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Dear VCs: Making Pledges Won't Close The Funding Gap

7 Min Read
Business



Amid the mainstream conversation about inclusion and justice in the workplace, otherwise known as #MeToo, a Silicon Valley venture capital fund considered how they can be more inclusive of the women, minority, and LGBTQ entrepreneurial communities.

Their solution? Ask the CEOs they currently fund to promise to hire senior-level employees from diverse backgrounds.

Lightspeed Venture Partners, a venture capital fund that has investments with blockbuster startups such as The Honest Company, Affirm, and HQ Trivia, has asked its portfolio company CEOs to sign a “side letter" affirming their commitment to consider women and other underrepresented groups for senior jobs and new spots on their board of directors.

Can making pledges— or even hiring a C-Suite level employee to manage diversity efforts— really make an impact on the funding gap for multicultural women-led companies?

Many experts say it's going to take systemic change, not letters of intent.

It is well reported that the amount of investment going to multicultural women-led companies is incongruous to the entrepreneurial landscape and the performance of their businesses. Between 2007 and 2016, there was an increase of 2.8 million companies owned by women of color. Nearly eight out of every 10 new women-owned firms launched since 2007 has been started by a woman of color yet, these businesses receive an abysmal 0.2 percent of all funding. Amanda Johnson and KJ Miller, founders of Mented cosmetics, were just the 15th and 16th Black women in history to raise $1M in the fall of 2017.

The multicultural women who do defeat the odds to get funded receive significantly less than male founders. The average startup founded by a Black woman raises only $36,000 in venture funding, while the average failed startup founded by a White man raises $1.3M before going out of business.

The implicit and explicit bias not only impacts individual multicultural female founders, it could be stifling innovation. For example, companies with above-average diversity on their management teams reported innovation revenue as 45 percent of total revenue compared to just 26 percent of total revenue at companies with below-average management diversity. That means nearly half the revenue of companies with more diverse leadership comes from products and services launched in the past three years.

In our economy today, venture capital is responsible for funding the work of our most innovative companies. Venture capital-backed U.S. companies include some of the most innovative companies in the world. In 2013, VC-backed companies account for a 42 percent of the R&D spending by U.S. public companies.

With a wealth of multicultural women entrepreneurs and evidence to support the performance of diverse companies, why does this funding gap persist?

According to Kristin Hull, founder of Oakland-based Nia Impact Capital and Nia Community, many traditional investors consider women or minority-led businesses as a category in their portfolio, like gaming tech or consumer packaged good. Hull, who focuses on building portfolios where financial returns and social impact work hand-in-hand, argues gender and ethnicity are not a business category and investors who dedicate a specific percent of their portfolio to diverse companies are the ones missing out.

“We are doing this backwards," says Hull. “Adding diverse, women-run companies actually de-risks an investment portfolio."

Hull points to research that has found women are more likely to seek outside help when a company is headed for trouble and operate businesses with less debt on average. What's more, a study conducted by First Round Capital concluded that founding teams including a woman outperform their all-male peers by 63 percent.

Ximena Hardstock, a 43-year-old immigrant from Chile experienced this bias first hand before she raised $5.1M for her tech startup. “How do you get an investor to notice you and take you seriously?" says Hardstock. “White men from Harvard have a track record and investors are all looking for entrepreneurs that fit the Zuckerberg mold. But a woman from Chile with an accent who started a technology company? There is no track record for that and this is a problem so many women of color face."

Hardstock came to the U.S. from the suburbs of Santiago when she was just 20-years-old. Alone with no family or connections in the U.S., Hardstock worked as a cleaning lady, a bartender, and a nanny before she began teaching and working in education. “I had a lot of ideas and Chile is still a very conservative country," she says. “Most women become housewives but I wanted to do something different. So, I moved to the U.S."

Hardstock went on to earn a Ph.D. in policy studies, served as vice president of Advocacy for National StudentsFirst and worked as a member of Washington DC mayor Adrian Fenty's cabinet. Her experience working in both education and government exposed her to a need to simplify the process of connecting lawmakers with their constituents. As a result, Hardstock founded Phone2Action, a digital advocacy company that enables organizations and individual citizens to connect with policymakers via email, Twitter, Alexa and Facebook using their mobile phones.

Because venture capital and private equity are not necessarily meritocracies, Hardstock initially struggled to get in an audience with the right investors despite her company's growth potential, her experience, and her education. In fact, it wasn't until she won a competition at SXSW in 2015 that she could get an audience with a serious venture capitalist.

While it may seem like symptoms of a bygone era, both Hardstock and Hull say the path to investor relationships is forged in places where many women of diverse backgrounds are not – ivy league organizations, golf courses and late night post-board meeting cocktails attended mostly by White men of means.

The history of venture capital has never been very balanced, according to Aubrey Blanche, global head of diversity at Atlassian software development company and co-founder of Sycamore, an organization aiming to fix the VC funding gap for underrepresented founders. “White and Asian men have built the venture system and for generations have been seeking out people like themselves to invest in."

Personal and professional networks are critical for founders to connect with investors, but many multicultural women don't have access to the networks their White peers have. According to a study conducted by PRRI, the average White person has one friend who is Black, Latino, Asian, mixed race, and other races. This common situation makes getting that all important warm introduction to established VCs very challenging for multicultural women founders.

“Is the ecosystem of your network equivalent to your net worth? Absolutely," says Hardstock. “For us, we have to build our own ecosystem and recreate what happens on the golf courses and at the Harvard reunions."

To Hardstock's point, most multicultural women with entrepreneurial aspirations lack that Ivy League network. According to reporting published in The New York Times, Black students make up just nine percent of the freshmen at Ivy League schools but 15 percent of college-age Americans. This gap has been largely unchanged since 1980.

While notable female investors such as Arlan Hamilton, Joanne Wilson, and Kathryn Finney are actively working to close the funding gap for women of color, only seven percent of current senior investing partners at the top 100 venture firms are women. Less than three percent of VC funds have Black and Latinx investment partners. Without an influential network, Hardstock and entrepreneurs like her are left screaming for a seat at the table.

When Black, Latina, and Asian women founders do get in the room with the right investors, they have to work harder to get the investors to relate to their products and services. “Entrepreneurs solve problems they understand," says Blanche. “When multicultural women entrepreneurs present their businesses to a homogenous group of male investors who may not be equipped to understand the idea, they may pass on an amazing business."

Take, for example, the founders of Haute Hijab or LOLA. Founders of both successful startups would have to explain the market for their services to a table occupied mostly by men who may never have considered that Muslim women want more convenient access to fashion and have never considered women might prefer to purchase organic tampons.

This lack of familiarity typically means reduced funding for women and a host of other consequences.

As one recent study pointed out, even the way investors frame questions to women can impact funding. According to the Harvard Business Review, female founders are often asked “prevention-oriented" questions focused on safety, responsibility, security, and vigilance. Male founders, on the other hand, are often asked questions focused on hopes, achievement, advancement, and ideals.

When all of these factors are considered, a side letter may not be enough to begin to close the funding gap.

Both Blanche and Hull say real change can be made by democratizing information and education on impact investing. Both women say educating investors and MBA candidates about impact investing is the best way to overcome current bias.

Blanche's organization, Sycamore, produces a newsletter for new angel investors who want to help close the funding gap while making money in the process. Hull's firm has an internship program for multicultural girls from Oakland to expose them to the worlds of investing, entrepreneurship, business leadership, and financial literacy.

“I'm excited about the changes I see," says Blanche. “I see more firm employing the Rooney Law on an institutional level, an increase in smaller firms looking at underserved communities, and the democratization of institutional funding."

Hull adds that as long as multi-cultural women-led firms continue to show returns and outperform or perform on par with companies founded by White men, the investor community will rethink their portfolio strategies.


This piece was originally published in 2018.

5 Min Read
Lifestyle

Help! My Husband Won’t Stop Yelling At Me

Help! My Husband Won't Stop Yelling At Me

Dear Armchair Psychologist,

I'm a newlywed, and I love my husband very much. But whenever I'm on the phone, the way my husband speaks to me makes people think he is abusive even though he really isn't. He just has a hard time managing his voice and his energy levels when he is stressed. The next second he's back to being chill and flexible (once I'm off the phone, of course). I don't want people to misinterpret my relationship, and I do want him to change. What do I do?

- On The Edge

Dear On The Edge,

I'm sorry that you're feeling humiliated by your husband's actions. What you describe definitely sounds like a classic symptom of abuse and it is understandable that your friends are worried. The difference between abuse and a simple disagreement is that it happens every day with significant consistency. Your instinct to want your husband to change is likely rooted in the fact that you understand this behavior may not be sustainable to a healthy marriage in the long run.

You sound brave and strong, and you seem capable of distinguishing that these are his issues on display, not yours. As Dr. Seltzer, a Clinical Psychologist points out in this article, "In all likelihood, the rage says a good deal more about that person and the gravity of their unresolved issues than it does about you" Regardless, it is important to take care of yourself. Have you assessed how the yelling makes you feel personally without taking into account your friends' reactions? Does it make you anxious or affect your overall well being?

It concerns me that you are chalking up his behavior to stress. It's okay for couples to have conflict, and many psychologists agree that this can be done in a constructive way by communicating and expressing one's anger in order to work on them together. Contrary, it is not okay to be on the receiving end of your spouse yelling, and repeatedly so. Have you tried speaking to him about this issue? If so, how did he react and does he understand how his actions are affecting you? Has he made any effort to change his behavior? This could be an important first opportunity to work on a serious issue as a married couple, but if speaking to him directly isn't an option you should seek counseling. I recommended you see a professional therapist separately or a marriage counselor together. Meanwhile, if your mobile phone rings, take that call miles away from hubby!

- The Armchair Psychologist

HELP! Is Democracy The Right Path?

Dear Armchair Psychologist,

I wanted to ask you about a dilemma I struggle with. I come from a country that is under an autocracy. I'm curious to learn about the path to democracy and why some countries struggle more than others. And, an even bigger question of this model, does it "fit all?" Obviously, there are three basic models that are/were widely spread around the globe, including some deviations with different blends and mixtures: monarchy, democracy, communism. Throughout history, it seems that the democratic model has been well-adapted and successful in Western countries, where cultural, social and political conditions are well suited for it. Whereas in Asia, we can observe some deviations of this same model achieving success with a blend of authoritarian rule and sometimes communism such as in China, Singapore, and South Korea (all to varying degrees). What is your perspective on this? Living in the western world, one always hears about the democratic model being the right way, but if you look at the most successful examples (growth-wise): Singapore, South Korea were blended democratic models that have achieved great results. So, should the western world deviate from its preferred model given that checks and balances are in place?

Sincerely,
Anti-nationalist

Dear Anti-nationalist,

I'm sorry to hear that you're dismayed by your country's autocracy. Living in the US under Trump's rule is feeling more and more like an autocracy for myself and many others these days.

Let's take a look at the growth rate of the countries you mentioned. The USA grew by 2.3%, South Korea grew by 3.1%, and Singapore grew by 3.6%, in terms of GDP. While it's true that the US may seem to lag behind a bit in growth, it's important to put into perspective how that growth is measured. The old saying "There are lies, damned lies, and statistics" comes to mind. But the perspective of how we measure things is crucial.

As an example, let's say you are coming out of college and you're worth $1,000 because that's all you have in your bank account. Your neighbor has $10 million. Next year, you have $2,000 and your neighbor has $12 million. Your growth rate was 100% and your neighbor's was only 20%, but does that mean you did much better than your neighbor that year? Of course not, because it's also the total amount of money you make each year that counts.

Courtesy of Y-chart

Basically, the US made around $240 billion in growth in 2018, whereas Singapore and South Korea made about $25 billion each. Smaller, emerging countries always grow faster initially but as they get larger they have to keep making increasingly large amounts of money to keep that same growth rate up, so it's no surprise that growth slows over time.

However, discussing economics alone can't answer your question, because, as many people often do, you're conflating Capitalism with Democracy. They are very, very different things. One is how you structure your economy. The other is how you structure your society. Judging Democracy by how the economy is doing is like judging an apple by an orange. The point of Democracy is not making sure you can buy that new television, it's to ensure human equality and personal rights.

You asked about Democracy and if the Armchair Psychologist believes that governments should be accountable to the people they govern. Should the population be able to remove its leadership? Are checks and balances good for a nation to keep megalomaniacs from taking complete control? Absolutely. Is it perfect? Absolutely not.

Your question may also be "is capitalism the best way for emerging societies to grow?" Most scholars would argue that America wasn't truly capitalistic in its infancy. Rather, it was about communal living, small local towns becoming self-sufficient, growing their own food, and taking care of each other. How economies grow in their earliest phases is a function of the local culture and the resources available to that country and also what infrastructure needs to be developed (schools, transportation, highways, refineries). There are many ways of improving the wealth of a country, but removing the population's control over leadership isn't a necessary ingredient to success. I hope this eases your mind; this is a difficult dilemma to work out. But, as Churchill once said, "Democracy is the worst form of government, except for all the others."

- The Armchair Psychologist

Need more armchair psychologist in your life? Check out the last installment!