Perhaps you’ve been there before: An investor shrugs and waves their hand. “Go raise a friends and family round,” they say before perfunctorily throwing out a number worth three times more than the average Black household.
A new white paper by the venture fund Fifth Star put into context how incongruous such statements are: The average friends and family round is $23,000. The median liquid U.S. Black family wealth is $3,630 compared to $79,000 for white families; the average Black founder raises less than around $1,000 from family and friends.
“For a Black entrepreneur to raise the average $23,000 friends and family round, they’d need to secure the entire liquid wealth of six Black families,” the white paper concluded.
This lack of available initial funding leaves Black founders starting well behind their white counterparts, creating a domino effect that stifles generational wealth creation. That’s another byproduct of this country’s continued economic segregation, which has engendered a racial wealth gap 100 years going on.
Fifth Star Funds seeks to tackle this issue by positioning itself as the first “friends and family round” fund for Black founders. It writes checks worth up to $25,000, slightly higher than the $23,000 average. So far, it has backed 21 entrepreneurs in its local Chicago area and plans to expand across the U.S.
This raises some interesting questions: What if more funds were to brand themselves this way? And what would be the impact that would have on spurring entrepreneurship within the Black community?
Calling oneself a “friends and family” fund is perhaps a matter of semantics. Many funds focus on pre-seed investments and, when deployed by a venture firm, consider such early-stage “friends and family” checks to also be some sort of pre-seed funding.
Like other early-stage funds, Fifth Stage seeks to be one of the first checks a founder receives. A main difference could be in the proof points Fifth Stage uses to assess a founder: For example, it doesn’t back founders who have raised more than $300,000. It also seeks “excellence” in other areas of a founder’s life.
“Have you been on the local soccer team for the last five years? Did you grow up helping your parents raise your younger siblings while they had to go work and provide for your family?” Christine Concepción, a managing director at Fifth Star, listed as examples of questions the firm asks. “We care less about where you stand today versus how you got there,” she said.
“Unless the F&F round from a fund was taking those things into account, just calling it something different is like putting lipstick on a pig.”
Even the matter of branding a firm as a “friends and family” venture rather than “pre-seed” or any of the usual terms may attract founders from communities in which venture language isn’t common.
Viola Carmona, founder of fintech Champion 40A, told TechCrunch+ that such language would signal clearly to her that the fund writes smaller checks and that they would be confident in her as a founder instead of worrying about traction and revenue.
Rich Fortune, co-founder of social planning app Hangtight, agreed, saying that pre-seed investors typically seek some form of traction, such as revenue and customer growth. “A fund that exclusively targets friends and family [rounds] could create numerous opportunities for underrepresented founders who lack access to a personal network capable of providing financial support,” he said.
He described the fundraising journey for his company as a “rollercoaster” and said access to a fund could have kickstarted its initial development and helped it move faster. “Although the round’s terminology is inconsequential to me, I’ve always believed that a friends and family round is a necessary [prerequisite] of pre-seed funding,” he added.
Meanwhile, Mec Zilla, founder of web3 company MECX DAO, feels the semantics are just that: semantics. “The beauty of a friends and family round is that you have people who know you placing a bet on your reputation, character and capacity. Unless the F&F round from a fund was taking those things into account, just calling it something different is like putting lipstick on a pig,” she told TechCrunch+.
Per Fifth Star, the lack of access to early-stage funding prevents Black founders from even taking the first step toward launching a business. The firm identifies this as one source of the inequality within the venture landscape, because founders who raise friends and family rounds are more likely to raise other types of funding. White entrepreneurs raise angel rounds at 25x the rate of Black founders, overall raising non-institutional capital at 40x the rate.
The paper cited the Angel Resource Institute, noting how in 2020, it was estimated that Black-led companies received 3% of all angel funding, compared to the 84% that went to white-led companies. At the same time, a 2019 Kauffman study found that white founders raised $20,682 in non-owner equity funding. Black founders raised $976.
Perhaps in some ways, that is tied to the fact that Black households only hold 2.9% of all wealth, despite making up 15% of the U.S. population, compared to white households, which hold 86.8% of the wealth in the nation, according to the Federal Reserve.
There is hope in figuring out how more “friends and family” branded funds can exist, and some investors are already noodling with the concept. Zane Venture Fund’s founder, Shila Nieves Burney, said she would be open to writing smaller check sizes to founders, as she has already reserved slots for LPs from underrepresented backgrounds. And Jeff Williams, co-founder of Be Nimble Foundation, is launching a fund, dubbed Nile Capital Fund, to provide small checks to founders.
Both Williams and Kimiloluwa Fafowora, founder of e-commerce business Gander, pointed out that a firm investing as a “friends and family” can eliminate the risk that taking money from one’s actual friends or family brings. “I could ask my family, but considering they don’t come from very comfortable backgrounds, I would feel guilty for taking their limited disposable income and having them invest it in a risky asset,” Fafowora told TechCruch+ “Of course, it could have a high reward, but it also has high risk.”
Williams said entrepreneurship service organizations could have a huge impact in this area, as they could provide capital and resources for Black founders to start off. “There’s not nearly enough funding available at the earliest stages, especially for Black founders,” he told TechCrunch+. “We feel like we can make a larger impact for more Black founders at this investment level.”
Naturally, there are existing pre-seed funds or accelerator programs that cut larger, life-changing checks, but the competition is high and the risk is higher, especially when you are Black. And sometimes, a founder just needs a little help to start off.
The conversation here, like at the seed stage, seems to be in its early days. Maybe these efforts are best expanded into the public sector, where the pressure for returns is low. Or, as Concepción said, maybe this model can change everything.