Just 0.24% of venture capital money goes to Black founders and 0.02% goes to Black women founders.
Eric Collins is on a mission to change this. Collins runs Impact X Capital Partners, a venture capital firm that believes in financial returns as well as social change and backs entrepreneurs looking to improve society and the way we live.
Impact X, which was founded in 2018, invests in underrepresented entrepreneurs including people of colour and women who are based in the UK and Europe.
“This has been a trend for a long time. It’s not simply an issue related to demographics like race – it’s also related to gender. Less than 3% of venture capital money goes to female-led teams, despite women obviously making up around 50% of the population. The numbers are not getting any better because investment activity has naturally fallen since late 2021 with the economic uncertainty,” says Collins.
He says part of the problem is because most investors are sourcing deals from their networks. If you are a fund manager looking to invest in new companies, you are likely to rely on your network of people who went to school or university with you and possibly people with whom managers have worked. Therefore you are choosing from a very small pool and depending upon your personal outreach will not achieve much diversity.
When choosing which founders to back, Collins says Impact X follows some standard models and also breaks some rules. Impact X looks for the team’s track record. Ideally they will have started and run other successful companies in the past. If not, they should demonstrate they have played a key part in growing and scaling an organisation. Impact X wants to see demonstrated tenacity and the stewardship of resources.
Impact X also looks at how the founder has funded their company. Have they put themselves at risk and invested their own money? If not their own money, then how have they invested their time and network.
Areas with particular growth potential include health tech and artificial intelligence. Impact X likes people who are inventors of things we haven’t thought about before and who have the potential to encourage deep disruption. Sometimes that is a product disruption, a market disruption and / or a business model disruption, i.e. better, faster, more sustainable.
“There are thousands of start-ups and about 1% will be appropriate for venture capital. And of that 1%, only a fraction are achieving the kinds of financial and social returns we’re looking for. The returns we target are 10x the money we put in within three to five years. So quite frankly, most organisations are never appropriate for venture capital. Those that are will demonstrate disruptive ideas and a growth execution plan,” says Collins.
One of Impact X’s biggest recent successes is Marshmallow, a London-based insurance technology firm that launched in 2016 and is valued at more than $1bn. The company was founded by twin brothers Oliver and Alexander Kent-Braham, and when it achieved unicorn status in 2021, Marshmallow was only the second UK start-up created by Black founders to be valued at more than $1bn. Impact X invested in Marshmallow in late 2020, when the company was valued at $30m. In February 2023, Marshmallow was reported to be the second fastest growing company in Europe. Meanwhile the company has grown its workforce while maintaining 50% women and 20% people of colour.
Another investment is Raylo, a company that offers smartphone and other device leasing over two years instead of buying a handset outright. Their business model helps close the digital divide, allowing people to access the latest technology on an affordable monthly plan. In addition, customers receive a replacement phone at the end of two years. The older device is refurbished and sold therefore powering a circular economy.
“Investing in underrepresented entrepreneurs is the surest and quickest path for future UK success. We want to remain the leader in this space. We believe underrepresented people are the X-factor. They are used to not being highly funded. They are very tenacious – they don’t get discouraged when things don’t go right the first time. They are also very creative and are able to pivot,” says Collins.
“We believe that investing in companies and the way in which we deploy our capital is the best lever to actually create social change. Growth companies are the engine that allows for a lot of innovation and disruption. So publications like the Growth Index help publicise companies that may not otherwise be on people’s radars.”