We Need More Anti-Racist VCs

This article was originally posted on Medium August 12, 2020

A Society in the Crucible

We are in a confluence of moments. After a series of high-profile, video-documented murders of unarmed Black people by police, the broader American public is once again paying attention to police brutality. Simultaneously, shutdowns due to the COVID pandemic and the resulting unemployment rates have created intensified scrutiny of our systems from a public becoming more engaged with world events and events in their own communities.

This convergence of circumstance has also created more discretionary time for people to march, protest and seek dogged accountability from their local, state and Federal government representatives.

Did I mention it’s a Presidential election year?

Brands have noticed and are reacting, too. Every company in every industry is thinking about how to respond to current events and shifting public sentiment about systemic inequities to preserve or gain market share and extend goodwill; some are even thinking about how to be a part of the solution as they examine how inequities manifest themselves in their organizations and professional communities.

There is perhaps no community of business where racial inequity is more pronounced than venture capital. We will explore these disparities more in-depth later in this article.

But first, how did venture capital respond to this latest confluence of events?

Investors and VC funds rushed to put out public statements1 in support of the protests and Black Lives Matter movement through press releases and social media posts. Some VCs have spun-off pre-seed and seed2 funds that focus exclusively on Black founders. Others have created boards or “councils3” inviting business leaders of color to the table to be involved in creating solutions to the deeply entrenched racial inequality that pervades the industry.

But are these the solutions that entrepreneurs of color are asking for? Perhaps more importantly: do they solve the urgent problems we all need to address around racial equity?

Anti-Racism and the Myth of Racial Neutrality

In the context of striving for racial equity, it is important to understand the difference between being “non-racist” and being “anti-racist”. Those who claim to be “non-racist” may say things like “I don’t see color” or “I view everyone as the same.” Being “non-racist” implies a passive approach to racial justice, and creates a “safe intellectual distance” between the individual and the systems in which they participate, the issues of endemic racial disparity within these systems, and how they, as an individual, benefit from these systemic inequities.

In reality, the “non-racist” viewpoint must always come from a position of extreme privilege. To be “non-racist” is to say “I am not affected by racism, therefore I am not concerned with the struggles of those who are.” In Ibram X. Kendi’s best-selling book How to Be an Antiracist, the author takes it one step further to say that a neutral stance on racism is, in fact, a racist stance.

“There is no neutrality in the racism struggle. The opposite of ‘racist’ isn’t ‘not racist.’ It is ‘anti-racist.’ The claim of ‘not racist’ neutrality is a mask for racism.”

Ibram X. Kendi, author of How to Be an Antiracist?

In contrast, anti-racism is the active process of identifying and eliminating racism in one’s self and the systems that one participates in. Anti-racists seek to change the organizational structures, policies, practices, rules and attitudes that result in racial inequity. They work where they are, with their peers, to root out and change racism in their communities, industries, places of work and influence, churches, and homes.

It is important to keep these distinctions in mind as we explore the current state of our racial struggles and the solutions being offered by our incumbent systems.

Performative Solutions: The Answers to Questions Nobody Asked

Clearly, BLM and the issue of police brutality act as our most current and poignant microcosm of how the broader issues of racial inequality affect our communities. Perhaps even more starkly, it has laid bare the inadequacies of the typical solutions offered by our current systems as they continue to profiteer from the very oppression we are in the streets protesting to change.

Much has been written about performative allyship?, and not surprisingly, the solutions offered by these systems are inadequate because they rarely seek to address the core problems and almost never take into account direct feedback from the communities being affected. As a result, there is a deep disparity between what is being asked for by the communities that are negatively affected by inequity and the solutions being presented to these communities by the system that inherently profits from this inequity.

Performing Versus Solving: Police Brutality

Let’s examine the issue of police brutality in good faith through a simple lens any entrepreneur or VC can understand: problem statement, market need, proposed solution.

Problem: Police, armed with military-grade weapons and equipment, routinely use excessive force to kill people of color with impunity for non-violent offenses. Black men are 2.5x more likely to be killed by police than white men. Indigenous and Latino men are roughly 1.5x more likely to be killed by police than white men.

Excessive police force is responsible for 1.6% of all Black male deaths and 1.2% of all Latino and Native male deaths from the ages of 20–24.

Market Need: Stop the police from killing people of color

• Divert funding from the police to social and community programs.
• Demilitarize the police.
• Change local, state and Federal policy, including ending qualified immunity for police and removing mandatory sentencing for non-violent crimes.
• Arrest and charge police officers who murder people of color.

“Solutions” from the system:

• Hire artists of color to paint murals / Black Lives Matter on city streets.
• Remove Confederate monuments and censor old sitcoms.
• Initiate police strikes / “Blue Flu”? and increase violence by police against protestors.
• Increase police funding.

Imagine: you are a VC. A team of founders comes to you with a pitch, and lays out the problems and market needs around police brutality as described above. Then, they pitch the four solutions listed above as their strategies to solve the stated problems and satisfy the market need. Would you invest in them? What advice would you give to them?

Important to note: Of course, this issue does not take place in the “free market” business context, but rather in the social, community and government context. However, if the idea is that government is to represent the community, there is an even bigger failing of enormous consequence for us all: government is simply no longer representing the will of its constituents.

Also worthy to note: VC is not immune to the bias baked into our governmental systems, as the laws against discrimination born out of the Civil Rights Era rarely apply in the VC world?, which exacerbates the problems of inequity that exist in entrepreneurship.

Performing Versus Solving: Venture Capital

Now, let’s take the same approach and review the issues around the major racial disparities in venture capital — starting with the problem statement, then examining the needs that have been identified in the market, and the solutions being proposed by incumbents in venture capital and the entrepreneurial ecosystems they support.

Problem: Black and Latinx people are sorely under-represented in the venture capital world, as both venture-backed entrepreneurs and as investors.

According to Harvard Business School, 81% of all VC firms do not have a single Black investor. In a sample of 160 firms with more than two employees, only 5 have at least 2 Black investors.

Even more stark: the number of Black decision-makers in venture capital in 2018 dropped to 1 percent — representing just seven Black people at the 102 largest venture capital firms in the United States, according to the Washington Post2.

Also perpetuating the cycle of keeping people of color on the “outside” of VC influence is the mentorship / funding gap that is pervasive throughout the startup ecosystem.

“Black founders are often over-mentored and under-invested. If you have the ability to write a check, but you will only offer mentorship…that is only helpful to your ego.”

Monique Woodward, co-founder of Black Founders11

Market Need:

• Fund more BIPOC entrepreneurs (write more checks).
• Close the mentorship gap by seeding BIPOC-led companies who have already gone through mentorship programs and providing studio and ecosystem support to improve the chances of their success.
• Create more opportunities for people of color to become investors with real authority (i.e. they can write checks and participate in decision-making as an equal partner).
• Create opportunities for influence to traditionally marginalized communities by paying BIPOC for their time to sit on boards, councils, think tanks and collaborate in building new systems based on equity.

“Solutions” from the system:

• Branded Scholarship / Mentorship Programs
• Branded “Councils” and other thought projects that ask people of color to work for free to fix problems they didn’t create
• “Exclusive” funds — which turn out to be separate, but nowhere near equal2. For example: SoftBank created a $100 million fund for Black founders while its Vision Fund (which invests in companies like Uber and WeWork) sits at $100 BILLION.
• The usual performative branding and marketing exercises. Andreessen Horowitz has $14 BILLION under management, and seeded its Talent x Opportunity Fund12 with only $2.2 MILLION while using Marvin Gaye lyrics as a backdrop.

Imagine: you are a VC. A team of founders comes to you with a pitch, and lays out the problems and market needs around racial inequity in venture capital as described above. Then, they pitch the four solutions listed above as their strategies to solve the problems and satisfy the market need. Would you invest in them? What advice would you give them?

Yeah, There’s a Business Case for That

If I need to make a business case for why VCs should be anti-racist, then I will.

Minority spending power equals $4 Trillion per year13. Diverse founding teams create better business outcomes, including raising more funding and achieving larger exit multiples, according to a study conducted by Kauffman Fellows?. Every metric you should care about suggests that making the effort to create more diverse fund management teams would result in higher returns for the fund while boosting the diversity of representation for VC-backed Founders.

“It would also serve investors well to view investing in Black founders through a reparations lens and understand that entrepreneurship has always been a part of the Black experience,” says Tunji Fadiora the President and CoFounder of ELEV8 Ventures. Tunji is a serial entrepreneur who works with startups everyday in the ecosystems of Northern Florida, which he’s helped to build.

“If you look throughout history you see story after story of innovation coming from a dark space, from Jack Daniels1? to the invention of the light bulb1?. The fastest growing free market anywhere in the world is in Lagos, Nigeria1?. Entrepreneurship is tied up with Blackness, but has been mostly confined to white spaces in Western business and venture capital.”

Tunji Fadiora, President of ELEV8 Ventures

“And if you want to talk about global competition, China is outcompeting the U.S. in terms of investing in Black people,” Fadiora adds. “Although largely problematic, China has invested $300 Billion in Africa since 20051?. This makes them poised to lead emerging markets in the 21st century and beyond.”

And it’s more than theoretical: there are a few VCs out there doing the work and making investments in an actively anti-racist way.

“We invest in the very best founders who identify as women, People of Color, or LGBTQ. I personally identify as all three,” says Arlan Hamilton. Hamilton is the Managing Partner of Backstage Capital, which she founded while homeless in 201422.

Since then, she’s raised a successful venture fund and has invested in over 130 companies, the majority of which are led by women, people of color and LGBTQ founders. In May 2020, she released her first book It’s About Damn Time: How to Turn Being Underestimated into Your Greatest Advantage.

“It was crazy to me that 90% of venture funding was going to white men, when that is not how innovation, intelligence, and drive is dispersed in the real world.”

Arlan Hamilton, Founder and Managing Partner of Backstage Capital

Hamilton is currently raising her second fund23 which will be focused on investing specifically in black women founders and aims to close at $36 million.

The business case is here. The need is here. The will to commit must also be here from those who are in places of privilege today.

Becoming an Anti-Racist VC

This isn’t charity work, but rest assured that anti-racism will feel like an altruistic stance if you are someone who benefits from the system as it exists today. Perhaps we can agree that altruism is not the most highly-prized attribute in the venture capital world.

But for those willing to do the internal work for the benefit of the greater good (and to reap the increased returns), there are a series of commitments that you can make to anti-racism that will begin to move the needle in your daily life and in the areas where you exert influence.

1. COMMIT FOR LIFE

Accept this mission as a life-long effort, not a short-term endeavor or marketing campaign, and commit to doing the work required to make a difference starting today and follow through when the media stops watching. This includes building new and sustainable anti-racist systems to ensure your work and influence lives beyond your expiration date.

In terms of the VC world, realize this means a commitment to listening first, and then changing the rules of engagement. “I’ve learned from female founder colleagues of mine that investors who want to invest in underrepresented groups have to understand exactly what that means going in,” says Ayinde Alakoye.

Ayinde is a bit of a rock star: a serial venture-backed entrepreneur, media mogul and the force behind the iheartradio app. He served as a speech-writer for then-Senator Barack Obama during his first campaign for President after building a successful career setting ad sales records for Clear Channel. He’s been featured in Forbes and is an in-demand public speaker.

Yet, Ayinde has written extensively1? about his struggles to raise capital from venture funds in the United States, ultimately having to pitch VCs in Europe to obtain seed funding for his startups. Ayinde’s current startup, nēdl, is currently raising a round on the crowdfunding platform Wefunder.

“Investors focused on ‘underestimated’ founders should be prepared to invest MORE in them to safeguard their investments against systemic racism that makes it tougher to find follow-on.”

Ayinde Alakoye, Founder of nēdl

In other words, the anti-racist stance in venture capital will involve a mult-generational effort that changes the investment paradigm and recalibrates how investors view risk — specifically how they view RACISM as a risk — to their bottom lines.

2. COMMIT TO RADICAL GENEROSITY

Accept that making real change for future generations will require relinquishing some privilege2? (giving up space, passing the microphone, creating and providing platforms for others in addition to giving your money and time). Ask for help when needed, but commit to paying people of color for their time.

Over-invest in founders of color through a reparations21 lens and use your new perspective on risk to include impact as part of your measured rate of return.

“VCs need to create new ways to conduct due diligence and make investment decisions that give credit to the experience of Black and brown founders,” says Calvin Williams, Jr. Williams is the CEO and Founder of Freeman Capital, a startup focused on closing the wealth gap by offering wealth building services and mentorship to marginalized groups.

“The metrics that VC has traditionally used to make investment decisions are, understandably, built upon the archetypes of what’s been successful before. This doesn’t leave much space for Black and brown founders in an asset class that has been predominantly white for so long.”

Calvin Williams, Jr — CEO & Founder of Freeman Capital

“The disparity in VC funding opportunities has led many underserved entrepreneurs to seek out sources like side jobs, crowdfunding, and SaaS lenders as a means of levelling the playing field,” adds Williams. “If VCs cannot update their models and become more data-driven to overcome bias, they are going to miss the boat on the markets of the future.”

3. COMMIT TO DOING THE WORK WHERE YOU ARE

This requires identifying and wrestling with bias through sincere curiosity and desire to improve yourself, your peers, and the systems in which you participate.

“If there are no people of color in your daily life ask ‘why’, and then work to change the rules, policies, and procedures that support this lack of diversity,” explains Aisha Adams, an educator, community organizer, and active entrepreneur in the Asheville, NC ecosystem.

Adams has built an infrastructure to support diversity and inclusion in her local business community through her program Equity Over Everything, which focuses on three prongs of impact: representation (through her show The Asheville View), entrepreneurship, and home ownership.

“If you aren’t investing in founders of color, ask ‘why’. If they’re not in your pipeline, then change your current marketing or recruitment strategy to make it more inclusive.”

Aisha Adams, Founder of Equity Over Everything

“If you are seeing founders of color applying for your funds, but your fund keeps passing on them, rewrite the policies and rules to make them more equitable for all,” adds Adams.

The work doesn’t end with yourself or your peers. An anti-racist VC will also discover the need to “manage up” to sell the idea of strength through diversity to limited partners as they raise funds, make capital calls, and report fund progress.

“Educate your LPs on all the diversity indicators — race, age, disability, ethnicity, gender, religion, sexual orientation,” says Adams. “If you see any inequity within your sphere, work tirelessly to eliminate that inequity.”

For those wishing to learn more about how to close the gaps of inequity in entrepreneurship, Aisha Adams also leads the Equity & Diversity program at Lenoir-Rhyne University.

4. COMMIT TO INCLUSION AND EQUITY

Special funds or projects will not solve the root problems within the systems that are currently at work today and which dominate and pervade our lives. People of color not only need separate spaces and funds (specifically at the pre-seed level), but also access to influential seats at the shared table within the funds that currently exist.

As an anti-racist in VC, your work is to either change existing systems or create new inclusionary systems that include people of color as a matter of course. This means hiring people of color as colleagues who have equal decision-making and check-writing authority within your existing funds. It means ensuring your existing portfolios are more diverse by creating and following transparent inclusion benchmarks within your fund, and then demanding the same benchmarks be met by your portfolio companies.

It means ensuring that your due diligence process* is free from bias, and that the metrics you use to decide investability are taking into account the backgrounds and experiences of the founders.

*This is a subject I will dive into more fully in the coming months. I’ll be developing, alongside ecosystem partners, tools and resources that will be open source and shareable, recognizing that we are just starting a very long conversation on this topic and still require the basic building blocks to establish anti-racism and increased inclusion as a fundamental pillar of the next generation of venture capital.

Additional Resources

The Black Founder List (US-Based, Venture-Backed)

A group of Black founders, VCs, and tech professionals put together the most comprehensive list of US-based venture-backed Black founders ever. If you’re a VC looking for a pipeline, this is a great place to start.

Anti-Racist Resource Guide From the Female Founders Fund

The resources included in this compendium have been compiled for the tech & VC community with the intention of deepening anti-racism knowledge and to share ways we can participate in creating change.

Deconstructing the Pipeline Myth from Kauffman Fellows

This is an in-depth data analysis that reviews and deconstructs the “pipeline myth” that says that there are not enough qualified minority founders to invest in. This study is rich with data visualizations, charts and graphs that illustrate the scale of the missed opportunity when VCs buy into the pipeline myth.

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