Friday Letter: Funding for diverse founders has ‘not meaningfully changed’

'There is still a pernicious idea in venture that by taking into consideration the identity and background of portfolio founders and companies, a fund will be deprioritizing returns,' says Kapor Capital's Brian Dixon.

Venture capital firms need to start putting their money where their mouths are when it comes to backing diverse founders, say the managing partners at social impact firm Kapor Capital.

“While there has been increased discussion about funding for Black and Latinx founders, we’re still seeing a disconnect between how dollars are allocated and the numerous diverse founders with high-impact companies who are being overlooked,” Brian Dixon, managing partner at Kapor Capital, told affiliate title New Private Markets.

Kapor Capital discovered this “disconnect” when it found – using US census data – that only 1.2 percent of the $147 billion invested in US start-ups in 2021 went to Black founders. Meanwhile, funding for Latinx-founded early-stage start-ups decreased from 1.5 percent in 2020 to 1.2 percent in 2021.

Kapor Capital managing partners, from left: Brian Dixon and Ulili Onovakpuri and founding founders Mitch Kapor and Freada Kapor Klein

“The reality is the VC industry has not meaningfully changed,” Dixon said. “There is still a pernicious idea in venture that by taking into consideration the identity and background of portfolio founders and companies, a fund will be deprioritizing returns.”

Kapor Capital, which backs tech start-ups that close equity gaps, has set out to disprove this, doubling down on efforts to back diverse founders. In 2017, about 59 percent of its portfolio companies were led by diverse founders, but by 2021, 100 percent of its investments went into companies with a founder from an underrepresented background.

If venture firms want to make substantial progress in supporting underrepresented founders, they need to start matching verbal commitments with tangible benchmarks and a specific plan of action, Dixon explained.

Kapor Capital accepts all cold requests from founders through its website as a way of leveling the playing field and preventing investments from circulating among the hands of a selected few.

Diversity and inclusion

The firm also created Founders’ Commitment in 2016, an initiative where portfolio founders set diversity and inclusion goals for their individual companies. “This lens helps us ensure the start-ups we invest in are driving change within their communities,” managing partner Ulili Onovakpuri said.

“We’ve demonstrated that diverse companies not only drive incredible returns but offer a competitive edge by bringing a distinct point of view into underserved needs in our communities,” Onovakpuri noted.

In September, the firm raised $126 million for its third fund from about 70 LPs, including Bank of America, Blue Cross, Blue Shield of Louisiana, Cambridge Associates, Ford Foundation and Winthrop Rockefeller Foundation, Venture Capital Journal previously reported.

At the time of its commitment, Ford Foundation flagged Kapor’s focus on increasing accessibility to venture capital as a key area of interest. “Investing in innovative people and ideas is what fuels economic and societal progress, but far too often access to that capital is unequal and unbalanced,” said Roy Swan, a director of mission investments at Ford Foundation.

Kapor Capital, based in Oakland, California, was founded in 2011 by Mitch Kapor and Freada Kapor Klein, who provided $25 million for its first fund in 2015 and another $60 million for Fund II in 2018. The couple announced in a blog post in May that they were stepping back and that Dixon and Onovakpuri had been named managing partners to lead the firm forward.