How to improve diversity at the enterprise level? Invest in Black-led firms

I recently worked on research that revealed Black founders in the United States receive only about 1% of the money invested annually by venture capital investors. This is disturbing on so many levels. It is especially disheartening when I consider how much of my day is fueled by startups. I check my social media first thing. Startup. I get my chai tea from, yes, a startup. When I need a ride, I’m off in a car from my ridesharing app. Startup.

These startups began with venture capital, capital that Black business owners are not getting. Capital that leaves Black-owned businesses starting at a disadvantage if they don’t have access to these funds.

The implications are massive. This lack of capital prevents Black-owned businesses from scaling and reaching their full potential. Thus, the lack of venture capital is catastrophic for Black business owners, their families and communities and the U.S. economy. Based on Accenture’s economic modeling analysis, the US lost up to $67 billion in business opportunities between 2016 and 2020.

We need a course correction. We need this money to contribute to the economy and by extension, to many of our poorest communities. Venture capital is an essential source of employment, innovation and economic growth. Greater representation of Black founders in venture capital could help create new sources of generational wealth. More equitable investment would also reduce biases in technology, as tech investments dominate the VC landscape (78% of all investments in 2019).

And our research found we can close this venture capital gap within 30 years—yes, that’s a best-case scenario—if we act boldly, right now.

This is critical for so many reasons. And if we want diversity at the enterprise level, we’ve got to consider inclusion earlier in the process, begin at the beginning, so we don’t have these problems further downstream.

But how? Here are a few crucial steps we can take inspired by our research:

Support Black founders in pre-series stages

This means increasing awareness, visibility and equity of investments in Black founders. Elevate the Black founder pipeline and increase diversity among venture capital decision-makers. One approach? Create targeted investments that direct funds to Black founders in areas that investors care most about. For example, Surdna Foundation established an $18 million fund to address economic, cultural, and environmental challenges, supporting Surdna’s mission of fostering sustainable communities.

Support Black founders throughout funding stages (A through D+)

Our research shows only five Black founders have progressed to Series D+ from 2016 to 2020. A targeted strategy can work here as well. For example, venture capitalists focusing on Black founders could equalize funding at each stage, enhancing the business capacity of Black founders. They can also provide education, networking opportunities and mentoring, and expand sources of capital to Black founders.

Engage corporate venture capital decision-makers

Large corporations are already playing an integral role in helping startups scale. And research has shown that diversity improves and strengthens financial performance at the individual portfolio-company level and fund returns. They can commit to diversifying those investments to co-create and drive value for customers and clients. Accenture’s Black Founders Development Program seeks to do this. It helps Black entrepreneurs advance and grow their technology businesses through access to venture capital, corporate membership and strategic connections with Accenture’s business partners, clients and people.

Name it, claim it, change it

How much will it cost to close this parity gap in 30 years? By our calculations, it will take $1.4 trillion. Is that figure daunting? Sure. But it’s real. Consider that the US saw $50 billion pledged to racial justice over a few months. That level of engagement could get us more than two years down the path to reaching parity in 30.

Here’s one hypothetical course of action showing what an accelerated path to parity could look like. First, between 2022 to 2027, investors need to fund an additional 373 Black-founded companies with an average deal size of $75 million. Next, investors would fund 700 Black-founded companies from 2027 to 2032 with an average investment of $500 million. Finally, from 2032 to 2052, it would take around 1,022 Black-founded companies with an average deal size of $1 billion to equalize the playing field. Difficult? Sure. Do-able? Absolutely.

Make a difference

Venture capital investors put some $150 billion into startups in 2020, a 7% increase from 2019. Yet the venture capital funding gap is growing. Say “Enough.” Commit to closing the gap. It’s possible with targeted actions like widening the Black founder pipeline, equalizing funding at each funding stage and scaling the business capacity of Black-led firms. The sooner investments are made, the faster society will reap the benefits.

Once we commit to making a change and start making those changes, efforts to close the funding gaps between Black and non-Black founders will gain momentum. We will have more black investors, more Black-founded companies, more black fund managers—more representation that allows us to work meaningfully to level the playing field.  Eventually, these companies will grow into bigger companies with diverse workplaces. Then, there’s a chance to use this novel strategy to solve the talent crisis soon.

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To intensify the already devastating toll that the pandemic has had on the talent shortages, there is also less tolerance for people to continue to work in toxic environments, where their needs aren’t being met.  In fact, black entrepreneurship is on the rise, which signals that Black workers aren’t looking for a way out. They are looking for a way in. A way into meaningful work, with equitable compensation, and places where they feel they belong. As Rosanna Durruthy shared in her recent Fast Company article, we’ve seen Black professionals turn toward entrepreneurship at unprecedented rates. The number of African American business owners in operation surged to almost 1.5 million in August 2021—up 38% from February 2020. According to another analysis, there are 30% more Black-owned businesses in the US than before the pandemic.

With this abundance of talent and a commitment to closing the gap, I look forward to the day when I can browse social media, order my chai tea or hail a ride-sharing company—all powered by Black-owned startups.