Rebecca Kacaba, CEO & Co-Founder of DealMaker
An illusion in the startup world is that anyone can have a great idea and bring it to fruition with grit, determination, and a lot of hard work. A key part of bringing a founder’s vision to life is securing funding in order to build the product, app, or service. Without capital, the founder’s vision will forever remain only a vision.
So raising capital is tantamount to success. It’s never just been about grit and a good idea. Connections, networking, and getting in front of the right people are all key to getting your idea off the ground.
And after you’ve made these connections and gotten in front of the right people - then what? Does the funding go to the best idea or the strongest founder with the most solid plan?
Statistically speaking, that’s not always the case.
In 2021, female founders got 2% of all venture capital (VC) dollars - which was the lowest percentage since 2016. And since 2011, the highest that statistic has ever been was 2.7%.
And not only are female founders getting just the tiniest sliver of the VC pie, but the check sizes are also smaller (by about 20%) when compared to similar valuations of male-led startups.
VC firms are making improvements year-over-year, and if we look at startups with a sole female founder AND a co-founder that is female, the share of funding jumps up to 17.6% in 2021. This is much better, but still lagging other industries on inclusion and equity metrics.
Let’s take a look at minorities and POC founders: according to a Crunchbase study, in 2020 Black and Latinx founders only represented 2.6% of all VC funding ($2.3Bn).
So overall, the record for VC funding doesn’t look that impressive for POC or female founders - as neither have ever gotten more than a 2.7% share of the total funding pie. And while there are many VC firms that are specifically focused on bridging this gap, as an industry, VC firms are still lagging behind banking, lending, and other financial markets - by a mile.
Opening the Pre-IPO Markets
Now a material change that has improved these trends is the advent of Equity Crowdfunding (ECF) primarily via Reg CF and Reg A+.
ECF basically sells your pre-IPO deal to the crowd (the public). The JOBS Act provided exemptions to the ‘accredited investor’ requirement in 2015, and this change has enabled founders that didn’t qualify for VC money to find a new source of capital. Non-accredited investors are your customers, your fans, and the general public.
So, if you’ve built a following and are mid-growth and need to raise capital - you don’t have to give away control and equity to a VC firm. Conversely, if you don’t even get a meeting with a VC firm - you still have an incredible tool at your disposal to raise funds with the crowd.
And this new phenomenon has had a material impact on female and minority founders.
According to KingsCrowd data, looking at Reg A & Reg CF deals since 2020 - here is the comparison:
Startups with female founders represent between 10% and 15% of dollars invested in all Equity Crowdfunded deals since July 2020.
Going from 2.7% to 28% is a material improvement in access to capital for founders of color. Crowdfunding your investors is truly democratizing access to capital for founders who previously could not get access to raising capital by going the traditional VC route.
And Equity Crowdfunding is just really getting off of the ground. The first full year it was available was 2017, since then it’s grown from $49.2M total raised to over $507M in 2021.
But there’s more.
Not only is crowdfunding raising capital for founders that were under-represented via traditional funding options - it’s also creating a really interesting new phenomenon of “Impact Investing”.
The data shows us that the public (i.e.: the crowd) is more likely to invest in a great idea - regardless of the founder’s sex or ethnicity - but the crowd also chooses investments based on their social impact for good.
VC firms want returns and term sheets while the public wants to invest in companies that make the world a better place.
Social impact companies represent about 25% of the funding raised via Equity Crowdfunding for the first half of 2022.
This trend is largely a generational one - as the Boomers retire and make fewer investment decisions (and more liquidation ones), Gen X and Millennials are representing a large and socially/environmentally conscious generation, and impact investing is expected to reach the mainstream.
A 2021 study conducted by Fidelity Charitable reports:
• 61% of millennials are active impact investors vs. 23% of baby boomers
• 62% of millennials say impact investing has a higher potential to create long-term change vs. 28% of baby boomers
• 66% of millennials believe in the financial viability of impact investing vs. 23% of baby boomers
In the first six months of 2022, more than 25% of dollars invested in ECF deals went to a socially impactful startup.
By contrast, only 8% of VC funding went to impact startups.
Both inclusion and impact investing trends cannot be over-emphasized when it comes to the material change that ECF is making in the capital markets space. Where VC firms are protecting their own interests and their investments (as they should), Crowdfunded deals are protecting access to capital for anyone overlooked by traditional firms WHILE skewing to innovation that improves the human condition.
As a capital markets professional for 20 years, now it finally seems to be the time when anyone with a good idea or who truly wants to make an impact in the world can get access to capital with a community ready to stand behind them and their journey.
Join me in November as I deliver a keynote address at the 2022 Equity Crowdfunding Week conference to learn more or follow me on Twitter @Rkacaba.
1. Is the issue that not enough startups have female founders and POC at the helm? My suggestion to both VC and ECF data analysts is to collect pitch data too - what is the percent that are turned away/don’t qualify as a metric for inclusion. For instance, if VC firms turn away the same percentage of male founders as they do female founders, that would show that we simply need more female founders in the pool, versus an inequity trend.