Making the business and social case for banks and venture capitalists working together with the underrepresented but promising new faces of startups
The current data on where seed funding flows today suggests we are still misreading a crucial census trend and therefore missing investment opportunities. The message? The racial makeup of America’s most powerful and innovative demographic age group, Gen Z, has shifted significantly, yet most investors continue to do business as usual. This oversight is concerning.
Despite the fact that ethnic Gen Z Americans are breaking even in number with their White counterpart and that there has been an explosion of buying power by ethnic Americans, a McKinsey study reveals a stark disparity in U.S. venture capital (VC) funding: minority startup founders received only a fraction of U.S. VC funding. Only 1% and 1.5% of VC dollars go to Black and Latine founders, respectively, while Asian American and Pacific Islander founders struggle against funding barriers, especially in the tech startup space.
How about women founders? Only 1.9% of VC funds went to women-owned startups according to the same McKinsey study, despite the fact that nearly 40% of American businesses are owned by women today and that women-owned businesses increased by14% from 2019 to 2023.
This funding trajectory has veered off course and needs course correction. A thriving economy hinges on innovation, and startups are the cradle for such innovation. While VC funding has historically nurtured countless ideas into essential, life-changing startups, this time around, we seem to be missing the rising tide of innovative ventures spurred by the neglected half of our population – whether defined by race or gender. Today, the combined economic influence of minority and women-owned startups highlights the shifting demographics and underpins evolving consumer trends. The stakes are high. Neglecting their funding can jeopardize our economic future.
New York City, one of the most important destinations for tech startups and the second in the nation to attract venture capital investment in AI, calls for diversity in VC in order to boost innovation and economic opportunities. McKinsey experts refer to the underrepresented minority and women-owned startups in the nation as an underestimated powerhouses and urge more access to funding to unlock massive investment and innovation opportunities.
However, the flow of capital to underrepresented startups is challenging. These startups can be too early-stage or be considered too small for the VC arms of many banks, or too esoteric and unfamiliar to conventional VC investors. The reality is – VC investments tend to reflect the investors’ own demographics. The result? As of 2023, 98% of VC assets under management were still controlled by white men, driving 77% of VC dollars to white male founders.
When women-led ventures do get funding, gender gap shows up in a different way. Generally, due to factors including gender bias among investors, female founders receive approximately a quarter of the amount of funding they seek, while their male counterparts receive half, on average, according to a study by Harvard University.
It will take alternative and innovative approaches to break this pattern. A few factors are essential to break into the niche segment of the underrepresented innovation economy and nurture it into tomorrow’s mainstream. Both startups and VC firms trying to service them understand the economic power of a collaborative approach. Banks have an important role to play, especially at a time when many VC firms as well as their portfolio companies undergo multipronged stresses exacerbated by the 2023 VC turbulence in Silicon Valley and the nationwide aftershocks.
When banks and VC firms collaborate, underrepresented startups gain broader access to capital through a range of banking products including banking services tailored to startups and early-stage businesses, venture debt, and other credit products. Additionally, VC firms can also leverage banking partners’ expertise in risk mitigation, capital call lending to speed up and ease deal execution, and access to other growth opportunities. This collaboration can also foster networking and partnership opportunities with banking clients, enhancing the startup ecosystem’s support infrastructure.
“Following the turmoil triggered by Silicon Valley Bank’s fallout, we’ve heard ongoing concerns that smaller funds and startups, often led by women and minority founders, are being overlooked by large banks,” said Wendy Cai-Lee, founder and CEO of New York-based Piermont Bank, which has intensified its efforts to bridge the funding gap for minority and women founders. “In addition to working with multiple startups, we’ve also invested more resources into capital call lending for smaller funds, with a strategic outreach focusing on funds managed by women and minority founders.” She explained. Piermont also doubled down its commitment to lending to women and minority founders.
Similar to Piermont Bank, some commercial banks have experience working with minority and women-owned businesses and continue to enable their growth and innovation. In the case of Piermont Bank, one of only four multiracial Minority Depository Institutions in the country, it has extended over 50% of its loans to businesses in low to mid-level income communities and women and minority-owned businesses. These banks own valuable and trusted relationships with innovative and hardworking business owners and have proximity to a diverse and rapidly growing communities that yields significant purchasing power, fertile soil to birth startups.
Piermont, for example, recently expanded a $10 million line of credit to a tech-empowered commercial real estate investment fund led by an Asian American female founder. This banking product helped the fund to grow and expand its footprint in fast-growing but underserved markets.
Collaborative initiatives between banks and VC funds leverage each other’s resources to better serve underrepresented startup founders. Together, we shape better pathways for capital to flow toward the burgeoning innovation economy of today.