Long before the ubiquity of Covid-19, Tiffany Dufu had plans to kick off a seed round in March 2020. Then the pandemic hit and both she and her husband contracted the virus.
While juggling childcare responsibilities and an illness that has claimed the lives of about 200,000 people in the U.S., the mother of two and the founder of The Cru, a peer coaching service for women, scheduled video sessions with hundreds of investors, taking ten-minute naps in between calls.
“I knew it would be a daunting task but the reality was that we weren’t yet at a place of cash flow break-even and I needed to raise more capital to ensure the sustainability and the health of my business,” says Dufu, who closed a nearly $2 million seed round in July, led by the early-stage venture firm Alpine Meridian and Bloomberg Beta.
For Dufu, who raised a $1 million round in 2019 and already had a solid network of investors with a vested interest in her company, her fundraising experience was on par—or even better—than the ordeal for most female founders, who now face greater headwinds due to Covid-19.
Since the onset of the pandemic, female founders, particularly those of color, report lower capital buffers and a higher likelihood of pausing prior plans to raise capital, according to a recent survey of early-stage founders by the advocacy group All Raise.
“Women don’t have access to the same opportunities for raising capital and they entered this pandemic in a capital deficient modality,” says All Raise CEO Pam Kostka. “As a result, they have substantially less runway to figure things out, make mistakes and weather storms.”
Just 26% of female founders report having at least 12 months of runway, compared to 38% of male founders. That number drops to 19% for female founders of color. Dufu, a Black female founder, says she had five months of runway in February 2020.
Women entrepreneurs have long faced barriers to raising capital, but 2019 saw a record number of female-founded startups land deals and reach billion dollar valuations. With the emergence of the coronavirus at the top of the year, advocates and underrepresented founders warned of a gender regression on what had been slow but still considerable progress in the VC world, as investors adopted a more risk-averse approach to capital deployment and doubled down on their current portfolios and networks amid shelter-in-place orders and travel restrictions.
“In the near term, there’s been this sense of hunkering down and supporting your existing portfolio companies. But there are also people saying, ‘Yeah, I’ll take that Zoom call and maybe I’ll invest in this person because my friend tells me that they’re great,’” says Jenny Abramson, founder and managing partner of Rethink Impact, a venture capital firm that invests in female leaders.
This new normal could also have the opposite effect, she says, and investors may soon realize that they have to intentionally broaden their networks and hire diverse talent in order to remain competitive, given their limited mobility. “The pandemic made the fundraising process far more efficient because everyone was meeting over Zoom and you could schedule 30 or 40-minute calls back-to-back,” Dufu says.
Industry-wide, VC firms scaled back their investment pace during the first half of 2020, and although most early-stage founders can attest to feeling the capital crunch, women have shouldered a disproportionate burden. Overall deal activity for female-founded companies has declined in 2020, with women founders receiving 4.3% of venture deals in the first quarter, down from 7.1% in the first quarter of 2019.
After a year of some forward momentum in the VC space, these numbers are discouraging for female founders, and even more so for founders of color who receive less than 1% of all venture capital investment. About 14% of founders of color started the year expecting to fundraise but have since scrapped those plans, versus 7% of white founders, according to the All Raise survey. Kotska says this is the wrong response.
“We’re in a moment where we need to drive change and so we need entrepreneurs coming forward with their innovation and ideas, and we need [investors] to meet them. This a two way street.”
After the death of George Floyd, some investors have become motivated to seek out underrepresented founders and create or amplify diversity and inclusion practices. Firms like Sequoia Capital and Benchmark publicly pledged to ramp up their support of Black founders, while others like SoftBank and Andreessen Horowitz dedicated new venture funds to invest in startups led by Black and brown entrepreneurs. Earlier this month, GGV capital led a $5.25 million Series A for Valence, a professional network that connects Black entrepreneurs to partners at firms like Greylock and Upfront Ventures.
“Investors are realizing that entrepreneurs who have been under-invested in can drive financial performance,” says Abramson, whose female-focused venture fund raised $182 million in July, far exceeding its $150 million target.
“Underrepresented founders are disproportionately tackling some of the biggest societal challenges because they see them in their daily lives, and they provide very-of-the moment business opportunities and real value.” Some of those challenges include access to clean drinking water, mental health support and childcare provisions.
Investors are also reading the writing on the wall: By 2030, women are expected to control two-thirds of the nation’s wealth, while people of color are projected to make up the demographic majority by 2045. “With that, you’re getting more and more people saying, ‘Wait a minute, I want to invest in people who represent a range of perspectives on society,’” Abramson says.
The 2008 recession ushered in a wave of digital-first startups, like Uber and Airbnb, that capitalized on the economic climate at the time and helped expand the gig economy. While the current pandemic-related economic downturn shares some similarities to its predecessor, it’s also uniquely different, Kotska says.
“The future Googles and Facebooks are going to emerge from this and we have a unique opportunity to ensure that the funding, founding and scaling of those companies is done with diversity, equity and inclusion built into their very fabric.”
-Ruth Umoh, Forbes Staff