The venture model fails in terms of diversity investing

Megan Harris of Astia proposes how to eradicate bias from investing. To do so, she says VCs must first dismantle the current process.

Venture capital clearly punches far above its weight. We choose and fuel the next industry-leading companies, and subsequently determine those individuals most likely to achieve new, significant wealth.

This power cannot be overstated, especially when we look at the data for investing in women, Black and other underrepresented founders. Underrepresented founders comprise a dismal, single-digit percentage of funded entrepreneurs annually, a shocking proportion that hasn’t changed in decades.

Importantly, funding for female founders, representing 2.3 percent of total venture capital in 2020, according to Crunchbase, significantly decreased during the pandemic, a growing divide that eerily reflects the broader wealth gap.

We are not necessarily investing in the best companies, but in those founders who are best connected to capital.

VC Diversity Venture
Megan Harris, Astia

Rethinking the venture model will take more than meeting with entrepreneurs outside of our homogenous circle. We must intentionally invest.

We have seen a recent explosion in targeted funds towards underrepresented entrepreneurs or side funds from prominent groups and institutional investors. Unfortunately, this represents a fraction of venture.

As long as the mainstream venture capital model itself is fundamentally broken for underrepresented groups, we will fail to see much deserved equity in entrepreneurship and beyond.

Built on bias

Astia has worked for 20 years to uncover the source of gender and racial investment disparities, and to seek equity for women-led teams. Our evolution as an investor has circled around one core revelation: even with the best of intentions, the venture capital process is built on bias.

In this time of global reckoning on how bias shapes society, we must face our own and rethink our process and the consequences of our investment decisions. To address this at Astia, we sought to innovate on the investment model itself, building an online platform called the Expert Sift with an open, global call for companies – those with inclusive teams. Referrals and connections are never required.

We retooled how to best evaluate companies, developing a data-driven, documented and repeatable process that leverages the feedback of a curated and diverse crowd on the value proposition of the business. We share this feedback openly with the entrepreneur to drive value and connectedness.

Astia will not ask who the team knows, or who else has invested. These are questions rooted in bias. Shocking to some, we don’t even meet with companies until they have passed through this democratized process.

Finally, Astia intentionally invests in companies with at least one woman in a position of power, equity and influence, and intentionally in teams with racial diversity. This is the world we wish to see, one of intentional inclusion, and because these teams and this investment thesis are most likely to succeed.

Through all of this, we have diversified and increased our sourcing of interesting, quality deals, often finding companies that others haven’t yet. If you take a look at our portfolio, you might not recognize many of the companies, even among those with successful exits. They are all proof of the great opportunity that exists outside of the traditional funnel.

For example, our recent lead investment in Goalsetter pairs a capable, inclusive team with an innovative fintech solution for a large underserved market, one historically ignored by large financial institutions. Goalsetter closed an oversubscribed round in addition to a $1 million partnership with Nike to bring savings accounts to 10,000 Black youth.

Performance still matters

As venture capitalists, we are in the business of returns, not impact. We look for undiscovered opportunities, and we look to diversify our investments. When 90 percent of our capital funds predominantly white men, eradicating bias and doing our part to intentionally instill equity actually improves our returns.

A recent McKinsey study shows that the argument for greater diversity within business is obvious. Companies in the top quartile for gender diversity on executive teams were 25 percent more likely to achieve above-average profitability than companies in the fourth quartile. Diverse teams, women-led teams and underrepresented founders all outperform.

Our model at Astia also outperforms, as we have achieved outsized returns for our investors since 2013. And this is demonstrated by how we recently launched a new $100 million Astia Fund, led by Mastercard.

As we continue to uncover new companies and new venture firms from outside the traditional mold, or those founded by underrepresented leaders, let’s rethink what each of us can do to do better, financially and in instilling equity.

If we look within ourselves and our biases and choose to broaden our viewpoint, we can change how bias shapes our pattern recognition. If we funded just one entrepreneur or if LPs funded one new GP who didn’t quite fit the normal model, that may very likely become our best investment yet.

Megan Harris is director of development at the Astia, which supports and invests in women-owned companies.