The killing of George Floyd and the ensuing protests over the last month have forced the venture industry to look in the mirror and reflect on its own role in the systemic oppression of Black people. The reflection isn’t pretty.

The industry is built on systems that contain biases and assumptions that have made it harder for Black founders and Black investment professionals to be as successful as their white counterparts or even have access to the same opportunities.

Black investors make up about 2 percent of overall investors, according to data compiled by Richard Kerby, a founder and partner at seed-focused Equal Ventures in New York. However, it gets worse. About 81 percent of firms don’t have a single Black investor and there are currently zero Black female general partners at firms not founded by people of color.

“At the end of the day it’s not that people have realized it was an issue, they knew it was an issue, and they are now being forced to care,” Kerby said.

Need to diversify

In the aftermath of the Black Lives Matter marches and protests that have occurred in recent weeks, many firms were quick to express ideas, make donations and discuss intentions to move the diversity needle. Others have made pledges to change their hiring and funding practices.

Despite the industry voicing commitments to change in the past with little results, this time feels different. It feels more authentic and it has VCs like Frederik Groce feeling “cautiously optimistic.”

Groce, a principal at Storm Ventures, an early-stage, enterprise-focused firm, and founder of the community organization BLCK VC said that the current conversations about racism feel more sincere. But none of that matters if the industry doesn’t stay true to its word.

“We as firms need to diversify. It’s ridiculous that it’s 2020 and you find general partnerships that are all white or all male,” he said. “Constant survey after survey and report after report show that diverse teams perform better.”

Firms need to hone hiring strategy

Sarah Kunst, the managing director at seed VC Cleo Capital, echoed this sentiment and added that the industry should focus on hiring in productive ways, because the market’s diversity problem won’t change if Black people are only brought on board at firms as associates or analysts without the ability to write a check or with no clear path to get there.

“The reality is nothing changes unless things actually change, which is in the hiring,” Kunst said. “If firms aren’t changing through who they hire, everything else is largely for show.”

Groce said that hiring a diverse staff is a crucial step because biases provoke many investors to back founders that look like themselves. Bringing diverse voices to the table helps diversify deployment.

Groce said that at Storm, the entire staff screens potential investments. As a Black professional, he pushes significantly more diverse teams through the process than his counterparts.

However, to say that if firms only had more Black investment professionals there wouldn’t be the same level of inequality is placing the problem on Black indigenous people of color (BIPOC) to fix and ignore the real industry-wide problems.

“I don’t think it’s enough for only Black investors to invest in Black founders,” Kunst said.

Hiring is also slow and infrequent for many VC firms. So while it may take awhile for firms to materialize on their hiring pledges, there is plenty more ways to help make the broader system more inclusive.

“I don’t think it’s enough for only Black investors to invest in Black founders.”

Sarah Kunst

Cleo Capital

Pat Matthews, founder and CEO of San Antonio-based B2B enterprise investor Active Capital, is one of many VCs pledging to hire and fund more diverse talent. In the meantime, his firm has made a total of $10,000 in donations to organizations like the NAACP Defense and Education Fund and the Minnesota Freedom Fund.

Matthews is part of a growing pool of investors that have begun to tap into the notion that to really drive change in the industry it starts but can’t end at the firm level.

How to move the needle

Many know that to actually move the diversity needle in the industry that it takes equal if not more work to fix the system that allows discrepancies to oppress Black and minority individuals from achieving the same opportunities in the first place.

“Starting with the acknowledgement that we are not living in a meritocracy, we have to start there,” said Michael Berolzheimer, founder and managing partner at pre-seed-focused Bee Partners.

Berolzheimer said that he found himself so frustrated with everything going on, he has since pledged to help right some of the wrongs that may have caused his firm to miss out on opportunities whether that be a founder or potential employee.

“Where are we finding those founders? We are doing it based on convenience and I think we have the opportunity to change that way of thinking and we have committed to that,” Berolzheimer said. “Part of this process to us as a firm is to commit and commitment is hard and it’s work. It’s going to make us feel uncomfortable and that’s a good thing because hopefully we are learning.”

He added that there are so many biases that Silicon Valley holds about the market that just aren’t true and contribute to the diversity divide. Groce added that without acknowledging these assumptions it’s hard to even grasp the full scope of the problem.

VC Michael Berolzheimer, Bee Partners
Michael Berolzheimer, Bee Partners

He and Groce mentioned that a prominent example is the expectation from most early-stage firms that the founders they are meeting with have already raised money from friends and family.

“We don’t do the same level of work when it comes to communities of color in the US and that is a problem,” Groce said. “The vast wealth inequality in the US has real material implications if a founder can raise money from friends and family. That structure isn’t equitable to everyone.”

Correcting the dialogue disconnect

Another disconnect exists around networks. Many networks in VC are exclusive and operate in satellite of one another with little effort to ensure inclusion.

“We have a lot of diversity in our portfolio, but I still think we can do better to broaden our network,” Matthews said. “Most of our dealflow is inbound, but we influence that. We act on referrals and we [visit] accelerators. It can come off like it’s a pipeline problem. I’m trying to have the realization we can influence our pipeline.”

Nihal Mehta, one of the founding general partners at seed-focused Eniac Ventures, said that when news broke about George Floyd, the Eniac partners, located in San Francisco and New York, decided to block out times in their calendars to meet with diverse entrepreneurs. They quickly booked 104 virtual meetings in less than 24 hours.

Mehta said that after his first few meetings he was shocked at the divide of knowledge and networks and how “siloed” information in the industry truly was. He found that references to successful companies or entrepreneurs didn’t resonate the same way they had in his usual meetings.

“Networks are very different and there is very little sharing across socioeconomics, geographies and of course race. That’s one of the big reasons that venture capital and the tech community at large is kind of estranged from the Black community,” Mehta said.

Berolzheimer has seen this, too. He said that venture is an information-sharing business and without the same access to knowledge that flows through these networks, entrepreneurs don’t start on equal footing even before they try to raise capital.

Mehta added that they hope to fund companies sparked from these meetings if they are a good fit. At the very least they want to make introductions to help these founders build out their networks which he remembers being invaluable when he was on the other side of the table.

Both Kunst and Groce added that in expanding a network, firms should look to build diversified networks outside of VC, too, which is a more common practice for white VCs and tech companies.

VC Frederik Groce, Storm Ventures
Frederik Groce, Storm Ventures

“There are a lot of Black executives who work in tech, but the average doesn’t know a VC,” Groce said. That’s extending outside these communities and I don’t understand why they wouldn’t take that time. That seems pretty obvious if you want to diversify your funnels.”

Kunst said she has worked to connect Black founders with public company CEOs and professionals, as well.

Growing to scale can lure LPs

Matthews said another way he will look to expand his network is as an LP. He currently is an investor in multiple small venture funds and said he is committed to expanding his reach.

At the early level, many first-time funds and small vehicles are funded by high-net-worth individuals or family offices, making expanded social networks once again an important asset for Black VCs to get started.

Kunst’s first fund was $3.5 million, the second largest first-time fund raised by a Black woman. And while many institutional investors have mandates to back diverse managers, the majority of the industry is too small for their support.

“Once you are at scale, institutional investors have the mandate to back you,” Kunst said. “I would guess that when you look or talk to the people who have scaled venture funds, when they get in front of LPs, they have a pretty high rate of success.”

While many LPs could put more pressure on the diversity of their managers and diversity in the underlying portfolio, that is just one slice of an asset class that has a long way to go.

“It’s hard to analyze any initiative without fully understanding it,” Kerby said. “Some of it could be great with investors and founders. I think we will have a better answer over the next couple of months, and that conversation will lead to a better answer toward the end of the year about which of those means will be longer lasting.”

Groce adds that moving the needle will be a lot of work for the industry but that the emphasis is on progress and no one expects the industry to change overnight, just to keep its momentum.

“I’m very optimistic we can actually do better,” Groce said. “We aren’t asking for 20 percent of your deals. We are just asking for more equity than we are at.”