The number of venture capital firms founded by Latinx investors is slowly increasing in the U.S. as the number of Latinx-founded startups explodes.
Latinx founders’ numbers are increasing at a faster rate than any other ethnic group – there are already 4.4 million Latino-owned companies in the U.S. which contribute at least $700 billion to the economy each year, according to the U.S. Hispanic Chamber of Commerce. Latinx is a broad term, sometimes criticized for being overly broad, that encompasses people with ties of heritage and language to Central and South America.
And a handful of Latinx-founded companies have become unicorns, such as San Francisco-based financial services company Brex, Seattle-based sales engagement firm Outreach and The Honest Company, a Los Angeles-based consumer goods company.
The number of Latinx and Black women who have raised over $1 million in outside venture funding doubled since 2018 to 93 Black women and 90 Latinx women, according to ProjectDiane, a biennial demographic study, Yet overall, fundraising for Latinx founded high-tech firms still remains challenging as Black and Latinx founders have only raised $2.3 billion or 2.6% of all VC funding in 2020 in the U.S., said Lolita Taub, a San Diego-based co-founder and general partner at The Community Fund, where she invests in community-driven companies. The Community Fund has made angel investments in MilkRun, a Portland, Oregon-based online platform connecting local farmers with consumers and Los-Angeles-based Suma Wealth, a digital financial educational platform focusing on the Latinx population.
Even as evidence mounts that diverse teams perform better, there remains a stark lack of diversity in venture capital. Some 80% of investment partners at them are white, compared with a mere 3% Latinx and 3% Black, according to a report from the National Venture Capital Association and Deloitte. Asian/Pacific Islanders comprise the other 14%. The combination of Latinx and Black-owned firms only manage 1% of aggregate assets under management in venture capital, according to the Knight Foundation.
A 2018 report by RateMyInvestor and DiversityVC showed that only 1.8% of VC firms were founded by Latinos and 1% had Black founders. But that report is a few years old. Rather than wait for existing firms to diversify, more LatinX investors launching on their own. The low-hanging fruit are Latinx founders who might have a hard time pitching in the largely White club of traditional venture capital, but who can make a case that they have an insight into new markets of Latinx or other overlooked consumers.
In 2019, Samara Mejia Hernandez, a previous early-stage investor with MATH Venture Partners and Goldman Sachs, launched Chicago-based Chingona Ventures, a pre-seed fund that makes investments in founders with nontraditional backgrounds that position them to create businesses in markets that are growing and often overlooked. The firm, which is still fundraising, makes seed stage investments of $100,000 to $250,000 to pre-seed and seed stage companies that have typically raised under $1 million in outside funding. The fund has invested in 15 startups so far.
Chingona Ventures is one of the eight early-stage, Latinx and Black-led venture capital funds that will receive a portion of $50 million from PayPal Holdings (NASDAQ: PYPL) in an initiative that was announced in October.
Venture capital firms were founded in 2020 even as the economy slowed down due to the global pandemic. In August, Noramay Cadena, launched Supply Change Capital, based in Los Angeles and Chicago. It is focused on 2045, the tipping point when minorities become the majority of U.S. consumers as well as women and people of color and the implications on the food supply chain. Over 75% of companies in Supply Change Capital’s pipeline in the past 90 days were founded by women and/or people of color. The VC firm is focused on investing in companies that are the “changing face of food.” Its investments bet on technology, the use of sustainable ingredients and brands that have cultural appeal or food brands made by and for specific segments such as women, BIPOC, diaspora – all verticals that can achieve mass market appeal.
Supply Change Capital invests in pre-seed and seed stage companies with check sizes of an average of $500,000. The fund thesis was catalyzed by an angel investment in OmSom, a New York-based food company that sells Asian spices. It was started by Vanessa Pham and Kim Pham, sisters and co-founders who are children of Vietnamese refugees.
“Women and people of color who have historically created our food and flavors will play an incredible role in building the next generation of iconic brands at the supermarket,” said Cadena. “We see this wave already building.”
Cadena and her co-founder Shayna Harrishave invested in 25 companies between them and have operator experience ranging from venture-based startups to Fortune 50 companies.
“Our thesis is at the convergence of several relevant themes – climate change, sustainability, healthy food, the supply chain and the technology emerging and established brands need to reach consumers,” she said.
Cadena, who was born in Mexico and raised in Los Angeles, is also bullish on the growing number of Latinx venture capitalists. Additional collaboration among Latinx investors will help increase their ecosystem of funders and founders
, she said. In October 2019, she and other Latinx venture capitalists who are both established and emerging founded the Latinx VC, a collaborative group that aims to increase the number of Latinos in the VC ecosystem by supporting career development and growing limited partner dollars.
While Starlight Ventures, a Miami-based venture capital firm that was founded in 2017 does not have a mandate to invest in a particular type of founder, at least 40% of its founders are women and/or people from diverse backgrounds, said Patricia Wexler, co-founder and managing director.
The returns are proof that having people of color and women as founders is critical – Starlight Ventures’ returns are in the top quartile of IRR from its 2017 fund, she said. “After living in Silicon Valley, I had the epiphany that we need to have more meaningful impact to continue delivering great returns.”
Two of the firm’s most recent investments are KulaBio, a company that produces super-charged nitrogen-fixing microbes to deliver low-cost organic biofertilizers and Carbon Chain, a software as a services (SAAS) company that tracks greenhouse gas emissions. The firm’s oldest investment is in Satellogic, an earth observation company that pioneered small satellites and is founded by Emiliano Kargieman, an Argentinian.
Increasing both the diversity of the founders of VC firms and the startups they invest in generates better returns and more valuable products and services, Wexler said.
“If you put capital into the hands of a broader set of people, their networks will be naturally broader,” she said. “It is easier if capital gets dispersed than just one VC holding a lot of money – the natural order of things will get adjusted.”
“We are deep believers that capitalism is a force for good,” Wexler said. “With the right guardrails and incentives, it is the best way to deliver progress at scale. Companies can help humanity thrive creating products and services that satisfy our needs without destroying the planet and help society be fairer, happier and healthier. Our companies make eggs without the chicken, nuclear fusion, treat depression without pills, just to name a few. 2020 was positive in catalyzing these things faster.”
Boston-based Mendoza Ventures was founded in 2016 by Senofer Mendoza and Adrian Menodza and invests in artificial intelligence, fintech and cybersecurity. In 2019, the firm invested $3.5 million in six startups that are based in Boston, New York, San Jose, California, Portland, Maine, Toronto and London, including two AI companies and three fintechs.
Is There ‘Diversity Theater’ Going On?
The trend may be too new to have a big impact on the fundraising numbers, which are only inching upward. ProjectDiane reports that the total amount of funds raised by Black and Latinx women founders rose to over $3 billion in 2020, compared to $1 billion in 2018. The amount of funding lags immensely compared to the average founder of a startup since the median seed round raised by Latinx women founders is $200,000 and the median seed round raised by Black women founders is $125,000 for those that did not raise over $1 million, ProjectDiane states. The national median seed round funding for a startup is $2.5 million.
“I’m not convinced that funds across the board have more interest in investing in underestimated founders,” Taub said. “But I know that many like to say they are interested, but are really playing diversity theatre. What makes me say this? The numbers.”
Thesilver lining is that there is a “community of progressive investors who get that investing in a homogenous community of founders through a homogeneous community of investors is not the way to produce outsized returns,” said Taub, who has spent 14 years working in tech and the Silicon Valley ecosystem where she made over 40 investments as an angel investor and VC at Los Angeles-based Backstage Capital and The Community Fund. She is also a co-founder of the Startup-Investor Matching Tool that connects VCs with startups, a scout at Lightspeed Venture Partners and a limited partner at Operators Collective.
Investments Span The U.S. And Emerging Markets
Some venture capital firms such as Chile-based Magma Partners invest in both female Latinx founders in the U.S. and Latin America. Magma invests in fintech, insurtech and infrastructure startups.
In April, Claire Diaz-Ortiz joined Magma Partners as a partner to lead Brava, the first venture initiative to invest in more female founders in Latin America. Brava is committed to investing in at least 20 female-founded Latin American startups over the next three years.
Diaz-Ortiz is also founder of The Angel Collective, an angel collective for global female VCs who co-invest in female founders across borders and is an advisor for January Ventures, a U.S. and U.K. based early-stage venture capital fund that invests in high-growth female-led startups.
Brava has invested $2.5 million in eight startups already, including Jefa, a digital bank for women, Yana, a mental health and wellness app for the Spanish speaking market, Prometeo, an open banking platform, The Intern Group, a provider of international internship programs across the globe, Vexi, a credit card for the underserved in Mexico and FlickPlay, a multimedia tech company using augmented reality to engage its community.
“I love being able to shepherd female founders from emerging markets to Silicon Valley and navigate through both of those very different worlds,” she said. “The resilience I see from these women is amazing. Breaking out with a venture-scale business as a female founder in an emerging market is so hard, so when they do succeed, they really fly.”
What This Means for Startup Founders
Developing a network and meeting with investors is more challenging for immigrants, which means VCs that focus on women and Latinx can be a good starting point. After working for companies in the photo, media, entertainment and fashion industries that needed frequent deliveries, Joshe Ordonez founded Airpals in May 2020. She had moved from Ecuador in 2016 to New York to study and receive her master’s degree in design management from the Pratt Institute.
She saw how inefficient and time consuming it was for these smaller companies to schedule courier services the same day to receive hard drives and other items. Airpals, whose four employees are all Latinx and has a development team led by a female, aims to streamline the process by letting customers from smaller businesses calculate prices automatically from its website and uses artificial intelligence to figure out the size of packages and delivery times. The company now has 76 clients, including DigitalOcean, New York-based cloud computing company, the David Lynch Foundation, clothing designers and a Black fashion brand, and a 38% customer return rate.
“We are tackling those companies and we are helping them to deliver their products to their customers and other items such as supplies and documents to their employees or other stakeholders,” Ordonez said.
The startup plans to start its pre-seed round in January 2020 to take advantage of the momentum.
“There is a boom in the delivery sector and there are many ways to innovate operations and keep them moving throughout the pandemic and after,” Ordonez said.
She read tweets from Latinx VCs on Twitter and thought it would be a good starting point, including ones from Maria Salamanca, the principal at Unshackled Ventures, a fund that invests in teams with immigrant founders at the pre-seed level.
The good news for founders is that although VC funds for people of color remain scarce, there is a growing investor community that “sees the business opportunity in investing in underestimated founders and are making sure we don’t leave money on the table, Taub said.