Racism and Venture Capital

Recently, I read with dismay certain controversial posts by Joe Lonsdale that caused Jeff Bussgang to write his Medium post Are VCs Racist? Explaining the Capital Gap. I thank Jeff, as an ally, for taking a public stand and writing his constructive and educational piece. I read the Venture Capital Journal piece that excerpted Jeff’s article, linking to but not sharing the posts themselves, an unfortunate editorial decision. I encourage everyone, particularly VCs, to read the full post.

When I read the posts that served as a springboard for Jeff’s article, I felt sad and, like many in the diverse VC community, too tired to respond immediately. Those posts came from someone who no longer seems to be the thoughtful, considered, intellectually rigorous investor I have known Joe to be. They didn’t come from the philanthropic idealist I met on a nonprofit board working to send URM kids to four-year colleges. They didn’t come from the visionary entrepreneur, angel, and later VC who was an ally to me, giving Ulu access to invest in Palantir early and who shared other opportunities as well. I feel compelled to speak because I know more of Joe than just his words on Twitter posts.?

Many condemn Joe and want others to do the same. I condemn what Joe said as unworthy of who I think he is. In addition, his comments had nothing to do with venture capital. One could tease out a grain of truth in his comments about educational attainment and familial status.? However, the bias and prejudice inherent in the words “failed cultures,” make it difficult to address his comments in a meaningful way.? More importantly, such a discussion would distract us from an understanding of how VC is racist.

As an Afro-Latina VC, I want to be an ally to the Black VC community and a bridge builder to other communities. It is sometimes difficult for people with differences to be in community together, to look at our shared past and the lack of equity to which many in our country have been subjected. We splinter off into our segregated neighborhoods, churches, and professions and we make people unlike us the “other” and “wrong,” as we see in these posts.??

Regardless, I don’t believe in “cancel culture.” The earliest abuse I encountered in life came through my parents. Each had been physically, sexually, and/or emotionally abused in their own childhoods. Like a third of abused kids, they carried some behaviors into the next generation that might be deemed unforgivable by some. Cancel culture essentially says that some things are unforgivable. It says someone can cast the first stone because they are without fault.? I can’t cast the first stone on Joe or anyone.? Despite my efforts, I too hurt people both unconsciously and unconsciously as a result of my early conditioning. I sometimes yell, and even scream, when angry at home because that’s how I was raised. I abhor behaving this way and the pain it causes my family. I challenge anyone, however, to say they have not been conditioned to accept unhelpful beliefs and behaviors in the environments in which they grew up.? The 1958 musical, South Pacific, got it right when it said, “You’ve Got to Be Carefully Taught.?

In Joe's case, as with most of us at our worst, there must? be some experience we don't know about that has contributed to his hurtful and inaccurate comments. Overcoming one’s conditioning can be supremely difficult; but I hope it's not impossible. Pema Chodron quotes Samuel Beckett in a recent book, “Ever tried, ever failed. No matter. Try again. Fail again. Fail better.” Most of us would benefit by taking that advice to heart, holding ourselves and others accountable for doing better instead of writing ourselves and others off as unforgivable.

Notwithstanding, venture capital sometimes gives me pause because of its intransigence on issues of diversity. The answer to the question of whether VC is racist–or sexist, ethnocentric, homophobic, classist or many other undesirable things–is simply, “Yes.” At moments in time, we as individuals are all of those things, as well.? What's more, the data show that these unfortunate traits are shared even by the groups against whom such significant biases exist. Women VCs often focus on risk as opposed to upside when questioning female entrepreneurs, the same way male VCs do.?

Racism arises from culturally transmitted systems of belief, bias, and behavior. Though it may sound strange at first, but that’s good news -- because, to put it simply, what has been learned can also be unlearned! Harmful lessons can be replaced with better ones. Education, awareness, and effort make change and progress possible.??

As Jeff Bussang points out, structural racism can be found in race-neutral practices. Some examples include:?

Minimum Fund Size Requirements

Many institutional LPs refused to invest in funds before a third or fourth fund.? Others have a minimum fund size requirement.? Given the history of this industry, such policies can be tantamount to saying, “We don’t invest in Black or brown managers, women and other diverse people.” New firms typically start small, prove themselves, and then raise larger rounds over time. Minimum fund size policies are often justified based on? efficiency arguments. “It takes just as long to diligence a small fund as a large fund, but we can put significantly more capital to work in a large investment.” However,, efficiency can create structural barriers to manager diversity.

Minimum GP Contribution Requirements

I believe GPs of color and women should invest as much as possible into their own funds to increase personal wealth and alignment with LPs (using cashless contributions as needed and possible). But LPs should recognize that women and people of color often earn only part of what men or whites earn given the same educational attainment or years of experience. Hence LPs should not expect the same size of GP contribution from diverse GPS as from GPs who have more means because of lack of equitable pay, prior financial “exits”, or family wealth.?

Black and Brown Quasi-Partners

Venture capital firms are beginning to hire more Black and brown investors. A start, but the data don’t demonstrate as much progress as one might expect. While I don't have hard numbers, I know from experience that it's a very small community.? I’ve heard far too many stories of diverse partners at top firms who are used to market funds to LPs and founders, yet receive little to no carry in their funds, have only modest influence on decision making, and do not sit on the boards of the best investments they source. Consequently, when our own LPs ask us how best to measure racial diversity in funds, we recommend assessing: (i) who votes on such investments, (ii) who receives attribution if the firm engages in attribution and (iii) the percentage of carry is allocated to diverse investors.

Non-Financial LP Decision Criteria

At Ulu, we see institutions “wanting to be allies” to diverse managers only to see them use non-financial decision criteria. LPs ofen tell us they want to invest in diverse managers who only invest in underrepresented minority (URM) founders. As a URM manager of a top 5% Fund I and top quartile Fund II, I’ve also been told by many LPs that Ulu is “too successful” for them to invest in our funds. A counterintuitive experience, and one that’s sadly consistent with the National Academy of Sciences published research by MacArthur genius, Professor Jennifer Eberhardt at Stanford University.? While most of the investments (? by our count) made in URM entrepreneurs in the US between 2015-2020 were made by firms like Ulu that had a URM founder, nearly all top-performing URM-led firms invested in diverse teams, and not exclusively in URM founders.? Will these new LP constraints reinforce racist stereotypes in the industry if returns aren’t great?? Only time will tell.

Misleading Diversity Data

In 2016, Richard Kerby published a TechCrunch piece on his? study on Who is a VC? that showed the lack of diversity VC. The next study the NVCA published showed the industry was half female and much more diverse.? What explains such a discrepancy in such a short period of time?? The hiring of a consulting firm that looked not only at the investing professionals but at the administrative and operational staff of VC firms, as well. Most will appreciate that having diversity in certain ranks (e.g. women in administrative assistant roles or people of color in compliance or investor relations functions) does not increase investment in entrepreneurs of color or women, much less expand access to decision-making authority or carry for diverse managers.?

Undermining Early, Diverse Fund Managers

Some law firms and larger VC firms are encouraging entrepreneurs to convert pre-seed and seed funds, more likely led by women, people of color, and other diverse managers, into common stock, when SAFEs are converted in Series A rounds.? Because industry practice typically holds common stock at a valuation equal to 20% of preferred stock, this anti-competitive stratagem reduces the track record of smaller, more diverse-led firms in a particular investment as compared to larger typically white-led firms who get preferred stock in the same round. This runs counter to the normal notion of risk-return. Investors who take greater risk by writing earlier checks, and who are expected to earn higher, not lower, returns for LPs, are undermined by such ostensibly race-neutral practices.? The differential on an investment endures unless or until there’s a public offering or acquisition. And, the diminution of interim returns could impact the ability of diverse, smaller firms to raise capital.?

At other white-led funds that signed pledges to extend opportunities to minority-led funds to co-invest with them, investors appear to work to keep the number to one minority-led fund in a round, pressuring entrepreneurs of color to make decisions they’d rather not.

Performative Diversity

At Ulu, we call these actions within VC, "performative diversity." It's a sometimes unconscious, sometimes cynical way to get more fees based on what LPs say they want to invest in. Sometimes it seems down right? anti-competitive. Without requiring data transparency from VCs, LPs are unlikely to have much impact.?

We hope LPs will support diversity by making investments in managers who are investing in diverse entrepreneurs, using? diverse investors who earn carry.? And yes, it would be great if entrepreneurs and LPs moved their business away from venture firms with performative diversity practices to the many Black, LatinX, other minority, women, LGBTQ-led firms and majority white firms that operate differently.?

An Invitation

I? am genuinely thankful for the opportunities Joe Lonsdale extended to me years ago, long before anyone thought of embedding pledges in term sheets to encourage co-investing with managers of color. In return, I extend an invitation to Joe--to join together with me in respectful dialogue and to participate in a learning journey surrounding the biases that do exist in our profession. Whenever you're ready, Joe, I'll be here and we'll find time to talk? I’d also like to invite folks like Jeff Bussgang, Jenna Nicholas of The Impact Experience, Daryn Dodson of Illumen Capital, Jennifer Eberhardt, and many of the Black-led VCs mentioned in Jeff Bussgang’s article as well as Ulu entrepreneurs and leaders in the DEI community like Elise Smith and Heather Shen of Praxis Labs, Lisa Gelobter of tEquitable, Dane Holmes, Tolonda Tolbert, Tom Chavez, and Vivek Vaidya of Eskalera to engage constructively around this topic.