The Funding Divide: The Long Road to Fairness in Seed-stage Fundraising
When it comes to fundraising, there are some things outside of your control.
At DocSend, we studied the fundraising process of 175 startups at the seed stage in 2019 and analyzed data to understand which seed startups were successful in fundraising and why. Through comparing data from our first seed report in 2015, our analysis shows how the seed round has evolved since then and how the process and expectations have become more intensified today. Further insights from our 2020 Pitch Deck Interest metrics also indicate that the experience in the seed round is amplified in an unprecedented market environment.
There are other challenges for some startups: DocSend’s analysis also indicates that as startups progress to the seed round, the demographic and geographic makeup of founder teams that get funded becomes more homogenized. Data shows that white, younger male founder teams from the West coast tend to raise more money, more easily. As CEO of DocSend, this data on The Funding Divide was important to capture and share with the startup ecosystem to help create awareness for underrepresented founders.
Starting a business is one of the most challenging things you can do. Surveying the existing landscape of products and companies in any given industry and deciding that you can do better takes a lot of courage and comes with considerable risk.
But to many, that’s all part of the draw. Striking out and creating something completely unique that you can call your own has fueled the entrepreneurial spirit of millions of both successful and short-lived ventures.
What founders don’t sign up for, however, are the long-entrenched institutional barriers that have kept many people on the sidelines of the fundraising community. Our newest report, The High Stakes and Hard Work of the Seed Round, shares some clear data that puts into focus many of the challenges facing women and minority founders that most already know to exist.
In a companion article dissecting the state of seed-round fundraising, we look at some of the factors that are within founders’ control when fundraising and the steps they can take to optimize their investor pitching process. While founders can take steps to improve their chances of success in the seed round, we also discovered things outside of their control that also impact their ability to fundraise.
Where you are matters as much as who you are
In the pre-pandemic, less virtual world of fundraising of 2019, investors in the seed round greatly preferred and rewarded founders based in the Western United States. West Coast founders, particularly those in the Bay Area and Silicon Valley, raised significantly more money than any other group. The map below shows the disparity between founders in the four quadrants of the United States with Midwest founders raising only about 72 percent of the capital founders in the West.
In the off-kilter year of 2020 as investors and founders rely on their pitch decks to tell their story and use video conferencing technologies like Zoom to compensate for the lack of in-person meeting opportunities, the geographic bias will hopefully diminish to some degree — giving founders in South Bend the same fair shake as those in San Jose.
Women and minorities are not getting the same opportunities with VCs
As female and minority founders move to more advanced rounds of fundraising, their overall representation and rates of success drop off significantly. To find success, female founders also must contact more investors only to raise less than their male counterparts, and minorities weren’t able to raise as much as all-white teams.
In the seed round, female teams contacted 76 investors on average and raised $1.5M from 57 meetings. Compared to all-male teams, all-female teams had 58 percent more meetings but raised 21 percent less cash at the end of the round.
For minority founders, they contacted fewer investors but had the same amount of meetings as all-white teams. However, that did not equate to the same amount of money; teams with minority founders raised 17 percent less than all-white teams on average.
Investors value youth over experience
According to the report, investors trusted their money with younger founders at much higher rates. The report shows that founders in their 20’s face ideal circumstances when fundraising at the seed level. They were able to raise three percent more than founders in their 30s, 14 percent more than those in their 40s, and a significant 44 percent more than those in their 50s.
- Teams in their 20’s managed to raise the most money in just 35 meetings, which gives them $54,911 per meeting.
- Teams in their 30s and 40s were only able to raise $44,124 and $41,647 respectively.
- Teams in their 50s lagged behind with only $31,569 per meeting.
Those that had the clearest decks were in their 40s, with VCs only spending 3:17 reading them, where they spent 3:51 on decks from founders in their 20s. Founders in their 50s not only came in last for the amount raised, but they also had the most time spent on their decks (topping 6:30).
Acknowledging the problem and building solutions
Investing in a company requires a lot of confidence and trust, and as a founder, it’s your job to show investors that your company is the right choice. If barriers like race, gender, age, and geographic location stand in the way of investors choosing to fund a company, we’re left with a smaller pool of ideas and stifled innovation.
One step we’re taking to help overcome institutional bias is providing founders with the DocSend Fundraising Network (DFN), a new, data-driven way to connect quality founders to committed investors. The DocSend Fundraising Network connects qualified founders with the right VCs who are looking for new investment opportunities based on a data-driven methodology derived from our research. This approach not only helps facilitate connections in a virtual business world but also helps to remove inherent bias from traditional fundraising approaches.
To learn more about the DFN and to apply to join the network, send your pitch deck here.
