Latinx-founded companies are growing fast, but many lack the crucial leverage of early-stage funding – a mechanism that can fuel rapid scaling – during their critical, early years of operation. And although the total allocation of Latinx-founded businesses has grown considerably in the U.S., from $1.7 billion in 2017 to $6.8 billion in 2021, according to Crunchbase, the proliferation of these startups appears to far outpace their access to capital.
For example, research from Bain & Company found that while new Latinx small businesses make up 50% of the new small businesses in the U.S., these startups only have a 1% share of the investments from the top-25 private equity and venture capital firms.
This lack of private equity is further compounded by the fact that 90% of Latinx-founded small businesses cannot access government-funded aid, and 63% of them require the usage of personal savings or credit cards to fuel their start – a strategy that places the founder’s personal money at risk, according to the Latino Community Foundation.
Data shows that even after accounting for credit risk, Latinx-led businesses are getting short-changed. The Federal Reserve Bank of New York, for instance, demonstrated in its 2021 Report on Firms Owned by People of Color that only 25% of Latinx-owned firms with low credit risk received all the non-emergency funding they sought, compared to 48% of white-owned firms with similarly low credit risk. That same report held that the Latinx startup owners with the lowest credit risk “were approved for full financing at nearly the same rate as high to medium credit risk white-owned firms.”
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Send in the venture capitalists
Beyond government aid, personal savings, credit cards, and bank loans, few options remain to fund early-stage businesses that otherwise possess attractive, long-term growth potential. One of the most prominent, popular, and perhaps essential choices lies in venture capital, in which early-stage investors gain equity, or an ownership stake, in exchange for providing capital support as the company develops.
While this type of funding can help immensely, non-white people have not only been under-supported, but they have been heavily underrepresented at venture capital firms.
In a 2020 survey conducted by the National Venture Capital Association and Deloitte, non-whites represented only 22% of U.S.-based venture capital partners, of which Hispanic and Latinx employees made up a mere 4%.
Seeking equitable funding
With all these factors stacked against Latinx founders, the startup space may start to look grim. To get a better perspective on these issues, LABS spoke with a representative of Latinx VC, a non-profit seeking to shift these trends in favor of Latinx business owners.
Noramay Cadena, co-founder and board member of Latinx VC, is working to increase the ecosystem of Latinx funders and founders. She mainly targets growing the pool of Latinx fund managers, like herself, who in turn lend to increasingly diverse businesses. “Research shows that the more diverse a check-writing partner is, the more diverse their investments will be. Women invest in women, for example, two to five times more often,” said Cadena.
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To highlight why the U.S. needs more diverse venture capital champions, Cadena recounted aspects of her early introduction to the venture capital scene:
Living at the intersection of innovation, equity, and impact for all of her career, Cadena originally hailed from a mechanical engineering and aerospace background. During that time, she thought the disparity between Latinx and their white counterparts couldn’t get any worse than what she experienced in those fields, which she found to be incredibly homogeneous.
Nevertheless, when she finally moved into venture capital in 2015, she discovered it certainly could get worse; at the time, she recalled being able to count the total number of Latina women in venture capital in the U.S. on a single hand.
Cadena believes that these issues of inequality in venture capital are systemic: “I do think it’s a very insular community,” Cadena said. “Venture capital has a history of relying on warm introductions, so the same networks and communities are self-perpetuated.”
This clear imbalance in the industry compelled her to stay, be out and proud, and continue to advocate for seats at the table.
The future of funding
When asked about the future, Cadena remained highly positive.
In addition to her optimism, Cadena shared an encouraging anecdote, which placed a bright spin on the outlook for Latinx venture capital. She described an Oakland event she hosted in 2019 in partnership with the Hispanic Heritage Foundation that showcased Latinx who were running their own venture capital firms. Eleven Latinx VCs attended, representing $600 million in assets under management.
A mere two years later, they launched an open application in the hopes of understanding the amount of growth, and they had “37 or 38 funds,” led by Latinx, apply. Further, the $600 million grew to $2.5 billion over that same amount of time.
“This is the beginning of the tidal wave,” exclaimed Cadena.
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Focusing on the upside and what we can control
In contrast to Cadena’s focus on increasing the number of Latinx venture capitalists, Pedro Sorrentino – founder and CEO of Atman Capital, a $50 million pre-seed, Seed, and Series A fund that invests in startups in the U.S. and LatAm – believes ethnic distinctions should not be the center of the conversation today.
Instead, Sorrentino looks to realities he can fight. He sees his mission as that of a fiduciary: to make money for their ambassadors, abide by all the promises to their founders, and do the best they can.
While he does believe the problem of the lack of Latinx venture capital funding might exist, he seems adamant that we need to make a conscious choice and focus our attention on the exciting new horizons that currently present themselves.
“The momentum has never been better,” Sorrentino said of the Latinx venture capital market. “I’m an example of someone who has never formally been involved in [systemic bias]. I’m playing the game alongside the best of the best, and I find that when I meet other people from similar backgrounds, they’ve all faced struggles. That being said, we’ve never had so much democratization of access across the board.”
Sorrentino helped found ONEVC, a VC firm based in both Sao Paulo and Silicon Valley, in 2017 and was the manager’s focal point in the US. He left early last year to create Atman.
Tying it together
Latinx entrepreneurs are flourishing today like never before, and their new businesses are quickly outpacing available venture capital. While this lack of funding, the lifeblood of startups, presents significant obstacles to future growth, Cadena and Sorrentino agreed that the outlook for Latinx businesses and venture capital is bright.
“We have never had so many high-quality investors, having a dedicated strategy to Latin America, paying deep attention to the region,” Sorrentino asserted. “The environment has never been as positive as it is now, and it will only get better … the gaps in the market continue to be filled – all the way from Angel to IPO.”
In essence, Latinx founders and funders face an inflection point, and all indications point to it being positive, if not a little slow to start.