For several years now it’s been public knowledge that there’s glaring inequality in the world of venture capital. On the one side are firms made up overwhelmingly of white men and on the other, the companies they invest in, which studies show are overwhelmingly founded by white men.Women of color are waging an uphill battle to address what’s broken, but it’s becoming more and more clear; they can’t do it alone.
There have been efforts to put a bandage on the problem—hire a woman VC or invest in a company founded by a minority here or there. But overall, diversity has been slow to come to venture capital, with the least amount of funds consistently going to a small number of women of color. According to incubator and research center,DigitalUndivided’s ProjectDianeand ProjectDiane:Latinx studies, two demographic studies of startup founders, businesses with women of color CEOs get less than 1 percent of all VC funding every year.
Of all VC funding over the past decade, Latinx women-led startups have raised only 0.32 percent while black women have raised only .0006 percent. And while 2017 saw the highest amount of funding raised by companies founded by women of color, they still remain shockingly underfunded compared to others, both in the number that get investments and the amount of funds they receive. The question then is why—if everyone knows such disparities are happening—are funders allowing them to continue?
One reason may be that many VCs simply don’t recognize the problem. Last year, aMorgan Stanley-funded surveyof 101 investors found that nearly 60 percent believe women and minority-owned businesses receive “about the right amount of capital” while 20 percent believe they receive “more capital than they deserve.” The study attributed this false perception to the fact that many white and male investors don’t often have many women or people of color in their professional networks, and so do not review many minority and women-founded businesses. Further, they don’t make doing so a priority. Then, once women and non-white business owners do get a foot in the door, they have to go the extra mile to prove their redeeming qualities, and overcome higher perceptions of risk, than their white, male counterparts.
“Once women and non-white business owners do get a foot in the door, they have to go the extra mile to prove their redeeming qualities, and overcome higher perceptions of risk, than their white, male counterparts.”
Laura Huang, an associate professor of Business Administration at Harvard Business School, studies the investment decisions and behaviors of angel investors and VCs, particularly in regards to the race and gender of entrepreneurs. Some of her research has shown that VCs ask male and female founders different questions in evaluating their companies.
Huang says, “The types of questions they ask females might be much more focused around the problems that they anticipate, whereas with men they’re asking questions around things like, ‘Where’s the opportunity here? How big can you grow this?’” adding that overcoming those preconceptions is harder for women of color than white women. “Whereas a white female entrepreneur might be able to … mitigate the amount of risk, it might be a harder hurdle for black women [for example] to be able to do that because it comes embedded with it this sort of disbelief around around what they’re able to achieve.”
Cecilia Corral says that those findings resemble her experience in pitch rooms. As the co-founder of CareMessage, a non-profit tech company that uses text messaging to connect underserved communities with healthcare organizations, she found that in pitching funders unfamiliar with the low-income and minority populations the company serves, much of her time is spent correcting presumptive misconceptions.
“There were a lot of really basic things that they were very disconnected from, but just assumed that they know better than we do what the needs are within these communities,” Corral says. “These very real challenges that our populations face are very different than what they’re probably hearing from other healthcare tech companies that they’re funding. Sometimes we do get questions that are just them assuming that we’re not innovative enough.”
“There were a lot of really basic things that they were very disconnected from, but just assumed that they know better…”
For Riana Lynn, a food tech adviser and founder of multiple companies including biotech startup Journey Foods, pitching to majority-white panels can mean confronting biases against her as a black woman. “I’ve walked into rooms [and VC’s have] assumed that I’m not the leader of the company or I’m not creating some of the technology or [am not] a strong presence behind the IP,” she says. In pitching over 50 VC panels, Lynn says only six of those included women of color with vast majority comprised solely of white men. In her experience, women VCs were not only more likely to fund her, but were also more likely to offer her connections or another form of informal support, even if they didn’t invest.
When it comes to pitching panels of white men, Lynn has felt the most comfortable pitching those who had been vouched for by other investors who are women or people of color. “If they work with women of color or support other investors like let’s sayArlan HamiltonorPipeline Angels, they tend to just like be cooler dudes, just to be frank,” Lynn says, noting that she has found this with her own investors who are white men. “They just tend to be cooler people that have just a more diverse set of friends and colleagues in their network.” She says she has experienced times where an investor passed over her, only to fund a similar company with a white founder. But of those times she reflects, “Sometimes that sucks, but it’s also their loss.
Financially speaking, she’s very right. That same Morgan Stanley study estimates that the funding gap amounted to up to $4.4 million of missed potential revenue for 2012 alone.
Being such a systemic problem, it seems there’s no one solution or party that will bring parity to funding once and for all. But women of color working in venture capital are doing much of the work to push for progress. Even despite their small numbers. A2018 analysis by Equal Ventures partner Richard Kerbyfound that only 7 percent of VCs are women of color.
Black women make up 1 percent while Asian women make up 6 percent. Meanwhile, Latinx women represent 0 percent of the venture industry. Compare this to the 58 percent of VCs that are white men. Tellingly, these findings do not include data about Native American women, a demographic that is frequently overlooked in current diversity surveys of investors and founders.
Still, there are a handful of women of color who have started their own firms and funds prioritizing companies with founders from underrepresented communities. One isBackstage Capital, started in 2015 by Arlan Hamilton. A queer, black woman, she has emerged as one of Silicon Valley’s fiercest changemakers, announcing last year a$36 million fundreserved solely for companies founded by other black women.
“The funding gap amounted to up to $4.4 million of missed potential revenue for 2012 alone.”
Another isReign Ventures, an early-stage venture capital firm that Monique Idlett-Mosley and Erica Duignan started in 2017. Their firm is among the handful setting an example of mandating diversity in their portfolio. At least half of the companies Reign Ventures invests in are founded by women or people of color. They find that that standard, as well as their own identities, give their firm a competitive edge.
“Being two African-American women, we don’t have some of the issues with unconscious bias that might cause a more traditional VC to pass on a female or minority-founded company that actually has the potential to be a billion dollar business,” says Duignan.
Ulili Onovakpuri, a partner atKapor Capital, also highlighted diversity of both staff and founders as an advantage for a firm. “[We have] the ability to see deals that other venture capitalists don’t see because we have entrepreneurs and founders that are coming from a wide variety of networks,” Onovakpuri tells me. Those founders, she added, bring with them their own diverse, untapped networks and are able to apply their lived experience to fixing problems in communities outsiders wouldn’t necessarily recognize or understand.
To further break down barriers between the firm and underrepresented entrepreneurs, Kapor Capital has an open form on their website where companies seeking investment can request a meeting. “A lot of firms have explicitly said, ‘If you’re not smart enough to figure out how to get a warm intro with someone at our firm then that’s not a founder we want in our portfolio. But because the networks of the VCs are so close-knit, women of color especially struggle to reach into those networks,” she says.
Sarah Kunst, managing director atCleo Capital, says the solution for firms looking to diversify the founders in their portfolio is as simple as funding them. “There are so many [women of color launching companies] in every sector and there’s no excuse for not seeking them out at every level,” she says via email. “If you really can’t find them, go hire more diverse people and charge them with finding you brilliant, innovative, game changing founders. You’ll see more diverse founders than you could imagine and you’ll make a ton of money in the process.”
On the pitching side, the VCs and founders I spoke to stressed the importance of entrepreneurs reaching out to investors that are best positioned to understand their company. Meanwhile, Huang says that entrepreneurs can also use what we know about VC behavior and bias to empower themselves.
“There’s no excuse for not seeking out [women of color] at every level.”
In the case of facing an overemphasis on questions of risk, one solution is “making sure that you stop the conversation and direct it into a place where it’s on either more common ground,” says Huang. “Or when you anticipate that you’re facing a line of questioning that’s not going to serve you well, that you immediately redirect. That’s particularly important for people of color.”
Visibility is another important factor when it comes to inspiring this and the next generation of women of color in the venture industry. Last April, Corral began compiling a list of Latina tech founders that eventually grew to 50. At the start of the process, she was only aware of herself and four or five others. “I think that can start to get us at least to a good place where we can show VCs one, there are Latina women out there starting very successful companies solving very real problems, and on the founder’s side, give them examples so that they can see the depth and breadth of industries [Latina founders] are working on,” Corral says.
“Without that visibility it’s easy to just say well there they don’t exist, it’s a pipeline problem.” Her50 Latina Tech Founderslist joined others created by women of color VCs focused on increasing visibility of women of color investors, such asList of Latinas in VCby Maria Salamanca and Jomayra Herrera andThe List of Black Women in VCby Sydney Thomas.
No matter how diversity comes to venture capital, what is clear is that the status quo is not only inequitable, it’s irresponsible. Research shows that morediverse companies and organizationshave more financial success than homogeneous ones. Additionally, a study published in theHarvard Business Reviewlast year found evidence that diversity in VC partnerships leads to more financial gains.
Kunst says investors who aren’t following the research are making a mistake. “There are amazing women of color leading venture funds … but it’s not just on them to find women of color,” Kunst told me. “Every investor who cares about returns and every investor who cares about diversity should also care about funding women of color-led companies.”
For many currently holding power in the industry, change is going to have to come with a complete overhaul of culture and mindset, as several of the investors and entrepreneurs I spoke to highlighted. “I think people keep thinking of diversity as a pie [chart]. I don’t think it’s a pie.” Corral says. “I don’t think by giving someone more access you’re taking something away from someone else.”
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