A couple of weeks ago I flew home to Texas and was greeted by historic power outages and record-breaking freezing temperatures. In the time I was home I witnessed people suffer from food shortages and a lack of heat without any resolutions on the horizon.
Over 3 million people lost power in Texas and many people died due to the impact of these outages. As I was living through these traumatic times in McAllen, TX, my hometown, I was again reminded of the power of access and its very real impacts.
For context - my tiny hometown is part of a larger community called the Rio Grande Valley. We are the most southern part of the US and are a community that is 89% Latino. We are known for our palm trees, year-round sunshine, and the most delicious Mexican food in the US. We are also one of the poorest regions in the country with over 500,000 people living in Colonias - low-income communities that often lack basic utilities, access to healthy food, and high-quality healthcare. Because we are living through a global pandemic, it is important to also mention that my community has been disproportionately hit by COVID. So when these freezing temperatures hit South Texas, these underlying issues around access were exacerbated and it meant life or death for many people.
And when you spend days in dark freezing temperatures with no electricity and no wifi...you start to think deeply about your life and right now my life is business school and all things venture capital. So late into the night buried under 7 blankets laying side by side with my mother and siblings for heat and when finally everyone was in deep sleep, I started to make real parallels between access and outcomes. I thought deeply about access and the huge impact it can have on people's lives and communities. Seeing as how the LACK OF ACCESS was having such a stark impact on my community it made me think of how access impacted the founders that I am so deeply passionate about. This might be a bit of a jump but hear me out here.
To layout my argument, I’m going to share some numbers:
In the last 10 years, venture funding has grown 400%. In that same time, women-owned companies have grown by 40% and we have seen huge growth from founders of color.
YET
2.3% of all funding went to Female Founders
1% of all funding went to Black Founders
2% of all funding went to Latinx Founders
***I was literally shaking my head as I was writing this.
This is a symptom of a broken ecosystem where representation lacks at every level:
From the Limited Partners (LPs) cutting the checks to the venture funds
A study from the Bella Research Group and the John S. and James L. Knight Foundation found that Women and minority-owned firms manage just 1.3% of the $69 trillion under management in the U.S. financial-services industry
Also what’s frustrating on this end is that LPs aren’t providing transparency into their numbers and as all my business professors say - “you can't change what you don't measure”
To the Venture Funds themselves who are cutting the checks to the founders
65% of venture capital firms have no female partners
81% have no Black investors
To the Founders receiving the money
See sad numbers above (that reflect HUGE missed investment opportunities)
STUDY AFTER STUDY has demonstrated this not only is the right thing to do but it is the profitable thing to do with diverse teams outperforming returns for their investors. (Numbers below that demonstrate my point)
Diverse Venture funds achieve 10 to 20% higher return
Portfolio companies with diverse leadership achieve 20 to 25% higher valuations
Access is at the crux of this issue. Access to limited partners who fund diverse GPs to access to VCs who fund diverse founders. Access to capital is the life or death of this ecosystem.
We know the problem, we see the numbers, how can we make a change?
HOW DO YOU FIX IT? HERE ARE SOLUTIONS:
We need more diverse representation at the institutional partner level
Many of these institutional partners are funds that are growing money for everyday people and as we see demographic changes in our country - those every day people come from are more and more diverse communities.
Solution:
Deploy money into funds that are focused on investing in underrepresented founders. I understand that many of these funds are micro funds (usually less than $15MM in AUM) and it is unrealistic for institutional partners to cut smaller check sizes.
BUT they can either:
A) Make an expectation to correct a structural issue
B) Work with funds of funds with the mandate to only invest in VCs that are deploying money to underrepresented founders
2. We need more diverse GPs and investment associates at venture capital firms
These numbers are so bad plus y’all as someone working at a VC fund now a lack of diversity is NOT good for business. You don’t have access to fresh deal flow or are thinking about innovative spaces to invest in.
Solution:
Emerging Fund Manager Programs
Pipeline for Investment Associates
Recruit from HBCUs and HSIs
Commit to mentoring and training underrepresented minorities to break into VC
These are programs that I have personally done to break into venture:
3. We need to deploy more money in Women, Black, and Latinx founders
Deal Source from untraditional places
Put the sweat equity in - coach coach coach
Set up office hours and create spaces for underrepresented founders to coach them with their business plan, their pitch deck and help them grow
If you all want to join my office hours, sharing my calendar here
For every traditional mainstream deal you look at commit to looking at diverse founder as well
Conclusion:
Y’all we have the power to create a more equitable world. We need to leverage our access and voices to create this change. Especially all the folks reading my blog, we are part of the entrepreneurial ecosystem - it is in our DNA to disrupt and bring change. The change that we are talking about is not only the right thing to do and leads to profitable outcomes and innovative solutions to problems we are facing!
As always, I would love to hear you. Comment below and let’s start a conversation.
Sources:
The Trouble With Diversity Data
MOVING TOWARD GENDER BALANCE IN PRIVATE EQUITY AND VENTURE CAPITAL
Diversity in the asset management industry
Institutional Investors Must Help Close the Race and Gender Gaps in Venture Capital
The investment industry claims to support diversity, but the numbers don’t add up
Global VC Funding To Female Founders Dropped Dramatically This Year