The Tech Funding Gap
A Policy Problem That Widens the Wealth Gap
Project By Mariah Lichtenstern, Aspen Tech Policy Hub Fellow
"The funding gap" is a term to describe the lack of equitable funding to underrepresented startup founders (Black, Latinx, and/or female). Venture capitalists bear the brunt of media criticism for demonstrated inequities in tech funding. A closer look reveals that the limited partners who invest in venture capital funds, and regulators who constrain capital formation, are also part of the larger, systemic problem.
Current regulations overseen by the Securities and Exchange Commission relegate the majority of Americans to second-class status based on income and net-worth criteria, limiting participation in key private market opportunities - or restricting it altogether. This puts under-represented founders at a disadvantage by constraining their access to capital and creating prejudicial barriers to entry.
This project recommends that the Securities and Exchange Commission dismantle discriminatory investor criteria. It also recommends that existing institutional investors pledge to create opportunities for diverse and emerging managers to establish investment track records. These solutions can advance equitable tech startup funding while helping to close the widening wealth gap.
Stop Startup Redlining
The Securities and Exchange Commission segregates investors by income and net worth, with separate and unequal investment opportunities which impact the vast majority of Americans. This constrains capital formation and wealth creation - especially for Black, Latinx, and female founders and funders. Ensuring that all Americans can attain accredited investor status through self-verification of independent or assisted sophistication is essential to closing the wealth and funding gaps.
Actions
Solution 1:
Securities & Exchange Commission (SEC):
Give All Americans a Fast Track to "Accredited Investor" Status
Dismantling systemic discrimination in startup fundraising and investing is the fastest way to start closing the funding gap. The first step is doing away with income and net-worth standards for who can invest in early-stage startups. Next, all investors should have a path to accreditation without the unreasonable time and cost barriers currently required. Finally, we must do away with provisions that advantage founders and funders with high income, high net-worth, and high net-worth networks, over those that don't.
Income inequality makes it difficult for the majority of Americans to launch successful startups. This is especially true for underrepresented founders, particularly people of color, who are often less resourced due to systemic economic oppression and the resulting wealth gap. When underrepresented founders of color do make it to a venture-backable position, they receive less than five percent of total venture capital, despite data showing that diverse teams have higher returns on positive exits than their all-White counterparts.
Black and Latinx representation is also lacking among investors. Only six percent of venture capitalists are Black or Latinx (two percent at firms that are ten years or older). Less than five percent of angel investors are Black or Latinx. Several studies have indicated that this lack of representation is caused by and contributes to discrimination within the tech industry at all levels. The Opportunity Pledge presents a framework for lasting change
