Venture capital funding for black business owners is disproportionately low, with a mere 0.48% of funds raised in 2023 ultimately allocated to Black founders. With funding for Black founders on a steady decline, Illumen Capital founder and managing director Daryn Dodson joins Wealth! to discuss this disparity in more detail.

Dodson attributes the dwindling funding to the "implicit biases" that persist in the industry, noting that "a lot of people are overlooking and underestimating this really important market." He advises minority business owners to invest in fund managers who can "address biases in financial markets," thereby creating economic value and unlocking opportunities within this segment.

Dodson emphasizes the importance of awareness and preparedness, saying, "I think it's really important to be informed about the biases that they might face when they pitch, especially when they outperform." He adds, "We see that there's a lot of work to do for asset allocators too to address their biases."

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This post was written by Angel Smith

Video Transcript

$136 billion of total venture capital funding was raised in 2023 of that funding black founders received less than half a percent of the funds allocated.

That's down from 1% in 2022 and 1.3% in 2021.

According to Crunch based data, with funding for black founders on a steady decline.

What does this mean for new business owners?

For more?

We have D Dotson founder and managing director of a woman capital A VC Fund of fund focused on bridging racial and gender bias d in a pretty stark drop there.

Why is this type of funding on the decline?

Well, one of the reasons why this funding is on a decline, we believe that our looming capital is because of implicit biases that face Black and Latino entrepreneurs.

Despite the incredible growth trends in terms of their buying power is uh business owners as well as as demographics of people.

We think that a lot of people are overlooking and underestimating this really important market.

What's the long term impact on this type of bias in the VC space?

Well, you, you know Charlie Munger had a saying that compounding knowledge is followed by compounding returns.

And one of the things that we find is that the long term impact of biases prevents compounding returns over a long period of time.

What we do is we focus on working with investors and uh investing in fund managers that then go on and compound knowledge around addressing biases in financial markets.

We're not the first ones to do this.

Actually, Daniel Conman won the Nobel Prize in this area um of addressing biases and looking at the ways in which addressing these biases create economic value.

So lumen is focused specifically on investing in diverse businesses with underrepresented founders.

What do you look for when it comes to those founders, when it comes to those companies, when choosing who to invest in?

Well, one of the things we look for is the out performance of fund managers and companies that are led by women and people of color partially because they make up only 1.3% of $82 trillion in capital.

Whereas the demographics of these uh folks is much larger.

In addition to that, we published our own research in collaboration with Stanford Spark.

Uh a really important think do take at Stanford and what we found is that the hire that black fund managers perform the more bias they face.

So that means that much of the market is missing outperforming entrepreneurs and out performing fund managers when tested against their peers uh that aren't black.

So we believe there's a massive uh investment opportunity there.

And the data suggests that as well and what resources are there for black entrepreneurs who are struggling with funding?

Well, one of the things they could do is read our, our paper and not only them, but those that are searching for market rate returns across uh the market and latent value in the market.

So I think it's really important to be informed about the biases that they might face when they pitch, especially when they outperform that uh those that are allocating capital have uh oftentimes unintentionally, these are, these are implicit biases in many cases, but nonetheless, they create material outcomes.

And when we, when we think about the pension funds, the sovereign wealth funds, the university endowment managers that we tested in this study, and we found that systematically they overlook the out performance of black managers.

We see that there's a lot of work to do for asset allocators to also uh address their biases and for VC firms that wanna boost their diversity investments.

What's a good first step to correcting some of that bias?

One of the things that they can do is look at their hiring promotion, retention, and distraction of talent processes.

And they can look at systematic rubrics for making sure that they're addressing these biases and not asking different questions, for example, to women and people of color than they asked to other candidates in the application process, which we find again is systematic throughout the process.

And one of the things that leads to bad investing and also uh missing tremendous economic opportunities.

If we look at the investment process, in addition to the hiring process, we also see that these biases can be exasperated and because uh being second best in venture capital can be a significant impact on returns.

We think it's really important.

They address these selection biases when race or gender is present in the leadership of companies and treat them similarly to the other companies that they select Darren Dodson Alumen capital, founder and managing director.

Thank you so much for joining us today.

Really appreciate it.

Have a great day.