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VC funding for Black startups dropped sharply nationwide. It’s even worse in the Bay Area

man sitting on rock
Trevor Parham, co-founder and general partner of Oakland Black Business Fund, has seen the wave of investment in Black businesses subside over the past year. | Source: Courtesy Todd Johnson

Funding to San Francisco Bay Area startups with Black founders has continued its sharp downward tumble from the $1.7 billion peak reached in 2021 in the wake of a massive racial justice movement sparked by George Floyd’s killing. 

In 2023 alone, venture capital funding to Black founders in the Bay fell 78% from $895 million to $198 million, according to data from Crunchbase, which tracks venture capital funding. The number represents an 88% decline since 2021.

That decline is striking in the VC capital of the world, outstripping the already steep 71% year-over-year decline in funding to Black-founded startups nationwide and more than doubling the 37% drop in funding to all U.S. startups.

Across the country, Black-founded startups received less than 0.5% of the $140.4 billion in total venture funding directed to startups in 2023. As a point of reference, Black people make up around 13% of the country’s population. 

Trevor Parham, co-founder and general partner of Oakland Black Business Fund, a grantmaking organization for Black entrepreneurs started in 2020, said he’s not surprised by the drop-off. 

“Frankly, it was the result of a fad of investing that was seen as PR and marketing but not about validating a true value proposition that these Black businesses had,” Parham told The Standard.

He said the trend line parallels other inequities in the business landscape. Parham pointed to statistics showing, compared with white-owned companies, Black businesses were half as likely to successfully access lines of credit during the pandemic and were twice as likely to fail. 

The dramatic decrease in funding dovetails with growing backlash to diversity initiatives that gained popularity in the immediate aftermath of Floyd’s killing in May 2020 and widespread protests for racial justice.  

Parham said one major example in this reversal was the legal action taken against the Fearless Fund, an Atlanta-based organization focused on early-stage funding and providing grants to women of color entrepreneurs. Last year, anti-affirmative action activists sued the organization, arguing that the fund’s strategy was discriminatory. 

In a February interview with Inc. Magazine, Fearless Fund CEO Arian Simone said the lawsuits have forced the organization to shrink significantly and hampered its ability to raise capital.

“It all fell apart due to litigation,” Simone said. “You’re talking millions of dollars we’ve lost, and it’s truly impacting our operations.”

That chilling effect has spread even to organizations not directly facing lawsuits. Parham said corporate and philanthropic partners who previously supported the Oakland Black Business Fund have pulled back, some specifically citing the legal challenges to the Fearless Fund as reasons behind the rethink.

“We’ve followed the same trend overall, we got a lot of excitement and interest for a year to a year and a half when racial equity was a hot topic,” Parham said. “Now … this approach is being actively called discriminatory. It just sort of bookends the fad.”

Chris Metinko, a senior reporter for Crunchbase News, told The Standard that marginalized groups have historically been disproportionately impacted by slowdowns in the venture capital industry. 

“When there’s a pullback or slowdown in the market, I do believe that people are going to look at investments they feel most comfortable with,” Metinko said. “Unfortunately, that sometimes means a certain look or a certain education to an individual.”

Black-founded startups nationwide saw a funding peak of $4.9 billion in 2021. Bay Area-based businesses were major beneficiaries of that interest.

Last year, however, the nationwide number fell to $705 million, the lowest figure since 2016.

There have been efforts to diversify the ranks of venture capital firms, but the numbers remain low. A 2023 survey of the industry from Deloitte and the National Venture Capital Association found that Black employees made up just 5% of the VC workforce, compared with 70% who are white and 22% who are Asian or Pacific Islanders. 

Crunchbase data shows that later-stage growth rounds have taken the biggest hit from the slump. That difficulty is compounded for Black founders.

James Norman, the CEO of video analytics company Pilotly, said Black founders typically have a tougher time raising money from large-scale institutions, and in downturns, smaller funds have a tendency to clam up.  

“If you’re going to see the average founder being in a challenging market, the challenge is going to be two times that for a Black founder,” Norman said. 

He added much of the activity of larger funds has been on the continuing support of their existing portfolio, meaning those locked out at the ground level are further disadvantaged.  

In response to that funding gap, Norman co-founded Black Operator Ventures, a seed fund meant specifically to support Black founders. The argument the fund makes to its partners is less focused on impact or altruism, but instead on the economic opportunities that come from investing in an underserved market. 

Metinko said there have been more than 20 funding rounds greater than $100 million this February alone. As a point of comparison, he noted that over the entirety of 2023, only one Black founder was able to raise a round of similar size.

“Those numbers show there’s an obvious misalignment somewhere along the line,” Metinko said.  

Kevin Truong can be reached at kevin@sfstandard.com