Venture capital has a diversity problem: data show that the founders of Black and Latex received just 2.6% of overall funding in 2020. The teams set up by women received around 30% less money in 2020 than they did in 2019.
For decades, a close-knit figure of brilliant but like-minded individuals built a system of pattern recognition. It produced high growth companies with homogenous leadership teams. He called it merit. Those of us who did not fit the profile were told, or left with, assuming we did not have it.
When a founder needs money, but investors don’t think they have “what it is,” it can quickly become a self-fulfilling prophecy. No matter how good you are and how much product-market you fit in, at some point what happens is “to scale a company”.
Until recently, the lack of diversity in the ecosystem was largely one of us directly affected by it. It was not until the #metoo and #BlackLivesMatter movements clearly articulated a lack of funding for women and minorities – and problematic for the rest of the world.
I believe that underprivileged founders are the most undervalued asset class in America today, and investors are beginning to realize that diversity is not a charity – it is an economic opportunity.
Look at data only on startups founded by women, which deliver 63% higher ROI (according to First Round Capital), double revenue for every dollar invested (according to BCG), and take a full year less time to exit (According to Pitchbook and AllRaise). Founders who are tough for this, but strongly lead strong companies with external consequences for their investors.
The good news is that recent events shocked many into action. Following the assassination of George Floyd came a hawkish summer of pledges, micro-funds and quick investment in support of the Black Foundation. Overnight, these founders were heavily favored for opportunities to meet and speak with people and firms they had no access to in the past. Made some safe investments and new relationships that would help ease the line. For many, time had run out, and they did not materially benefit. In the end, the frenzy calmed down, and only 3% of the 2020 VC deal volume went to black-founded companies.
Ashley Wisdom, co-founder and digital health platform Health in Her, experienced this firsthand.
“Last summer I was overwhelmed by inbounds from investors, which was great at first,” she said. “But I was new to the venture; I did not know how to build a strategy around fundraising, and most of those investors were looking for companies at a later stage than mine. No one I spoke to at the time indicated that we were willing to invest despite our demonstrated traction in our pre-seed round. On the positive side, I met many great investors who made meaningful introductions to pre-seed and early stage funds. And some of those later stage investors are now seeing Health progress its HUE. “
It will be told very soon how much progress has been made in the last year. But we have prior time evidence that small, cosmetic efforts in diversity do not lead to permanent change. Take a look at what happened to VC funding for women recently.
In the aftermath of #metoo, investors and corporations were also inspired to act with some success. For some time, VC investment in companies founded by women grew slowly but steadily. But once COVID became a hit, and investors retreated to their closest and trusted referral network, VC funding for women took a major step forward. Crunchbase data showed more than 800 women-founded startups globally, achieving a total profit of $ 4.9 billion in venture funding in 2020, representing a 27% decrease over the same period the year before mid-December. Does.
The lesson is this: Efforts in the periphery of venture capital do not make a difference in the long run. The good news is that many people have started taking action. To achieve systemic, long-term reforms, VC firms will need to make changes to their core systems, creating diversity in the primary investment process. The results will not be immediately visible, but they will be more sustainable and, as the data suggest, more profitable over the lifetime of these funds. Here are three specific tasks VC firms can do to achieve this:
1. BIPOC and Hiring Female Investors
A recent Pitchbook report states that women investors are twice as likely to invest in companies with female founders and three times as companies with CEOs. And yet less than 10% of all VC partners are women. According to BLCK VC, more than 80% of venture companies do not have a single black investor in their team. It is less surprising that only 1 percent of venture-funded startup founders are Black.
When you hire from the same communities you want to invest in, and ensure that your new hires are set for success, you unlock dealflows, relationships, and insights into new markets and customer sets. This creates a more diversified portfolio and a stronger investment team, offering a better view of their entire portfolio of companies.
2. Measure the top of your funnel
Input matches output. VC firms must do everything they can to foster strong relationships with underrated founding communities to enable greater diversity at the top of low-flow funnels.
Partner, sponsor and invest in organizations such as the Female Founders Alliance, Sogal Foundation, Black Woman Talk Tech and more. Go out of your way to attend events, ask for introductions, schedule casual coffee meetings and meet all the founders in those networks – and foster those relationships meaningfully over time. This is how you sow the seeds of great decades.
3. Invest directly in emerging fund managers
There are hundreds of new funds, many of them under $ 50 million in assets under management, with direct access to talent you are not currently seeing. These common allies have credible relationships with the founder, VC, who may be wary of mainstream VC. If you are a large VC fund, you should actively invest in them. Emerging managers can act as your scouts, and in return, you will help build the ecosystem yourself.
I believe the lack of diversity in venture capital is a one-time generation opportunity for those who are willing to place bets as soon as possible. If we invest in women at the same rate that we invest in men, it could boost the global economy by $ 5 trillion. This is a huge amount for graves. A homogenous portfolio misses that opportunity.
I know that most investors are aware of the opportunity and really want to do better. The more urgency they feel, the more likely they are to take independent initiatives to directly address disparities. While these may be helpful, they are also not sustainable. The best way to build a continuously diversified portfolio is to slow down, change from inside to outside.