Study: Black startups get just a third of venture capital raised by peers

Black founders of U.S. startups raise just one-third as much venture capital over the first five years as other comparable businesses formed at the same time, according to new research co-authored by Federal Reserve Governor Lisa Cook.

Only part of the gap in funding can be explained by tangible factors — for example, that Black firms have smaller founding teams, attended different schools from venture capital leaders or live in different regions, and are less likely to have a patent — according to the National Bureau of Economic Research study published Monday, Dec. 5. The other authors were Emmanuel Yimfor of the University of Michigan and Matt Marx of Cornell University.

The remaining gap can’t be accounted for by such variables, the research found. It compared Black-founded businesses with others that were set up in the same year, industry and state.

“Investors may provide less funding to Black startups because of bias,” the study noted. “Such bias has several possible sources. One possible source is taste-based discrimination. According to this view, investors consciously dislike working with Black founders and expect Black founders to compensate” them by accepting less funding.

Black founders are under-represented among high-growth, innovation-pursuing startups, and there has been only slight growth in the share of Black-founded startups over time, according to Cook’s research.

The evidence shows that the financial gap dissipates in later stages of funding, suggesting that investors’ initially biased beliefs reverse as they learn more about Black entrepreneurs’ capabilities, the paper found.

Cook was confirmed by the U.S. Senate in May, becoming the first Black woman to be a Fed governor.