Entrepreneurs raise an average of $23,000 during their friends and family funding round before launching their startup.
But a Black entrepreneur would need to secure “the entire liquid wealth of six Black families” to hit that $23,000 figure, according to research from Fifth Star Funds. The nonprofit said the median liquid wealth, which excludes home equity, of a Black family is $3,630. It also said Black founders receive only 1% of venture capital funding.
Fifth Star Funds is looking to change those statistics — billing itself as the first friends and family fund in the U.S. And the nonprofit plans to expand nationwide to support more entrepreneurs of color.
Typically, startups first raise money from a close network of friends and family before looking to venture capital firms or other companies. But a friends and family funding round is the largest setback Black founders face when attempting to secure capital funding, according to Fifth Star Funds.
The nonprofit seeks to close that gap by providing early-stage funding to tech founders. The team, compromised of entrepreneurs and industry leaders, is led by its six founding members, including Stella Ashaolu, Kyle Backer, Osa Osarenkhoe, Tim Huelskamp, Nate Pelzer and Tracey Suppo. It’s raised $1.4 million, since launching in 2021.
Ashaolu said the members are all entrepreneurs so they’re familiar with the challenges startups face.
While Fifth Star Funds’ focus is on Black founders, applications are open to any individual who can demonstrate they have experienced racial discrimination in securing startup funding.
The nonprofit has invested in 27 Chicago-based companies to date. It’s “industry agnostic” but much of its portfolio includes tech-enabled software businesses, particularly those using artificial intelligence, Backer said.
A nationwide crackdown on diversity, equity and inclusion practices is creating opportunities alongside challenges, the founders of Fifth Star Funds said.
“What these attacks on DEI are doing is kind of lifting the veil of previous efforts around DEI and causing people to really think about, ‘What are the outcomes?’ and being able to make them defensible, as opposed to just signals,” Ashaolu said.
It’s a difficult time for the technology economy right now, Osarenkhoe said. Funding is “really drying up for all startups across the board,” he said, making Fifth Star Funds’ mission even more critical.
“That drying up of capital tends to be asymmetric, where the folks who had access still have all of the access that’s left, and the folks who had difficulty getting capital are now just left with effectively nothing,” Osanrenkhoe said. “It’s a better time for us to exist than ever before.”
Fifth Star Funds is considering a couple of new investments, while it scouts for a capital partner to help take the fund to a national level. Once it scales nationally, Fifth Star Funds anticipates hiring on the operations side.
“We have a very strong pipeline of founders who seem to be investment-ready,” Backer said. “We believe that this pipeline is strong and would only continue to grow, especially as we become ready to expand this nationwide.”
Its goal for the year is to find a “transformational capital partner,” the founders said, and with a $5 million annual fund goal, Fifth Star Funds could support hundreds of founders a year.
Some of its leading supporters include the Goldman Sachs Foundation and Salesforce.
“We’ve set the stage to make this work,” Osarenkhoe said. “We believe that there are folks out there, especially at a time like this when we are seeing all these shifts to DEI initiatives and other organizations scaling back. We’re hoping this might lead to potential for someone to look at something that does have a high leverage impact … of this nature.”
