Even before the racial reckoning of 2020, the lack of diversity in venture capital was a widely known problem. A 2018 study by The Information found that of the 102 largest venture capital firms in the U.S., only seven had Black people in decision-making positions. Another study conducted by Silicon Valley Bank found that Black startup founders received only one percent of funding from VC. As a result, underrepresented founders are often left seeking non-traditional ways to raise capital.
With recent changes by the Securities and Exchange Commission (SEC) to regulate startup and private investing, and a few noteworthy raises from founders of color, regulation crowdfunding could become a more popular means of raising capital for some startups.The foundation for crowdfunding investment today stems from the 2012 passing of the Jumpstart Our Business Startups (JOBS) Act. The legislation is a benefit to platforms like Republic, a crowdfunding platform where more than $500 million in capital had been raised from individual investors into private companies between the passage of the law and Nov. 2020.
The maximum amount that could be raised through a regulation crowdfunding campaign was $1.07 million over 12 months. It has increased to $5 million this March. About 5 percent of the startup founders that are raising money on WeFunder are Black, according to the crowdfunding platform. Johnny Price, WeFunder's director of fundraising, said the company still has work to do when it comes to diversity but noted they're still pacing better than traditional VC when it comes to working with founders of color.
One of the things we're excited about with this democratic approach to raising capital is that it will make it easier for underrepresented founders, be they Black founders, female founders, or founders in Tennessee versus New York and California, Price told The Plug.If you can say the people that are going to make the investment decisions are ordinary Americans, and maybe they are women of color that don't live in San Francisco, then that's going to enable us to get more capital flowing to founders that have historically been underrepresented, Price said. Since 2012 WeFunder has helped founders raise $250 million to date. The platform takes a 7.5 percent fee on funds raised on successful campaigns. While the average company raises about $350,000 on WeFunder, there have been exceptions. In 2019, Maxeme Tuchman, co-founder of Caribu, a video-calling platform for kids, became the first Latina founder to raise $1 million through crowdfunding.
Raising funds as a Latina is challenging. The odds were not in my favor, and they still aren't, Tuchman told Google. Over the years, I've had plenty of investors advise me to just give up. It was never because they thought it was a bad idea, they just weren't willing to take a risk on someone who didn't fit their preconceived mold of a successful entrepreneur, Tuchman said.In 2019, Dawn Dickson of PopCom, became the first woman to raise more than $1 million in an equity crowdfunding campaign on StartEngine. She has since hosted another successful Reg-CF campaign and is currently running a Reg-A campaign through StartEngine.Dickson currently mentors founders on an individual basis, but said she eventually plans to launch CrowdCoach, a comprehensive equity crowdfunding course led by highly experienced coaches.
Every single day of my life, someone reaches out to me and asks me for advice about crowdfunding, Dickson told The Plug. Nothing really existed that targeted our community. Crowdfunding company Republic has also had a few founders of color reach this milestone. Fleeting, a platform created to manage trucking fleets, and Blue, a smart business card and mobile app are backed by the first Black man and first Latinx, respectively, to raise $1 million through regulation crowdfunding.
These founders of color don't represent the normal raise for startups through regulation crowdfunding, but Price believes their visibility might inspire others to raise capital this way. Still, diversity in investment crowdfunding must contend with the racial wealth gap and the fact that many investors still might not come from diverse backgrounds. Pialy Aditya, Republic's chief strategy officer, points to Arlan Hamilton's recent $1.1 million raise in just nine hours as an example of a raise that included diverse investors. Using Republic's platform in February, Backstage Capital opened a new fund and exceeded their $100,000 goal through regulation crowdfunding.
Over 3,000 investors have contributed to the round, final numbers on the number of women investors won't be available until after the campaign has ended in May. Hamilton, who previously told The Plug that she viewed crowdfunding as the future, said she was motivated to open the fund and open opportunities for wealth to a larger community, rather than the few traditional VCs. Although she declined to go into specifics about Backstage's plans to utilize regulation crowdfunding, she said the company has every reason to continue to use crowdfunding as part of [its] toolkit.