Friends and family funding screws equality in entrepreneurship

Many early stage founders get their first external capital from “friends and family”.

That’s code for wealthy relatives and angel investors who are already in their networks, or have easily been introduced. The latter is called “smart money” for a reason: big angels bring connections and expertise, as well as critical early funding.

Yet, the reliance of so many early-stage companies on these rounds of friends and family is a key driver of continued inequality in entrepreneurship. There is one reason why 75% of UK founders come from advantaged socio-economic backgrounds. It is hindering efforts for more gender and racial diversity among the founders.

That’s why if we’re going to give more entrepreneurs a chance, we need to rethink “friends and family” funding.

It’s not so angelic…

The first problem is that angels typically invest in deals brought in through their networks. In many cases the fear of missing out on a company backed by their peers is a big motivator to sign a check. So, if a founder already has easy access to angels they can contact in their network of friends and family, who can vouch for them as fellow angels, they are more likely to get funding.

Even when angels return founders based entirely on the progress of the business (aka traction), and not a warm introduction, we have to ask – how did the founders finance early development and testing?

“If I start a 20km race 15km ahead of you, I will win. Even if you’re twice as fast as me”

Founders are more likely to gain traction when they have the financial security to experiment with an idea, make mistakes, iterate and grow the business. We can fool ourselves with how “young” a business can be to test, but it still requires disposable income and disposable time. That automatically leaves out talent juggling multiple jobs to provide for their family, those with caregiving responsibilities they can’t afford to outsource, or those without a financial safety net to fall back on.

Basically: if I start a 20km race 15km ahead of you, I win. Even if you are twice as fast as me.

VC blames the ‘pipeline’ issue to cover their own sins

Meanwhile, VCs blame the lack of diversity in their pipelines. But, they are also constantly asking for higher traction before they invest. So again, it’s often only the founders who have received angel investment and have the time and security to build traction, who get their foot in the door at VC funds.

I recently spoke with a partner at a VC who kindly shared the numerical benchmarks she looks for in startups when considering investment. According to her, there would have been enough traction before to get seed funding from you now at pre-seed.

To be clear, I don’t think it’s bad in itself to ask for traction, but doing this on your own and looking at how easy the resources were for founders to access, there is a risk of increasing the number of people who can afford to access VC funding. And VCs end up looking at highly talented, motivated and experienced founders who are not represented by the entrepreneurs most likely to be backed today.

That’s especially insidious when VCs complain about a lack of a pipeline of diverse founders as a cover for their own lack of diversity glare, especially on investment committees and with general partners who carry — but that’s another article.

The loop repeats and the various founders are still screwed

Too often who gets funding determines who leaves and has personal wealth to reinvest in their communities ie. become angel investors for the next generation.

We can’t be surprised then, that’s all 14% of UK angels are women, and Only 11% do black, Asian and ethnic minority investors.

A lack of representation among angel investors means that various founders face microaggressions and outright discrimination every day: “I’ve faced angel consortiums where there are only three women on the board, and a male investor asked me to demonstrate how to condom put on me, or that she was dismissed as a ‘little girl’ by one VC,” a vegan condom company Hank on Founder Farah Kabir tells me.

As angel investor Andy Ayim puts it, many people who don’t feel they are “rich” enough to invest with angels will never go down that path. Society places invisible barriers on behaviors like angel investing that are “just another way to keep the rich, rich”!

Four ways investors can start making a difference:

A recession and cost of living crisis will only make this worse. If investors aren’t proactively supporting founders from more diverse backgrounds — now — we all lose.

How investors can get started

For those who want to do more to support underrepresented founders I encourage you and your investor friends to do more to hold yourself accountable here:

  1. Audit your current investments: Where did you meet them and where did their first funding come from? If you believe that you are supporting the best founders, ask yourself, do you really believe that these only exist in your own networks? And is saving or a wealthy community a shared characteristic because it inherently improves them? Or are you falling into the trap of only supporting those who have a financial leg up? Be brutally honest: is the pattern problematic, even if the individuals in your portfolio are awesome?
  2. When considering new ventures, don’t look at drag alone: Ask yourself what a founder has done with the resources available to them in the time they’ve been working — not just how quickly they’ve achieved their metrics.
  3. If you are struggling with dealflow – check out networks like Variation X, VC included, Academy of Angels, Google Black Founder’s Fund or one I’m building now, IfWeRaise. But give an account of how you cope — is it a tokenistic engagement, or a deeper investment of your time and capital? What results are you seeing? If it’s not working to diversify your portfolio, what else can you do?

The simple, quick results are not sexist answers, but require deeper introspection and long-term accountability from individuals and organizations like VC.

What cannot continue to happen, however, is that the same people who benefited from historical imbalances continue to ignore their own biases and ongoing systemic disadvantages when making investments.

If you are not actively part of the solution, you are probably part of the problem — albeit unknowingly.

Hattie Willis is the founder of GuessWorks, a venture builder, startup coach and trainer, speaker and facilitator.

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