PeopleDIE&BPerformanceSocial Impact
By Alfonso Villanueva, Ivy Lau, Jay Ganatra, Jeremy Jonker, Mario Ruiz, Peter Sanborn, and Usman Ahmed
Corporate Venture Capital (CVC) has established itself over the last half century as a powerful force in investing. Over that same period of time, the racial wealth gap in the United States has grown to unprecedented levels. Venture capital investment is strongly correlated with long-term wealth creation. Yet, Black, Indigenous and People of Color (BIPOC) founders have struggled to raise venture capital.
PayPal made a $535 million commitment to racial equity in June 2020, including $100 million that has been invested in Limited Partnerships in BIPOC venture funds that disproportionately fund BIPOC entrepreneurs.
PayPal Ventures and PayPal’s Global Public Policy and Research Team authored this White Paper to share some of the lessons and challenges on our journey, with the hope of catalyzing other CVC teams, other forms of private capital, as well as the public and social sectors to invest in BIPOC fund managers, entrepreneurs and communities.
Here are six takeaways from the white paper:
- Entrepreneurship is key to reducing the racial wealth gap. Black business owners have 12 times more wealth than non-business owners in the community. Successful entrepreneurs are also more likely to provide the kind of “friends and family” money that is required for others looking to follow in their footsteps.
- BIPOC communities are very entrepreneurial yet lack access to the capital needed for them to start businesses. A 2015 survey found that Black Americans are 50% more likely to attempt to start up a business than White Americans. However, Black businesses report rejection for bank loans at three times the rate of their White counterparts.
- BIPOC communities are significantly underrepresented in the venture capital ecosystem – from investors, to founders, to even employees at venture backed startups. Approximately 1% of venture capital funding went to Black startup founders in 2018. What’s even more shocking: Black women have raised only 0.0006% of total tech venture funding since 2009.
- There are unique advantages that CVC teams have when it comes to investing in BIPOC fund managers and communities. Corporations typically have broader strategic mandates than traditional venture capital firms. In fact, in a survey of CVC fund managers, 80% said that they are primarily looking for strategic alignment in their startup investment. Since CVC investments are about more than merely financial returns, there are real opportunities for CVC teams to make a meaningful difference in reducing the racial wealth gap.
- CVCs can also play a supportive role by engaging with BIPOC VC fund managers, investing directly in their funds, and joining as limited partners. These BIPOC VCs are able to reach deeper into the community and provide the financing that will be needed for startups to grow. Successful BIPOC VC funds are more likely to fund BIPOC founders, which will build greater wealth in BIPOC communities, and provides a greater funnel for more traditional CVC deals.
- There is tremendous opportunity for government, universities, and foundations to invest in the ecosystem around BIPOC startup entrepreneurs and VCs that back them. The public and social sectors are well placed to improve the state of friends-and-family funding gaps, accelerators, pre-seed stage companies, and broader ecosystem support efforts. These institutions can also help the private sector provide capital in segments that might be deemed too risky, with solutions like guarantees and/or co-investments.
You can download and read the full white paper here. Read also about research conducted in partnership with historically Black colleges and universities (HBCUs) that outlines opportunities for the financial services industry economically empower Black communities and advance racial justice here.
At the time of writing, Alfonso Villanueva, Jeremy Jonker, Peter Sanborn, Jay Ganatra, and Mario Ruiz were part of the PayPal Ventures team; Ivy Lau and Usman Ahmed are part of the Global Public Policy and Research team.