How to Fix a Racially Biased Venture Capital Model and Commit to Diversity in Entrepreneurship

In the wake of the murder of George Floyd and nationwide protests, venture capital firms are making newfound commitments to invest in, or at least evaluate, potential investments that are led by diverse founders. Although commitments such as SoftBank’s $100 million fund to support people of color may seem like a leap forward, when we consider the $120 billion of dry powder (available funds remaining to invest) that the industry saw in mid-2019, these proclamations are merely a drop in the bucket. Let’s not even mention Andreessen Horowitz’s paltry $2.2 million donation-based fund intended to grow to $15 million to invest in “underserved” founders.

In order for us to really see change in the entrepreneurial investment landscape, we need not only significant allocations dedicated to overlooked groups, but also an overhaul of the existing mechanisms by which these systems function.

As investor Monique Woodard stated during a BLCK VC webinar, “You have to fix the systemic issues in your funds that keep Black founders out and keep you from delivering better returns.”

It is important to note in this statement that this is not just a moral imperative, but an economic one, as well.

Data abounds that more diverse leadership and teams lead to better company performance and female founders return 35 percent more on the dollar than their male counterparts. The new mantra “make the hire, send the wire” has echoed across social media, but the truth is that it’s not just a simple fix of hiring one person or even making a single investment.

To achieve repeatable and enduring change, venture capital firms have to do what they have failed to do for more than 70 years: change the very way that the system functions in sourcing, evaluating and supporting deals.

So, what exactly do those action steps look like? Let’s take a deeper look.

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Sourcing deals

Venture capital is driven by relationships and many investments are sourced via personal referrals, usually through one’s direct networks. Given the homogenous and elite nature of most partners and investors in firms, this yields a proclivity to investing in homogeneous and elite groups.

There are three clear steps to unraveling this bias:

Stop relying on warm introduction

Investors’ networks tend to mirror themselves. So, if your own network lacks diversity and you rely on your network for deal flow, how can you expect to see startups led by diverse founders?

Take an honest survey of your closest 50 professional connections or top deal flow referrers. What proportion of those connections are women, Black, Latinx, immigrants, etc.?

If your goal is to invest in more Black founders but only five of your closest 50 connections are Black and you primarily rely on warm introductions, it’s unlikely that you will be introduced to a sufficient number of Black founders. Build in a mechanism to accept unsolicited applications for investment.

Work harder to broaden your network

Connecting with excellent diversity-focused incubators and accelerators such as Camelback Ventures in New Orleans, Opportunity Hub in Atlanta, the LatinX Incubator in Chicago and the Hillman Accelerator in Ohio might serve as a starting point.

In addition, there are wonderful angel networks investing in Black founders who are looking to broaden their network of co- and down-stream investors — go find them!

Hire more diverse investors and change your culture

Just making a symbolic hire will never be enough. More importantly, you need to fix the culture that has allowed bias to flourish for so long. You need to ensure you can retain this talent by creating a culture of belonging, retraining current employees, and being vigilant that these new hires are in positions where their voices can be heard, particularly when they challenge the status quo.

Evaluating deals

There is a very real possibility that many of the firms that have failed to move the needle on diversity in their portfolios have programmed bias into how they evaluate deals.

There are two clear ways to tackle this:

Reevaluate your investment scorecard

Investors have the tendency to rely on pedigree to assess founder acumen. Investment scorecards evaluate teams and give brownie points for things such as ivy league degrees or esteemed lead investors. Both of these are elite groups that have their own biases ingrained with very little diversity, and so discrimination perpetuates itself.

To counteract this, it is time that firms create better assessments of deals and founding teams based on true merit. To evaluate determination and persistence, which are better indicators of success, our assessments must consider that a founder who comes from less privileged circumstances with weaker networks has had to overcome much greater obstacles to reach the same level as their ivy league counterparts.

Analyze and reform your interview process

In 2017, HBR discovered that male and female founders are asked different questions during interviews, with women asked about downside protection and men asked about upside potential. These same biases emerge with persons of color and often in egregious ways.

Take for instance when Iman Abuzeid, founder of Incredible Health, was mistaken for a delivery driver when she arrived for her investor interview, dressed in the exact casual manner which so many male startup founders assume. Firms need to conduct training and reform on how founders are treated when their companies are being considered for investment.

Supporting companies post-investment

Finally, firms cannot assume that the work is done once they have cut the check. Knowing that the entire venture ecosystem has many bias loopholes, investors must put in the additional effort to tear down access barriers alongside their portfolio companies after they make the investment.

Making it a priority to go the extra mile to close gaps for founders while serving as a fierce advocate for them with potential customers, talent, and investors will have an instrumental impact. A growing body of academic research shows that human capital investment more strongly correlates with startup success than solely investment of monetary capital.

What this time undoubtedly calls for is a comprehensive overhaul of our investment industry. Yes, “make the hire, send the wire,” but start the holistic reform across the entire process to effect real and lasting change.

Story originally published July 2020.

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