Twitter was in a tizzy when a buzzy new VC fund debuted in March.
The chatter was not about the fund but rather that the announcement of the all-male firm was made on International Women’s Day. It was seen as yet another example of the industry doing business as usual after professing the importance of diversity.
The venture industry remains predominantly male and white, according to data from the National Venture Capital Association and Deloitte. White men and women represent 76 percent of investment and partner positions, followed by Asian or Pacific Islanders at 17 percent, Hispanic or Latinx at 5 percent and Black partners at 4 percent.
Crunchbase reports that Black-led start-ups received 1.2 percent of the total value invested in companies in the first half of 2021, with 2 percent going to female entrepreneurs.
Those shocking statistics might cause some people to throw up their hands. Nevertheless, VCs – ever the optimists – say the situation is far from hopeless.
Here are six things firms are doing to make the industry more inclusive.
Use the power of the term sheet
As any lawyer will tell you, if you want to make sure people follow through on what they say they’re going to do, have them put it in writing.
In the venture business, the most important place to write things down is the term sheet. That is why Alejandro Guerrero, general partner of Act One Ventures, created the Diversity Rider in 2020. He says the idea came to him as he looked for ways to deepen his and his firm’s commitment to diversity.
The rider states: “In order to advance diversity efforts in the venture capital industry, the Company and the lead investor, [Fund Name], will make commercial best efforts to offer and make every attempt to include as a co-investor in the financing at least one Black [or other under-represented group including but not limited to Latinx, women, LGBTQ+] check writer (DCWs), and to allocate a minimum of [X]% or [X] $’s of the total round for such co-investor.”
When Guerrero came out with the rider in August 2020, nine venture firms committed to including the language in all of their term sheets: Equal Ventures, Fifth Wall, First Round Capital, Greycroft Partners, Harlem Capital Partners, Maveron, Plexo Capital, Precursor Ventures and SVB Capital. Since that time, more than 85 venture firms have publicly signed up to use the Diversity Rider and have inserted it into hundreds of term sheets, according to its website.
Early stage investor Lerer Hippeau took the Diversity Rider’s exact wording and plugged it into its conversations and contracts with portfolio companies, says operating partner Stephanie Manning Cohen.
“We thought that if we were including it in our term sheets, it would create a conversation very early for our portfolio companies, especially since often these are companies that are going through their first real institutional round,” says Manning Cohen. “It’s a great time to make sure founders think about that [diversity] from day one.”
Guerrero is optimistic that more VCs will sign on as word spreads. “The majority of the folks signing on now, it’s because they’ve been seeing this in term sheets and in the deals they’re doing,” he says. “There have been so many diverse syndicates finding their way to cap tables, which is great; though it’s still more dependent on a network.”
Some firms may choose to bypass the Diversity Rider and make their own modifications to their term sheets to achieve certain diversity goals. Take early-stage healthtech investor DigitalDx Ventures. Co-founder and managing partner Michele Colucci says she makes sure the companies she backs commit to diversifying their boards by stipulating in the term sheet that the company’s board should include at least one or two women or people of color.
“All of DigitalDx’s deals now use this standard required language after we noticed a pattern in the first two out of three investments of having no women on the boards,” Colucci says. “The resulting groupthink was very limiting.”
So far, DigitalDx has used the term sheet stipulations with five companies, with another three on the way. Colucci notes that some investors push back on this. In one instance, new investors to a portfolio company asked to remove the requirement during another round. The company tried to renegotiate the terms, but DigitalDx stood its ground.
“The end result is that we broadened the term sheet to include women and minority board members,” she says.
Identify and correct unconscious bias in investment decisions
In an ideal world, investment decisions are made by groups that reflect society.
However, we do not live in a perfect world, and under-represented groups have trouble raising venture capital. To correct this imbalance, it is important that firms confront their unconscious biases about race and gender, says Sharon Vosmek, chief executive of Astia.
Astia is a non-profit organization and foundation founded in 1999, whose mission is to provide capital to women-owned businesses and level the playing field for inclusive teams.
It has created three investment vehicles to support diversity, starting with Astia Angels, a group of angel investors. It bolstered its financing efforts last year with the launch of its first venture fund, which is anchored by MasterCard and has a fundraising target of $100 million. That fund has invested in start-ups such as fintech company Ellevest, content licensing platform Catch&Release and interior design company Modsy.
An ‘aha’ moment
While Astia’s efforts have helped make the industry more diverse, the organization realized it still had a blind spot when it came to race. Vosmek recalls an ‘aha’ moment at an event in 2018. “We hosted a dinner party for the companies we did not invest in but met all our criteria; it was one of those events where we catch up and see if we wanted to invest now,” she says. “At that dinner, I realized that 80 percent of the CEOs were Black.”
“We intend to work vigorously to eliminate bias at all stages of our investment process. We’re going to continue sharing our learnings, and we hope others follow us”
It was a humbling moment. “We’ve always been clear that investment is the measure of if we’re successful, and this was a very clear failure,” she says.
After the dinner, Vosmek and her team returned to their datasets to figure out what made them pass on those deals and founders. They developed a pilot program called Astia Edge to determine how unconscious bias affected their investment decisions and to come up with a solution. Astia shares the details of the three-year pilot program in a January report entitled Astia Edge, Our Failure to Invest in Black Founders and What We Have Done About It.
The pilot program led to the creation of Astia’s third investment vehicle, Astia Edge, an evergreen fund backed by its corporate partners that invests in “exceptional seed stage companies led by Black and Latinx women.”
The effort has already yielded positive results. Since the start of the pilot, 23 percent of Astia’s new investments have been in companies led by Black CEOs, and two of the four investments made by Astia Fund since launching in January 2021 have been in companies led by Black female CEOs, according to Astia. To guide Astia Edge, the company hired a program director but declined to reveal that person’s name as of press time.
“This is just a start for us, and I don’t want anyone to walk away and say Astia has declared victory,” Vosmek says. “We intend to work vigorously to eliminate bias at all stages of our investment process. We’re going to continue sharing our learnings, and we hope others follow us.”
Diversify your network
The lack of diversity in venture can be traced to a homogenous network of people who rely on existing connections for deals.
In theory, diversifying that network should result in more exposure to – and funding for – under-represented founders.
Marceau Michel and Himalaya Rao-Potlapally co-founded Black Founders Matter in 2018 as a way to support Black-led start-ups that fall outside the traditional VC ecosystem. The $10 million seed-stage fund focuses on Black founders who built companies based on their lived experiences and approach business differently than traditional founders. It has invested in 10 companies so far and has made “incredible progress with them,” says Michel.
It was clear from the start that the fund should not use traditional means of evaluating founders. “We really wanted to do things differently when it came to this fund,” Michel says.
“What a lot of funds end up doing is investing in Black entrepreneurs who graduated from Stanford or already have the network instead of looking for different entrepreneurs with different lived experiences”
Black Founders Matter
“Benchmarking has been the way venture has been run for the last 100 years. But when you’re going to compare people from different backgrounds, life experiences and networks, it’s hard. You have to look at the founders and value them for their innovation instead of separating them for being different.”
Rao-Potlapally says Black Founders Matter isn’t advocating for the removal of benchmarking measurements. Instead, it wants to put a greater emphasis on what makes a founder different and uniquely positioned to create solutions. “What I’m saying is that when you have diversity mandates, then what you look for is someone that satisfies that requirement without actually seeing if they’re different,” she says. “What a lot of funds end up doing is investing in Black entrepreneurs who graduated from Stanford or already have the network instead of looking for different entrepreneurs with different lived experiences.”
Invest in diverse managers
Quite a few new funds led by women or people of color have emerged in recent years.
But some efforts have taken longer than expected to hit their goals. Enter The Equity Alliance, a fund of funds that acts as an LP to venture firms led by diverse teams.
Its high-powered founders are Richard Parsons, former Time Warner CEO and co-founder of R&R Ventures; Ronald S. Lauder, a billionaire and philanthropist; Benjamin Lerer, Kenneth Lerer and Eric Hippeau of Lerer Hippeau; Eric Zinterhofer, founding partner of Searchlight; Scot Kapnick of HPS Partners; and Michael Novogratz of Galaxy Investment Partners.
CEO Claude Grunitzky tells Venture Capital Journal that The Equity Alliance was born out of the realization that many new funds – especially those started by people of color and women – reached their fundraising targets much more slowly than those run by white males.
For example, it took Serena Ventures, founded by tennis superstar Serena Williams, more than a year to raise $111 million, while VC funds managed by white males have raised that in a matter of weeks, Grunitzky says. (The Equity Alliance is an LP in Serena Ventures.)
‘Totally different planets’
“We tested this model of channeling dollars… into some of these funds because we think that a rising tide does lift all boats,” he says. “We were thinking of the system’s inequities where, without always saying that the odds are stacked against Black people and women, I could see that we were on two totally different planets.”
Grunitzky adds that the fund of funds can make direct investments in portfolio companies of the VCs they work with to further invest in people of color and women.
The Equity Alliance’s first fund raised $28 million. Grunitzky says it was thanks to the diligence of the VCs it invests in that The Equity Alliance found success early. He notes it already has one unicorn in its portfolio – Esusu, a credit-building platform – which it backed after Esusu received an investment from Serena Ventures and Concrete Rose Capital.
The Equity Alliance is not the only fund to use this model. For example, Plexo Capital is an LP for new VCs, in addition to an early-stage investor. Likewise, Techstars and JPMorgan teamed up to form an $80 million fund to support diverse entrepreneurs and founders.
Lower the hurdles to let more people in the race
If the venture industry wants to be truly diverse, it must go beyond its own partnerships and investment portfolios to increase participation from under-represented groups.
Take historically Black colleges and universities (HBCUs), which confer about half of the STEM degrees for Black students. They often cannot invest in VC funds because they cannot meet the minimum investment requirements, says Laura Weidman-Powers, operating partner at Base10, a Black-led VC fund.
The combined endowments of 100 HBCUs come to just $2.7 billion, she notes. Contrast that with Harvard’s endowment, the largest in the nation, at $53.2 billion.
Carry for scholarships
To help grow HBCU endowments, Base10 last year launched the Advancement Initiative, a $250 million fund that invests in pre-IPO companies. It has promised to donate half of its carried interest to HBCUs to grow their endowments and create student scholarships.
The Advancement Initiative also includes HBCUs among its LPs, including Howard University, Florida A&M, Hampton University and Tuskegee University.
“There are two main sides to [the Advancement Initiative]. One is to grow HBCUs endowments, and on that front we’ve almost fully deployed. We’re looking ahead towards the idea of raising a second one”
“There are two main sides to [the Advancement Initiative]. One is to grow HBCUs’ endowments, and on that front we’ve almost fully deployed,” Weidman-Powers says. “We’re looking ahead towards the idea of raising a second one, which creates another opportunity for more HBCUs to participate.”
Another VC firm trying to make it easier for under-represented groups to participate in venture is A100x, which focuses on the blockchain. The New York firm offers a lower investment threshold for women to be LPs in its fund.
A100x general partner Nisa Amoils says it was important for the fund to tap all kinds of interested investors, even if they do not have deep pockets. “I’ve noticed that many women don’t even know if they’re an accredited investor or not,” Amoils says. “[Venture capital] is a system that’s traditionally kept people out, and to close the gender gap I think women have to be able to create wealth.”
When women reach out to A100x as possible LPs, the fund allows them to participate in much smaller amounts. Male investors, she says, have to invest 10 times the minimum for women. She declined to give exact amounts.
Get hands-on with mentorship
Mentorship and internship programs have existed for as long as most VC firms, but it is only recently that they began to focus on working with under-represented ethnicities and sexual orientations to create a more diverse and equitable industry.
The Material Change Institute offers a one-year executive program to support diverse investors and increase their representation in the industry. Launched in October 2021, participants undergo a three-month intensive course where they learn core investment skills before taking internships with VCs.
Founder Eve Blossom says the program’s goal is to allow people to complement existing skills such as marketing with investment skills, easing the path for more diverse investors to enter the industry.
“Minorities and women have long been under-represented in the asset management markets as a whole,” Blossom says. “A lack of experience or skills or networks, proximity and track record are often cited as barriers to employing under-represented individuals. But in reality, it may be the fund itself that lacks the experience and networks in finding, hiring and retaining diverse investors.”
VC appears to be embracing the mission. The Material Change’s lecturers have included veteran VCs such as Charles Hudson of Precursor Ventures, Nihal Mehta of Eniac Ventures and Tim Chang at Mayfield Fund.
Angel investor Ayori Selassie says participating in the program taught her ways to transition to VC full-time. “I come from an operating background, and I didn’t want to just transition to running a fund,” Selassie says. “I wanted to run the best possible fund that I could, and when I heard about Material Change and the way they bring in all of these seasoned investors, I knew that was something that would’ve been impossible for me to access before.”
Creating a guide to VC fund management
Other programs aimed at helping new GPs include Plexo Capital’s GPx, which launched last year to help guide new VCs and give them access to a network of GPs and LPs. Plexo founding managing partner Lo Toney says he started GPx because of his own experience.
Toney got his start at GV (formerly Google Ventures) and realized there was no comprehensive guide to VC fund management. That led him to reach out to his mentors and eventually gather his learnings into a program.
GPx offers open-source video classes from industry experts. A cohort program also grants access to office hours with mentors. While not necessarily targeted towards diverse GPs, Plexo is known for investing and working with diverse VCs. Its inaugural cohort leans heavily towards people of color and women. GPx cohorts can also use Plexo’s in-house portfolio managers and a social media manager to build their brand.
One of the goals of the program is to remove the roadblocks those new to the industry typically face. “By helping to remove some of these artificial barriers, we hope to make becoming a GP more efficient,” Toney said in a previous interview with VCJ. “That by removing some of the friction, they will be able to understand what’s necessary to be a truly world-class, institutional-grade fund manager.”
There is no easy fix for lack of diversity. Many of the programs enacted by VCs are sure to evolve. The important thing is that these efforts demonstrate that VCs are serious about making good on their word to ensure the companies they invest in reflect the society that utilizes them.