Friends and family funding screws equality in entrepreneurship

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

That’s code for wealthy relatives and angel investors already in, or easily introduced by, their networks. The latter are called “smart money” for a reason: great angels bring connections and expertise, in addition to crucial early financing.

But, the fact that so many early-stage companies rely on these friends and family rounds is a key driver of persistent inequality in entrepreneurship. It’s one reason why 75% of UK founders come from advantaged socioeconomic backgrounds. It’s hamstringing efforts for more gender and racial diversity among founders. 

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

Not so angelic…

The first problem is that angels typically invest in deals introduced through their networks. In many cases fear of missing out on a company their peers are backing is a major motivator to sign a cheque. So, if a founder already has easy access to angels they can reach out to in their friends and family network, who can vouch for them to fellow angels, they’re more likely to be funded.

Even when angels do back founders based solely on progress on the business (aka traction), and not a warm introduction, we have to ask — how did the founders fund 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 have greater traction when they have the financial security to experiment with an idea, make mistakes, iterate and hone the business. We can kid ourselves with how “lean” testing a business can be, but it still requires disposable income and disposable time. That automatically excludes talent that juggling multiple jobs to provide for their family, those with caring responsibilities they can’t afford to outsource, or those who don’t have a financial safety net to fall back on.

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

VC’s blame the ‘pipeline’ issue to cover their own sins

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

I recently spoke to a partner at a VC who kindly shared the numerical benchmarks she looks for startups to hit when she’s considering an investment. According to her, what would previously have been enough traction to get you seed funding would now be required at pre-seed.

To be clear, I don’t think asking for traction is bad in itself, but doing this in isolation of exploring how easy resources have been for founders to access, risks compounding who can afford to access VC funding. And VCs end up overlooking incredibly talented, motivated founders with experience that isn’t represented by the entrepreneurs most likely to be backed today.

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

The loop repeats and diverse founders are still screwed

Who gets funding all too often determines who exits and has personal wealth to reinvest in their communities, ie. become angel investors for the next generation. 

We can’t be surprised then, that only 14% of UK angels are women, and Black, Asian and ethnic minority investors make up just 11%.

Lack of representation among angel investors means that diverse founders face microaggressions and outright discrimination every day: “I’ve pitched to angel consortiums with just three women at the table, and been asked by a male investor to demonstrate how to put on a condom, or been dismissed as ‘a little girl’ by one VC,” vegan condom company Hanx’s founder Farah Kabir tells me.

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

Four ways investors can start making a change:

Recession and a cost of living crisis are only going to make this worse. Unless investors get proactive in supporting founders from more diverse backgrounds — now — we all lose.

How investors can start

For those wanting 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 you’re just backing the best founders, ask yourself, do you really believe these exist only in your own networks? And is having savings or a wealthy community a shared trait because it innately makes them better? Or are you falling into the trap of backing only those who have had a financial leg up? Be brutally honest: is the pattern problematic, even if the individuals in your portfolio are awesome?
2. When assessing new ventures, don’t look at traction in isolation: Ask yourself what a founder has done with the resources available to them in the time they’ve been working — not just how fast they’ve gained their metrics. 
3. If you’re struggling with dealflow — look to networks like Diversity X, Included VC, Angel Academe, Google’s Black Founder’s Fund or one I’m working on building now, IfWeRaise. But hold yourself to account for how you engage — is it a tokenistic involvement, 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 answers aren’t sexy ones of simple, quick wins, but require deeper introspection and long-term accountability by individuals and organisations like VCs. 

What cannot keep happening, though, is the same people who have benefited from historic inequalities continuing to ignore their own bias and ongoing systemic disadvantages when making investments. 

If you’re not actively part of the solution, you are likely part of the problem — however unknowingly.

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