stage venture capital firms are investing in underrepresented founders. Out of 5,985 VC firms investing at the seed stage, fewer than 45 made ≥49% of their investments in women- and BIPOC-led companies without an explicit mandate to invest in underrepresented founders. When we add in firms with founder diversity investment criteria, we still see that only 5% of active funds are making ≥49% of their investments in underrepresented founders. Women and people of color are the Founding Partners at 74% of these firms. There is significant opportunity for the remaining 95% of seed stage investors to impact these statistics by expanding their pipelines — tapping diverse founders bringing new thinking to sectors where change is overdue.
• In venture capital seed stage investing, companies founded by white women still benefit from the majority of the dollars that flow to underrepresented founders as a whole. White women founded companies comprise 79% of reported early-stage VC dollars going to underrepresented founders and 64% of investments made into companies with underrepresented founders by deal count. Ecosystem-wide, we need to up our game by investing seed money into a broader spectrum of founders of color.

Funders

As of June 1, 2023, there were 5,985 US-based venture capital firms (including Micro VCs and CVCs) on Crunchbase which are focused on seed and early-stage funding for US-based companies.

We specifically looked at the 2,463 firms who have made more than 10 total investments to date to filter out very small firms and those allocating capital less actively.

Of the 2,463 actively investing VCs, there are 111 firms for which ≥49% of their investments have at least one diverse founder. That’s only 5% of seed stage firms. By not investing more intentionally in diverse founders, the vast majority of VC firms are missing out on outstanding opportunities for returns from companies like Zola, Spring Health, The Mom Project, LaunchDarkly, Calendly, Vanta, Guild, Maven Clinic, Esusu, Cityblock Health, Skims, HoneyBook, Divvy Homes, Eventbrite, Careacademy, EverlyWell, and Brightseed — just to name a few.

We took a closer look at the 111 firms for which ≥49% of their investments have been in diverse founders by placing them in two categories: the firms that specifically invest in diverse founders and those that do not include founder diversity in their investment criteria.

46 firms specifically invest in diverse founders. While there are certainly many funds with a small carve out to allocate capital toward underrepresented founders, we focused on the firms that are making diverse founders a part of their DNA and every day investment thesis.

Of these 46 firms, 76% have a woman as one or more of the Founding Partners and 46% have a person of color as one or more of the Founding Partners. Our findings are consistent with Diversity VC’s report that found that firms with a DEI mandate in their investment criteria are more likely to have a female GP. For context, women only represent 8% of US VC firm partners, and just 3% of US venture capital partners are Black.

We then took a closer look at the remaining 65 firms which do not have a diverse or underrepresented founder investment thesis but have made considerable investments into them. Of these 65 firms, 44% have a woman as one or more of the Founding Partners and 33% have a person of color as one or more of the Founding Partners.

One widely accepted interpretation of this data is that when women and people of color are part of the Founding Partnership, there is an increase in the likelihood that a firm will fund diverse founders. This seems to be true even when the fund does not have an explicit mandate to make DEI investments. This has been covered in detail by many including the Harvard Business Review, which wrote that “VC firms with a female partner are more than twice as likely as firms without a female partner to invest in a company with a woman on the management team (34% vs 13%); and they are three times as likely to invest in women CEOs (58% vs 15%).”

Although these 65 firms do not specifically invest in diverse founders, 21 (32%) of them do have certain impact lenses or what can be called an “implicit” impact focus — they may have majority female LP pools, invest in companies that serve overlooked or underserved consumers, invest in companies tackling climate change, work with veterans, or have a carve out for diverse teams, to name a few.

Over the past seven years there has been a material increase in capital raised by firms with an explicit or implicit impact focus. According to a 2022 Harvard Business Review report, VCs are “more aware and more ready to incorporate ESG objectives than ever before” in response to both LP and social pressure to fund new businesses creating a more sustainable and more inclusive future for all.

The Founding Partners at these 21 firms are majority women.

44 firms remain without either an explicit diversity or implicit impact focus. These firms are still making ≥49% of their investments into companies led by diverse founders.

While we are not suggesting that white men do not invest in diverse founders, women and people of color are at the helm of the majority of these firms. Once again, we see that when women and people of color are in the room, there is an increased likelihood that capital flows to more women and people of color.

Below are a few of the firms that stood out in our research as being “diverse founder friendly” by both investing in underrepresented founders and either leading rounds or offering significant support to their portfolios:

Founders

The 2,463 seed stage firms from our original data set have made 181,808 investments to date. We focused on 32,840 of these investments classified as “Diversity Investments” on Crunchbase.

A meager 6% (or $3.17B) of the money deployed as “Diversity Investment” has been disclosed on Crunchbase, so it’s tough to get perfectly accurate numbers here; however:

• Of the reported money invested into companies led by diverse founders in Crunchbase’s all-time data as of June 2023, about 79% of capital went to companies founded by white women.
• When we look at deal count, 73% of all “Diversity Investments” deals are in women, but only 10% are in women of color. White women take home 64% of “Diversity Investments” by deal count.
• When we look at deal count in terms of race, 32% of all “Diversity Investments” deals are in founders of color, but only 30% of those investments are in women of color. Men of color take home 70% of investments in people of color by deal count.

In terms of both deal counts and dollars invested, white women are getting the vast majority, leaving both men and women of color a paltry slice of the pie. Women of color get by far the smallest slice.

BBG Ventures

In an effort to lead by example we are sharing BBG Ventures’ own diversity statistics—from our internal team to the founders, employees, board members, and more that make up our portfolio ecosystem.

BBG Ventures Team

BBG Ventures is women-founded. We have 6 full-time employees, of which 83% are women, 50% are women of color (Black, Latina, and Southeast Asian), and 33% were born outside the U.S. Industry-wide, women make up about 22% of check writers, but at BBGV they make up 100%.

BBG Ventures Founders

There are 62 founders (42 women and 20 men) across the 31 companies in BBGV’s Fund III portfolio. 100% of these portfolio companies have at least one female founder, 74% of companies are led by a woman CEO, and 58% of portfolio founding teams are composed of only female founders. 81% of companies have a founder of color.

BBG Ventures Portfolio Employees

Just over 400 people are employed full-time across the portfolio. 59% of portfolio employees identify as women and 2% of people identify as transgender or non-binary. A whopping 71% of our portfolio companies have majority (≥ 50%) female employee bases.

Our portfolio employee data is yet another example of the positive correlation between investing in more women founders and employing more women at startups. Forbes and HBR have explored this, too, writing that “businesses with female founders build teams with 2.5 times more women, and companies with a female founder and executive hire six times more women than those led by men”. Our portfolio’s gender split means that more women (and diverse employees) are being brought into the high-potential, generational wealth-building world of startups.

62% of people employed full-time across the portfolio identify as people of color and 38% are white. Although having an employee base that is majority minority is commendable, Black people make up only 5.5% of the portfolio’s full-time employees and there are no Native people employed across the portfolio.

One of our portfolio companies skews the portfolio-wide data heavily because it impressively employs over 100 Latinx people. When we remove that company from the data, we get a more normalized breakdown of the demographics across our portfolio.

When we compare these statistics to the 2020 census data (leftmost bar in the charts above) which indicated the U.S. population is 59.3% White, 18.9% Hispanic or Latinx, 13.6% Black, 6.1% Asian, 2.9% Multiracial, 1.3% Native American, and 0.3% Native Hawaiian or Pacific Islander; we see that we have room for improvement. We need to actively help our portfolio companies hire more Black, Latinx, and Native people.

Board Members

There are 76 Board Directors across the 23 companies in the portfolio that have formed a board: 54% of the Directors are women and 39% are people of color. 65% of companies have majority diverse boards, meaning that ≥ 50% of Directors are women or people of color.

These Director statistics are pretty outstanding benchmarked against the Him For Her And Crunchbase 2022 Study Of Gender Diversity On Private Company Boards which states that “nearly a third of the private companies… remain governed entirely by men”.

DEIB Policies

There is a recent industry-wide trend of VC firms incorporating DEIB strategies. Nearly half (46%) of firms surveyed in the 2022 VC Human Capital Survey have a diversity strategy. Implementing a DEIB strategy is important because more diverse, equitable, and inclusive venture capital teams have been shown to consistently outperform, owing to broader networks and more effective decision making. We first wrote our internal DEIB Policy in 2022.

In the past year, we have enacted even more robust policies around bias reduction in investment decisions, formalized employee review processes to increase equity and inclusion and reduce bias in promotion decisions, and updated our hiring process. Moving forward, we commit to publicly publishing our DEIB policy on our website and auditing our new policies to ensure our team grows thoughtfully. Note: one of our LPs, Illumen Capital, has been a driver here. Their focus on educating and holding their GPs accountable is having a real impact.

Currently 13% of BBGV portfolio companies have a formal DEIB Policy in place. BBGV commits to helping our founders craft DEIB policies to ensure that over the next two years, we double the number of portfolio companies with policies in place.

Call to Action

We’d like to close with an invitation to action. Whether you’re an LP, GP, or founder, you can help increase investments to underrepresented founders. When we examine the data, we are reminded that very few firms are meaningfully investing in diverse founders; and white women are benefiting most in the “underrepresented founder,” “impact,” and “diverse investment” space—even so, white women still remain underfunded in comparison to white men, at less than 2% of total capital invested. Seed stage investors especially have our work cut out for us to both deploy capital to founders of color and help them grow their businesses.

LPs:

1. Allocate more money to firms with GPs who are women and people of color, because with them at the helm, it’s more likely that capital will flow to underrepresented founders. A few LPs doing this well are Bank of America, Illumen, Pivotal Ventures, and MassMutual Impact Investing.
2. Explicitly ask that at least part of your deployed capital be allocated to diverse founders. Ask that your GPs report on the founder demographics of their investments.

Seed stage investors:

1. Hire diverse investors and promote them into check writing roles. Make a plan to intentionally increase your firm’s representation of underrepresented individuals, especially at the Partner level. More diverse check writers means more diverse founders.
2. Widen your aperture to source deals outside of your network. Open your deal pipeline to cold outreach and actively meet women and founders of color. Share deal flow with investors focused on backing women and BIPOC founders—both to help all founders maintain diverse cap tables by ensuring underrepresented investors can gain allocation into fast-moving deals and to meet extraordinary diverse founders who you might otherwise overlook. Collaborate with accelerators and founder programs focused on helping early-stage underrepresented founders—such as Google’s Founders Funds, AWS’s Impact Accelerators, and Morgan Stanley Inclusive Ventures Lab.
3. Join values-aligned VC organizations. There are many organizations that promote diversity in startups and venture capital such as Pledge LA, Venture Access Alliance, and DiversityVC.
4. Publish a report showcasing the demographics of your firm, founders, portfolio company employees, and board members. Greater transparency in these diversity stats will help us all hold one another accountable.
5. Integrate DEIB metric tracking and/or Diversity & Inclusion policies into Term Sheets. You can’t change what you don’t track; and we can help all our portfolio companies do better by ensuring they’re tracking DEIB metrics and installing holistic DEIB policies from the early stage. We’ve already seen top tier investors start to adopt this tactic, and we’re excited for it to gain momentum as an industry norm.
6. Institute a thesis and/or mandate to improve diversity at your fund. As we explored in this report, firms with clear investing mandates are the ones most actively moving the needle on capital flow to diverse founders. While this strategy has recently come under fire, BBG Ventures’s own thesis centers around backing diverse founders who build diverse teams. Considering study after study shows that diverse teams outperform gender and racially homogenous teams, it is investors’ fiduciary duty—and in their own interest—to invest in women and people of color founders who historically build those diverse, high-performing teams.

Founders, especially women of color:

1. Continue to seek capital and support from VCs who care. Check out our market map to find great investors, and if you need a kickstart, check out accelerators like Google for Startups, Hearst Lab, and Techstars.
2. Pitch us. If you’re working on a big idea that will reshape the way we live, our inboxes are open. We want to usher in a new wave of transformational change with you.

Methodology: Notes on the Data

The data leveraged in this report originates from our portfolio companies or from Crunchbase. Crunchbase data is sourced from investor portfolio updates, community contributors, AI and machine learning, and Crunchbase data analysts. We recognize that while Crunchbase data offers powerful insights into industry trends, there are gaps. For example, a company may not have founders or leaders listed on its Crunchbase profile, or Crunchbase might not have a gender listed for founders attached to the profile. For our analysis on ecosystem-wide firm leadership demographics and investment theses, we supplemented Crunchbase by referencing company website data, Crunchbase profiles, and other publicly available information to characterize Founding Partners. Below are a few notes to clarify our use of terms surrounding representation in this report:

• Crunchbase introduced their “Diversity Investment” tags in 2020 to identify investments that have been made into companies in Crunchbase’s Diversity Spotlight category which tracks founders’ race, ethnicity, gender, and sexual orientation. “Diverse founders” is a term we use in this report in line with Crunchbase’s reporting nomenclature on “Diversity Investments.”
• As reflected by U.S. Census data collection, “People of Color” includes Black or African American, American Indian or Alaska Native, Asian, Native Hawaiian or Other Pacific Islander, Hispanic or Latino. The term “BIPOC” (an acronym for “Black, Indigenous, and People of Color”) is often used interchangeably with “People of Color” but is meant to specifically center the voices of the Black and Indigenous communities.
• We acknowledge there are many more identities that comprise a fuller picture of “underrepresentation” in venture capital. While BBG Ventures’ investing thesis centers around on women, non-binary, and BIPOC individuals; we aim to be inclusive of and, in the future, measure our impact amongst members of other protected classes across sexual orientation, veteran status, disability status, immigration or citizenship status, age, etc.

Finally, we contacted the Crunchbase team for clarification and definitions of the following terms:

• Crunchbase introduced their Diversity Spotlight / investment tags in 2020. Diversity Spotlight is a feature on Crunchbase that indicates if there is diversity in an organization’s leadership team. For startups, this includes Founders and CEO’s. Leadership from underrepresented backgrounds who want to raise visibility for their companies are able add their data to Crunchbase for free and indicate which diversity spotlight tags are relevant.
• “Diversity Investments” are investments that have been made into companies in Crunchbase’s Diversity Spotlight category. Diversity Spotlight reflects the types of diversity represented in an organization. You’ll notice we have two variations for each diversity option: “Led” and “Founded.”
• “Founded” refers to at least one of the founding members of the company identifies as one of the listed underrepresented groups (ie, Hispanic/Latinx Founded—a Hispanic/Latinx person founded the company).” More info here.
• “Early Stage Venture” is used for companies that have a Series B or earlier as their most recently completed funding round.
• “Micro VC”: Crunchbase does “not have an independent definition for Micro VC, it is defined generally as ‘money invested to seed early-stage emerging companies with amounts of finance that is typically less than that of traditional venture capital’—meaning Micro VC firms typically invest in companies at very early stages and typically invest between $500,000–$5,000,000.”

About BBGV

BBG Ventures is a seed and pre-seed venture fund leading investments in female & diverse founders who are uniquely qualified to build for our polycultural future—it was one of the first funds to put a stake in the ground around this thesis in 2014. These founders are bringing new thinking to sectors where change is overdue, such as healthcare, future of work, fintech, climate and consumer, solving problems for millions of Americans via B2B and B2C business models. BBG Ventures has invested in over 100 female-led companies over three funds. 100% of Fund III companies have a female founder; and 81% have a founder of color.