Revaluing venture capital
Recently — at the height of the protests — someone I work with sent out an email. As a Black woman, she wrote about her sadness and pain, she shared statistics on the disproportionate number of Black people affected by COVID-19. She shared her fears about being a woman struggling with infertility in a world where she is five times more likely to die in childbirth combined with the reality of raising a child in a world where the color of their skin makes them a target for police violence. Does this act of vulnerability sound like the founder of a fast-growing venture-funded start up?
Well it is, and I am backing her. As an investor in her company, which provides telemedicine to women pre- and post-natal, I have confidence from her email that she has deep empathy for her market, has a personal commitment to serve this market, and has the moral imagination to build a business in the future and well as in the present.
Movements like “Me too” and “Black Lives Matter” have asked venture capital funds and limited partners to become more aware of the inequality in our industry. For example, women make up just 14 percent of investment decision-makers in venture capital, according to the NVCA-Deloitte Human Capital Survey Report, and only 25 percent of investment professionals in venture capital are minorities. Venture is a network game, so the lack of diverse fund managers leads to a dearth of diverse founders. Only 2.2 percent of the $130 billion total in venture capital money invested in 2018 went to women. We invest in people we trust. This often means who we met through friends, who we went to school with, who presents like us, and who communicates like us. This has created a reinforcing cycle that has left some of the best talent out of the market.
One of the strategies to address this issue has been to create “carve outs” or small allocations from big funds to invest in diverse fund manager and entrepreneurs. Institutions like Goldman Sachs have done just that. There are a few challenges with this model. First, most institutions have criteria that does not allow them to invest in first-time fund managers. In a world where only 14 percent of investment managers are female, with a significantly smaller number having run a fund before, how can we possibly widen the pool? Layered on top of this challenge is the financial burden it takes to get a fund up and running. Many managers have to forgo salary for at least a year while they are fundraising (and those are the lucky ones who even raise a fund). Very few women and minorities have this kind of capital cushion. In addition, fund managers have to commit 1 percent of the total fund size. So, if I raise a $50 million fund, I have to put in $500,000 of my own money. Potential investors base their diligence on how much “skin in the game” the managers have committed. I don’t have that kind of money, and I know many others in my position don’t either. These are meaningful technical issues that can and need to be addressed.
But those technical issues are not the biggest hurdle. Women and minorities think differently; they run companies differently; they communicate differently, and they see opportunity in different places. In short, you can’t just put a woman or minority in the position and expect her to act like the traditional male investor or entrepreneur. To change the diversity of the industry we must be willing to embrace divergent cultural styles, different ways of communicating, and new ways of assessing market opportunities.
For example, studies have shown that women do not oversell themselves, and — in an industry where the best salesman wins — women often don’t get funded. I have had the privilege of sitting with many female and male entrepreneurs during their pitches. Women tell you the statistics, they tell you exactly where they are, and they tell you the calculated risks. This mentality has the positive effect of producing revenue more quickly than their male counterparts, but has the negative effect of not inspiring an investor. Great salespeople in venture, on the other hand, sell, often blurring the lines of where they are and where they want to be. This creates a culture of “upward hypocrisy” which can lead to overvalued companies producing little if any revenue.
Women and minorities identify market segments by virtue of where their empathy lies. For example, founders of multimillion-dollar companies like Rent the Runway and Spanx struggled to raise money early on because traditional VC’s did not understand or empathize with their market segment. With just 1 percent of venture-backed black founders and only 1.8 percent Latino founders it is hard not to wonder what other multimillion-dollar companies we are overlooking.
Finally, the culture of venture has become about growth and scale at all costs. I have watched one too many purpose-driven entrepreneurs — male and female — push their company at a pace it could not absorb in order to meet the quarterly targets of venture capitalists. Value should not be at the cost of scale. For these very reasons you see more purpose-driven (often of younger generations) entrepreneurs seeking out impact investors in order to ensure their commitment to provide societal value is aligned with their investors.
The investments in venture capital reflect those who built it. But those who built it may have blind spots around markets they have not worked for, lived in or sold to.
The business stakes are too high for us not to create a more inclusive industry. Hiring a black partner or “carving out” small amounts of money for diverse entrepreneurs or fund managers is not enough. We need to rethink the culture of our industry, the markets we invest in, and the voices we listen to in our conference rooms. These choices have the potential to unlock billions of dollars in markets we may never have seen.
Blair Miller is a venture capital investor and senior fellow at Yale’s Jackson Institute, lecturing on “Aligning Profit and Purpose. She holds an MBA from the University of Michigan’s Ross School of Business and a BA in English literature from the University of Virginia.