When Lo Toney started Plexo Capital in 2016, he knew the way to convince investors that diversity is good for business is by emphasizing the numbers.

“I came up with [Plexo] before #MeToo took full steam and well before the unfortunate killings of Breonna Taylor and George Floyd,” he says. “And so I had to go with a business approach because, in order for me to make the case, I had to talk in terms of ‘Hey, this is the value proposition for this strategy.’ There was no way maybe in this environment, people can say ‘Oh, well, we should just do this because it’s the right thing to do.’”

He adds: “The mindset back then was this is just all about making money.”

As he was raising his inaugural fund, which backs ventures and makes direct investments in companies, it took several meetings before he talked to an institutional investor that wanted to focus less on the money and that understood why investing in diverse GPs and founders just makes sense.

These days, the narrative is vastly different.

Many diversity funds have cropped up in the past few years, driven by a societal sea change in the conversation around race, gender and equality, as a new crop of diverse GPs look to invest in their communities. A generational shift within LPs and increased pressure from their constituents have also pressured LPs to actively invest in companies with diverse teams.

Despite increased attention from LPs, many VCs say more investors need to commit for several years and not limit their intention to promote diversity to just one fund.

A report from Cambridge Associates found underrepresented founders – entrepreneurs who are Black, Latinx or Native American – have received less than 1 percent of investments from VCs. The same report showed only 6 percent of investment partners are Black or Latinx.

Lo Toney
Lo Toney, Plexo Capital

Meanwhile, the National Venture Capital Association and Deloitte found that women comprise 45 percent of the total workforce in venture capital, though few are in investment decision-making roles. Non-white employees made up just 22 percent of venture capital employees.

However, over the past year, more venture fund managers with a diversity lens have begun fundraising. Most funds focusing on diversity happen to be emerging managers, though there are many veterans in the mix. Newer venture firms such as Backstage Capital, TMV, WOCstar, Mendoza Ventures, Preface Ventures, Collab Capital and Recast Capital have raised new funds.

Meanwhile, larger venture firms have launched their own diversity funds. Insight Partners announced in June it closed a $15 million fund for diverse early-stage companies. At the same time, Homebrew general partner Satya Patel has led the formation, with several other seed-stage investors, of Screendoor, a $50 million venture capital fund of funds that will invest in seed and early-stage vehicles with at least one underrepresented minority GP.

But these diversity fund sizes are often smaller than what larger, more established funds can ask for.

Some lay the blame for this on the lack of minority GPs in the larger VCs and LPs, which often informs the types of network they have. This perceived homogeneous workforce can limit the founders they can reach out to.

A working-class population

Sharon Vosmek, chief executive and managing director of the non-profit Astia, says the LPs need to step up and take more responsibility for the millions of dollars they allocate to VCs.

“These pensions, be it CalPERS or CalSTRS, you name it, are built on the backs of the working-class population that I think would be stunned to find out that LPs have basically said, ‘You know what, it’s OK that we’re going to help white men create more jobs in the innovation economy,’” she says.

“We hope that we’ll see more diversity in the portfolio, because we’re talking about it on panels, and we’re talking about it in our interviews on the radio,” she adds. “But we don’t ever look at the fundamental impact of our $150 million in the market.”

Vosmek says LPs need to understand that even if their venture capital allocation is smaller, VC “out punches its weight in the economy” and helps create jobs and is the fastest way for women and people of color to build wealth. This way, LPs can see how much of an impact their investment has in terms of pushing for greater diversity.

Sharon Vosmek
Sharon Vosmek, Astia

Astia has made it a priority to invest in female leaders. One of the ways it works with its LPs is to help them better understand the impact their investments have.

A more diverse LP base also helps. Toney’s Plexo Capital acts as an LP for many diversity funds and has put capital into such vehicles as Preface Ventures, Ulu Ventures, MaC Venture Capital and the Female Founders Fund. Plexo also takes a direct investment in some of the portfolio companies of the venture firms it supports.

For Toney, LPs approach diversity in two different ways. Either they want to get more information on its benefits, or they see how the world is changing.

“One driver is the ability to see more success stories,” he says. “They want more data, they want more proof points, even though I would argue there’s enough data. The second piece is where the narrative is today. We’ve seen companies have initiatives. There are folks that invest in diversity and there’s enough data for them. And hopefully, that can provide the leadership for others to take the plunge.”

Toney, a former partner at GV, has raised funds for Plexo Capital from such investors as Google’s parent company Alphabet, the Ford Foundation, Cisco and Intel.

Funds that work with diverse founders believe LPs hold the key in their continued investment into diversity. But sustaining such investment can be a challenge when there are not many people within institutions, corporations and foundations who fully understand why it is essential to focus on underrepresented minorities.

Miriam Rivera, co-founder and chief executive of early- and seed-stage venture firm Ulu Ventures, says it is important for LPs to take a hard look at their boards’ representation to ensure that diversity initiatives come from the top.

“When diverse people are included, either in the board of organizations like foundations or like education endowments and pension boards [it’s good],” she says. “Pension boards typically do have people from the community, so they have some representation from their members, although not necessarily diverse members of their communities. Now, take it a step further and ask yourself: do we have diverse people from our population represented on those boards? Because you’ll see a difference in terms of what happens to investment portfolios when the boards of limited partners become more diverse.”

Rivera says it is often harder for underrepresented founders to access the kind of capital that their white male counterparts usually have access to, so it becomes vital that LPs open up their networks.

LP responsibility

Many VCs say that even though the narrative around minority businesses has changed, LPs sometimes – as Toney points out – need to be convinced that diverse-led companies will be successful.

However, it is difficult to remove societal pressure from the conversation. After the protests following the murders of George Floyd and Breonna Taylor, the rise in violence against Asian Americans and voter disenfranchisement – as well efforts to build on the momentum from the #MeToo movement in recent years – people called on companies to examine their commitments to minorities. LPs are also starting to see the importance of adding greater diversity to their ranks.

In some ways, LPs themselves have begun to push VCs to look for minority-led companies to invest in and to diversify their networks further. As LPs see a generational shift in their hiring, their approach to investment starts to change as well.

Vosmek, Toney and others point out that various LPs, and those that had not been LPs before, are also coming to the fore. Vosmek says that family wealth passing on to new generations, women gaining influence and power within family offices, and corporations creating more robust dialogues on race and gender are starting to provide capital to many diversity funds.

New LPs such as Synchrony Ventures and Accolade Partners back funds for underrepresented minorities. Accolade Partners, through its Accolade Empowerment fund of funds, is to invest $200 million in women-led and diverse managers. Synchrony Ventures committed $15 million to Black, Latinx and female VCs.

Although LPs play a critical role in expanding investments to diverse companies, the fact that more minority GPs want to start their own funds has pushed the needle even further. These GPs have often worked in larger VCs or in start-ups and have seen that they can make a difference by virtue of the investments they can dictate.

Toney notes that a lot of the new fund managers are succeeding in raising funds. “We’re seeing the benefit of the change and the narrative for those that have been doing this for a while,” he says. “[It’s] encouraging people to now want to go out and start their own funds, or go be scouts, or participate in some of these programs to learn how to be an investor or even do angel investing, whatever the case may be. These are all positive changes.”

An investor of color or of a different gender is more likely to seek out minority founders since their networks can look different from those of a white male GP’s network. Funds led by diverse partners sometimes do not even intentionally position themselves as diversity vehicles.

Diversify the ranks

Silicon Valley LatAm Capital, based in San Francisco, is not necessarily a diversity fund. However, founder and managing partner Consuelo Valverde says that when she took a closer look at its portfolio at the request of an LP, she found that 95 percent of its investments were in companies with diverse executive teams.

“This proves the case that diverse fund managers invest in different founders and different start-ups,” she says. “It’s a natural thing. Our networks are different. A VC’s dealflow or network is as diverse as the VC is.”

SVLC has invested in medical device company Encellin, diagnostics company HealthCube and biotech firm Correlia Biosystems. All three, along with others in its portfolio, have diverse executive teams.

SVLC, which closed a $22 million second fund on June 9, counts PayPal, the Julian Grace Foundation and entrepreneur Crystal Sacca among its LPs.

Diverse GPs often want to focus on their communities and bring funding or growth opportunities to people who look like them.

Valverde SVLC
Consuelo Valverde, Silicon Valley LatAm Capital

However, the responsibility of investing in more diverse companies should not only be a burden on people from minority communities, whether they are working for GPs or LPs. Relying on minority-fronted funds to continue investing in diverse companies puts undue weight on their shoulders. Often, this can lead some minority founders to feel betrayed that a fund headed by someone from a different minority decided not to put money into their companies.

Many VCs say this is why the entire ecosystem has to step up and do its part to expand its networks and tap diverse founders. LPs and VCs alike should take a hard look at how many companies with diverse leaderships they have invested in. This would also help them to determine whether there are companies within their respective sector strategies – such as fintech, energy and healthcare – that they may have overlooked because they concentrated on referrals from their current networks.

No matter who is pushing for more diversity, it is important that larger funds and LPs keep recommitting to the cause.

Just because more LPs and venture firms invest in companies with diverse teams does not mean the problem has been solved. Plexo Capital’s Toney notes that all these measures amount to an excellent first step, but that more should be done beyond the first few proclamations.

“What we need to do is continue to push and check in,” he says. “Are people re-upping? That’s going to be the big question and we need to look 12 months ahead and see if these corporations are coming back. If they don’t come back, those are some big holes to fill.”

Many of the people Venture Capital Journal spoke to agreed that diversity does not end after a year. It is an issue that has been in the public consciousness for decades and that has roared back, but that does not mean it will be an easy fix.

It is an issue where more than just words are needed. What is required instead is a focus on action around hiring more diverse employees, expanding existing networks, and recommitting to diversity year after year, fund after fund.

Only then will the change in narrative be complete.