The abrupt end to free-flowing venture capital has made it necessary for some founders of once high-flying unicorns to learn fast how to tighten their budgets and curb costs. But in actuality, only a tiny fraction of startups ever enjoyed the luxury of having millions to burn, even in the best of times. Within that echelon of well-funded startups, fewer still are helmed by female, Black, or Latino founders. As venture-capital funding reached record highs in 2021, peaking at $643 billion globally, the share of funding going to those founders remained stubbornly low: 2.2% went to solo female founders, 1.3% to Black founders, and 2.1% to Latino founders, Crunchbase said. Undercapitalized founders from underrepresented backgrounds are often at a disadvantage. But because many of them are well accustomed to operating their companies leanly in all environments, they're now poised for success in today's turbulent market, founders and investors say. Global venture funding fell 13% in the first quarter of 2022 from the fourth quarter of 2021, Crunchbase said. Some founders have chosen to forgo outside funding altogether, while others are preparing for a more opportune moment to fundraise once again. Insider spoke with nine founders and venture capitalists about how they're preparing for their companies to grow even as the broader world of startups faces turmoil.

Gaining an edge by growing at your own pace

Madison Maxey has the résumé of a Silicon Valley wunderkind. She left college to participate in the Thiel Fellowship, a program launched by the investor Peter Thiel that encourages talented students to leave school in order to pursue startups. In 2013, at age 20, Maxey founded Loomia, which makes electronic textiles for industries such as automotive and robotics. Over the next few years, she raised $1.8 million from Backstage Capital and other investors. That put her in rarified company: The nonprofit DigitalUndivided said fewer than 200 Black women had raised more than $1 million in venture capital as of 2021. Maxey's ambition for Loomia, it turned out, was ahead of its time. Despite articles and fashion showcases touting the future of wearable tech, there wasn't much of a market for it. The difficulties formed a rift between Maxey and her business partner, who eventually left the company. The path to further funding appeared untenable. So instead, Maxey focused on attracting more industrially focused customers interested in testing out e-textiles for research and development purposes — and who were willing to pay upfront. Today, Loomia is a profitable company with a small team of six whose clients have included Hyundai, Covestro, and Analog Devices. Having a diverse set of customers, both large corporations and startups, has enabled the company to ride out downturns such as 2020's business shutdowns, Maxey said, and she's following a similar playbook this time around. "In the e-textile space, competitors come and go," she said. "I feel better being able to stand on my own two feet."
Madison Maxey, founder and CEO of Loomia.
Madison Maxey, the founder and CEO of Loomia.
Diego Donamaria/Getty Images for SXSW
That type of perseverance is important for early-stage companies that haven't yet proved their business model, said Marlon Nichols, a partner at MaC Venture Capital. Because founders from underrepresented backgrounds often start out with limited capital, they're well-rehearsed at rolling with the punches, he said. "They've been running companies on shoestrings for a long time, so usually when they have to go back to that, they're pretty resilient," he said. Tara Reed, the founder of the online education company Apps Without Code, has funded her company through customer revenue from the start. With her previous startup, Kollecto, an art-collector marketplace, which went through the 500 Startups accelerator in 2015, she saw firsthand the challenges of navigating bias among certain investors. While her peers vented about their experiences, Reed decided to seek other paths to funding, she said. "I got really clear during that program that that was not the route I wanted to take," she said. "I felt very much that I was swimming upstream. My approach is to zig when everyone else zags." Funding through customer revenue has freed Reed to grow her business at her own pace while reserving funds to test out new products and services for customers. Apps Without Code brings in between $3 million and $5 million in revenue annually, she said. By comparison, the no-code education platform Makerpad made $200,000 in its first year of business, in 2019, and was bought by Zapier in March 2021.
Samara Hernandez, founding partner of Chingona Ventures, wearing black sleeveless blouse with white stripes and white pants in front of grey background.
Samara Hernandez, the founding partner of Chingona Ventures.
Chingona Ventures

Investors covet the scrappiness of underrepresented founders

Though Maxey and Reed aren't seeking venture funding, their lean approach isn't completely dissimilar to that of successful venture-backed companies, investors told Insider. "Operating in a lean, capital-efficient way is becoming a superpower, moving forward," said Jamison Hill, a partner at the VC firm Base10 Partners. Some data suggests that founders from underrepresented backgrounds outperform once they gain access to venture capital. A 2020 study by Kauffman Fellows and MaC Venture Capital found that startups with diverse founding teams produced a median return multiple of 3.26, as compared with 2.5 for startups with white founding teams. At least two previous studies have indicated a similar pattern for companies with women on their founding team. The ability to produce bigger returns with their capital is one factor that has drawn Samara Hernandez, the founding partner of the $59 million VC firm Chingona Ventures, to founders from underrepresented backgrounds, who make up about 80% of her firm's portfolio, she said. Chingona invests in companies at their earliest stages, and often such founders come to her firm after a period of self-funding their companies, Hernandez said. "That's the attractive piece, how they've been super efficient with capital," she added. "Imagine what they can do with $1 million in outside funding." One firm with a focus on underrepresented founders, the $75 million Slauson & Co., has made a similar argument to the investors in its fund. "Amidst all the new 'cashflow is king' blog posts and Warren Buffett quote tweets now coming from the venture industry, Slauson & Co. has not had to change our approach," the firm wrote in an investor letter viewed by Insider. "We continue to back founders whose lived experience is their competitive advantage." A similar pattern has held for the startups in the portfolio of Reach Capital, an edtech-focused VC firm with $355 million in assets under management. On average, its companies with at least one female founder or founder of color produced a multiple on invested capital of 4.2, versus 1.9 for its companies with only white male founders, a December blog post from the firm said. As the market cools, Jomayra Herrera, a partner at Reach, said the firm is now imparting lessons across its entire portfolio on how to accomplish more with less — namely, figuring out ways to make their capital stretch over a period of two years. "For our growth-stage investments, thankfully, almost all of them raised in the last 12 months," Herrera said. "But I will say many of them are reconsidering how they're thinking about their runway."
The three founders of Career Karma seated at a table in a podcasting studio with headphones and microphones.
Ruben Harris, a co-founder and the CEO of Career Karma.
Career Karma

Preparing for flusher times

As founders brace for the possibility of an extended downturn, it's also important for them to maintain growth even as they seek to curb costs. That can be a tricky balancing act for startups with capital constraints, Base10's Hill said. Founders told Insider that's something they're keeping in mind as they bootstrap, with an eye toward possibly raising venture capital in the future. Melanie Cristol, a lawyer and the founder of the sexual-wellness company Lorals, raised $250,000 in funding for her company in 2019, but she has largely funded the company herself since then, she said, in part by taking on roles as a legal consultant to other businesses. Still, Lorals' revenue has grown sevenfold over the past year, and the company recently gained clearance from the US Food and Drug Administration for its underwear, designed as an alternative to dental dams in protecting against sexually transmitted infections during oral sex. Lorals has a list of future products in development that have been requested by customers, and Cristol is open to raising outside capital again, she said. But she's seeking to do so on her own terms, with investors "aligned on our mission," and as the company nears profitability, she added, she'll be able to do just that. Tara Gupta, the founder of the climate-tech startup Map-Collective, funded her company with a grant from the National Science Foundation. She's emphasized long-term sustainability in her company's operations, working closely with customers to develop and iterate upon products, and isn't aiming for a quick exit. That approach has yielded ample growth even without venture backing, she said. "I haven't even noticed that we're in an economic downturn because it feels like there's one announcement after another where there is just incredible growth," Gupta said. "I mean, we cannot even keep up with it at times." A heads-down focus on organic growth during fallow periods can reap outsize rewards once fundraising opens up again, as Ruben Harris, a cofounder and the CEO of the edtech company Career Karma, learned. In early 2020, when the pandemic led to widespread business shutdowns and a pause in VC funding, Harris focused on managing costs and demonstrating strong business metrics, including profitability, even without a fresh round of capital. Since then, the company has raised two rounds of funding, including a $40 million Series B round announced in January from investors such as Top Tier Capital Partners, GV, and SoftBank. Even with that funding, Harris said, his approach to operating the business remained the same. He focuses on staying "default alive," a term coined by Paul Graham, a cofounder of the renowned accelerator Y Combinator — in other words, maintaining a path to profitability without relying on constant infusions of outside capital. Harris said, "We're doing everything we can not just to survive but to raise money when we want to."
Source: Insider