Feb 7, 2022 - Economy

A little-known chapter of VC history: The early Black investors

Illustration: Shoshana Gordon/Axios

Decades ago, raising traditional venture capital was virtually off limits to Black entrepreneurs — but some pioneering organizations like the Boston-based Urban National Corp., founded in 1971, proved it was good business.

Why it matters: With just 1.3% of venture capital invested in Black-led startups last year, many of today’s Black entrepreneurs are facing the same funding gap their predecessors did 50 years ago.

Flashback: At the start of the 1970s, a decade that gave birth to venture-backed household names like Apple and Genentech, such financing was only available to Black and other minority entrepreneurs via Minority Enterprise Small Business Investment Companies (Mesbics for short, and now called Small Business Investment Companies).

  • Enter the Urban National Corp. in 1971. It started out with $5 million from institutional investors including Harvard, Mobil, the Ford Foundation, Aetna, Salomon Brothers, Yale and MIT, among others (it grew to $10 million within a couple years).

The original, and continuing, hypothesis on which the Urban National was founded is that a combination of substantial financing, a strong and active board, and a staff of experienced professionals can give significant support to the growth of minority-controlled businesses through equity-type investments on a profit-making basis,” the firm declared in an ad in Black Enterprise Magazine’s October 1974 issue.

  • By 1982, the firm claimed it was the most profitable minority-oriented VC firm, with $1 million in profits the prior year.
  • “We only go into abut 5 percent of the deals that are proposed to us,” then-CEO Edward Dugger III told the Washington Post. “We are in this to realize capital gains in order to perpetuate what we are doing.”

Between the lines: Today’s Black investors of private capital still face much of the same skepticism over their business model when they choose to solely (or primarily) invest in minority-led companies.

  • “This is an opportunity to have a significant outcome for the firm and also have an impact,” insists Jessica Patton, co-founder of PE firm 5th Century Partners and formerly an investor at Andreessen Horowitz. “In the past, people bifurcated that,” she adds of the perception that such capital allocations are altruistic — rather than good business.

Yes, but: There has been some progress.

  • In 2021, Black startup founders in the U.S. raised about $4.2 billion in venture capital. That’s more than twice the $2 billion that in 2003 was under management for the VC sector focused on backing minority-led startups, according to a study.
  • And the number of Black venture capitalists has grown over the years, albeit very modestly.

The bottom line: “There’s not enough capital,” says Patton, about the persistent financing gap many Black investors are still trying to close.

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