Mac Conwell and Thea Messel have both achieved the monumental task of being able to close a first-time fund in an ecosystem that has historically said no to people from their backgrounds. Mac and Thea shared with us a little of their grit, determination, and work ethic in using everything at their disposal—including powerful tools such as data, research, and social media—to galvanize investors into their funds and begin investing in overlooked entrepreneurs.
Interviewed December 2020
Raising Funds through Non-traditional Methods
Erika Brodnock (EB):Mac, regarding fundraising, Twitter has been a major aid in your journey. Why have you chosen that medium? How did you make it work for you?
Mckeever “Mac” Conwell (MC): So, historically, most funds are raised under 506(b) within the United States, which means as you raise your fund, you can’t publicly disclose the bets you’re raising. It enables you to take around 35 unaccredited investors, whereas the other investors traditionally have to be accredited. This is what I have always heard, that is what I have always known. I had never encountered another option. It just so happened that earlier in 2020, AngelList announced they were starting what they called “rolling funds.” One of the unique things about the rolling fund was the 506(c) designation. To elaborate further, investors could be publicly solicited, but each investor must be accredited to use their platform. They already had several credit investors on their platform making investments.
This announcement came at around the same time that my Twitter following started growing. In June 2020, before I started fundraising, I had around 2,500 followers. I have been on Twitter since 2009. As of today, I have over 21K followers. As my Twitter following increased, I noticed that it was possible to raise a fund publicly. Additionally, when I decided I wanted to raise, it was really because I met a founder—somebody reached out to me on Twitter, I really liked them, and wrote them back. I tried to put a special purpose vehicle (SPV) together to make the investment. But one of my advisors said he didn’t want to put money in the SPV—however, he wanted to put money behind a fund. So, I went and raised a fund. I realized very quickly, my personal network would only get me to the half a million mark, maybe a little bit more. That was a fair way off my ambition of $10M. However, simultaneously, my Twitter followers were growing, several VCs were starting to follow me. I just made it a point that if someone was in venture, and they followed me, I sent a note with a link to my calendar, saying “Hey, let’s meet.” Very quickly, I started to have a lot of meetings. So, between June and September, I had over 1,100 meetings, 80% of which were with other VCs. I was meeting other VCs, some were saying, “Hey, the fund you’re working with sounds interesting, I’d like to be a part of it.” I was already using Twitter to meet people and gain introductions. When we publicly opened the fund in early September, we informed 506(c) that we were publicly soliciting, enabling me to put a post on Twitter saying, “Hey, I have a fund, looking for LPs.” I have to say at this point [at the end of 2020], I’ve soft circled slightly over half of $500M. Half of them are people who found us through Twitter. In the last four or five days, we have found 45 new people who are now looking at our legal documents. Whether or not any of them will ever convert into actual LPs is to be seen. However, the ability to reach an audience without having to do the multitude of in-person meetings has been phenomenal. It all happened by happenstance, I didn’t go in planning, or think this is going to be the way to do it. Everything fell in my lap at the right time—good timing.
Johannes Lenhard (JL):So instead of seeing the traditional fundraising route as the only way for you to close your fund, or thinking you were disadvantaged by the fact that you don’t have the same networks as many of your counterparts, you turned an adversity into a massive advantage here.
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MC: That is essentially what happened, and I got lucky for it. I will say, though, there was not a specific or magic thing that I did here. The magic pill to solve these issues is the fact my Twitter following grew from the fact that I had been investing for seven years already. I had my own unique perspective. That is what made people gravitate to following my tweets. I was able to use that gravitation to kick off everything that has followed. Without the solid foundation of knowing what I am talking about, having the experience to speak with authority, and people finding my perspective unique, none of the rest could have been possible. My earlier work facilitated everything slotting into place, similar to the crowdfunding model—much of what transpires in public is preceded by prior hard work and grind.
EB:Thea, what has your experience of raising been? What do you perceive to be your biggest problems?
Thea Messel (TM): Back in 2018, when I started Unconventional, the jungle of regulatory constraints and understanding what you are and are not allowed to do still stood. However, I’m happy to hear that it’s becoming easier to invest; there are some clear guidelines for when to onboard accredited investors and when not to. It is still a jungle here in Europe, particularly as there are directives coming from the EU that can have different implementations among the European countries. At Unconventional, we are based in Sweden and Denmark, and even between those two Nordic countries it has been unclear what was possible and not. When Mac speaks about publicly fundraising, here, it was quite clear that this is not allowed.
Our investment thesis is centered around investing in underrepresented founders. We could see there was huge potential in targeting these types of founders; they were outperforming, which research confirmed, as well as what we could see from the deal flow received when having this investment strategy. This is something that people would want to support if they knew it existed, but we were, and are still, constrained. We couldn’t even go to newspapers and tell them we are about to set up a fund like this, because as it’s in the area of impact, we wanted to be safe. We did not want to breach any of the financial authorities’ rules. The first entity we set up pivoted over the first 12 months. We initially wanted to set up a small €2M–€3M as a “normal” alternative investment fund. However, we didn’t manage to fundraise for that. It took a very long time because everything had to be kept under the radar, and it was just me at that point. Although I had strong first-time backers including Arlan Hamilton, and super angels from the Nordics, it all had to go through network connections, with me not being very vocal on social media. It wasn’t sustainable, so we ended up creating a reverse entity. Instead of fundraising for a strategy where you don’t have to identify the assets, we had eight predefined companies that we wanted to fundraise for that would be our first entity. Then we fundraised for that through our networks and onboard non-accredited investors. Those are investors who typically are underrepresented themselves, or don’t have accredited/professional investor status. However, after mastering that method there was another avenue we established where we had predefined companies and pulled them into a joint entity. This presented a greater opportunity to receive funding from a more diverse pool of investors. As a result, we raised from 60 investors across ten countries over the course of two months, enabling us to put between €10K–€20K into each company.
Getting Nos From Investors Due to Limited Track Records
JL:Can you share one story with potential backers/LPs/investors that didn’t go particularly well? And how did you deflect that?
MC: I don’t know if I’ve had any bad meetings per se yet. I haven’t had as many meetings with institutions, most of my meetings have been with individuals and family offices, these are people who wanted to meet me anyway. They already had some sense of who I was. They understand my goals, what I am working towards is already there. Nonetheless, I have gotten nos. Somebody was pushing me on the thesis side of things. I have received some pushback with standard perspective, questions such as “Shouldn’t you be investing in more companies?” and “Don’t you think you could change the structure of your fees?” Nothing too crazy. I haven’t had anybody ask me questions like, “Don’t you think you should cut your hair before you do this?”
The unique thing about my fundraising is, I have some investing background, but it’s limited. So, I have a limited track record. I’m a first-time fund manager. I know that if you have a standard, rigorous due diligence process to look at a fund, I am never going to pass your due diligence—ever! That is one of the reasons I have never pitched with my deck. Whenever I pitch to people, it’s just me telling the story. I share the entrepreneurs that I have been privileged to help in the past, and the kind of entrepreneurs I’m looking to help in the future. If that resonates with people, then we can start having a deeper discussion from there. But if you start going through all the legal paperwork or digging into my deck, I’m not at that stage yet. Maybe when I get to fund two or fund three, I can be better equipped to prepare for that level of track record scrutiny.
When I get these nos from institutions with that focus, I am well-prepared for them. Most of the people I meet have formed an opinion on how they feel about me, or about the fund, before they ever even talked to me. It’s just a matter of whether I mesh with what they thought they understood about me or the fund when we actually speak. We are lucky because during COVID-19, everybody is at home, so I could do all these meetings via videoconference. If not for that, I would be flying all over the country, and probably all over the globe to have meetings, just for people to say, “We’ll get back to you in a month” and “Let’s have three more meetings before I make a decision.” That takes a toll. So, the idea of somebody investing an early stipend into the GP of around $250K that you could use however you need, that could change everything for underrepresented GPs. While the kickback for that early investor could be that they get to participate in management fees of all the funds you raise as the GP, and everything else going forward.
Finding Initial Capital as a First-Time Fund Manager
EB:What are your thoughts on whether you would have been able to do that, coming from your ethnicity, socioeconomic background, etc., if COVID-19 wasn’t a factor? Is there a way that you would have been able to do this without COVID-19? Or without having some form of deep pockets (or an early investor) in the first place?
MC: Probably not. I mean, yes, but I’ll be honest, when I was thinking about doing this, I was initially trying to raise $100K–$250K for the GP, so I could have the money to go raise the fund. Raising a fund is essentially business development; using your business development skills to grow a network or have a network of people you can talk to, who could potentially be investors, is the way you go about it. I just happened to use Twitter as my tool, but it could have been LinkedIn, it could have been something else. I would have figured out a way to do it. However, some capital upfront is vital. I’ve been in the tech field for the last 20 years. With that being said, I have some people who I could go to, to see if I could get that money. But it would have been a lot harder for me to do it that way. To your point about people saying they don’t invest in first funds, most institutions don’t. Most first funds are high net worths and family offices. Those people don’t talk about this stuff as much. Then for the institution side who don’t say they don’t invest the first funds, it’s the same thing for investors today, we don’t invest in pre-product or pre-revenue companies. But every now and then you meet a founder, that’s pre-product and pre-revenue that you just truly have real conviction for. You take a chance on that one.
TM: Regarding COVID-19, yes, I definitely agree our operational budgets have gone down tremendously. We are affected by the fact that the investors have to accept that they cannot meet us face to face and sit down and analyze our body language. Finding other ways of connecting, especially over video call, is extremely good for the industry, in general, and particularly good for emerging managers with scrappy operational budgets.
What we tend to say is that we are a triple impact fund in the sense that we are underrepresented fund managers ourselves, in the profiles and backgrounds we represent. We channel money towards underrepresented founder segments. Then there’s that meta impact in that aspect. In addition, we only invest in companies that have impact at their core. We were just about to start our fundraise in early March 2020, then COVID-19 hit and everything stalled. But after the Easter holidays, stocks rebounded and we saw a tremendous appetite for positive impact investment opportunities. At that point, we suddenly had lots of interest from institutional investors, because as I mentioned, we have several layers of impact. They were quite enthusiastic; we actually increased our fund size, I would say tenfold of what we were initially aiming for. Unfortunately, it didn’t come through. In fact, what you mentioned, Mac, in terms of due diligence, well, we have the eight investments that we have, and even though they are performing well, we just do not check those boxes that the larger institutions are looking for. Even when they say they do back first-time fund managers.
Raising a fund is always hard, regardless of whether you have experience or not. What we experienced was that because we have a thesis of investing in underrepresented founders, that creates a sense of empathy in investors; it is something people like and want to be a part of. At the same time however, people were also reluctant to actually accept that the opportunity was there, because in doing so they had to accept there was a problem, and that the problem is as big as it is when it comes to the Nordics (which is known as the most equitable place in the world). What we found there was a lot of interest from outside of the Nordics, because it’s easier to see both the potential and the related problem in a market that is not your own.
What was particularly hard in the beginning was deciphering whether interest came from a place of “Oh, I’m curious about this thesis” versus “I believe in this opportunity, an alpha opportunity investing in underrepresented founders, and I accept that as a white man based in the Nordics.” In that process, there was a lot of talk about Unconventional. VC is a small community in the Nordics, we experienced that some investors spoke negatively about our pipeline, however that the same investors were investing in the same companies through other opportunities. This was very different when talking to investors from outside the region that found our dealflow and selected investments as high-quality dealflow. I suppose it’s always like that when you try to disrupt something, you are at the risk of getting shut down based on that alone. I think it is difficult, because we really want to change something in the industry, and at the same time, there are a lot of bigger players who say they want to support that change. Yet, they want to support that change until a certain level. As an emerging fund manager, if you’re going for the diversity focus, choose your battles. My advice is, be very transparent about the challenges faced by the founders you want to back and persevere. You can’t really do anything about institutional investors, they have their boxes they need to check, so focus your energy where there is bigger conviction and more flexible mandates, so you can get moving and accelerate the impact.
Advice for Emerging Fund Managers
EB:What has been your most important learning? What would your biggest piece of advice be? What would you say to emerging GPs that they should refrain from doing?
TM: I would say, the same as we say to our founders, in order to save time and be efficient, due diligence your investors before you spend too much time on them. Spend the time on those that are more probable of actually backing you. Do they have a track record of investing in underrepresented founders or in your industry? If they say they want to invest in diverse founders, do they actually have a track record of doing that? Have they put actions behind their words when it comes to that? That will save anyone who is fundraising, whether as a startup founder or emerging fund manager, a lot of time. Then in terms of ticket sizes, if they only invest in funds that have a minimum size of 100 million, then we shouldn’t spend too much time on them, even though they might like to have the conversation. When you’re in the diversity industry, everybody wants to say they are a part of it, and they believe it, and they think it’s important. However, very few come to the conclusion that they want to put their money behind such a strategy.
Efficient ways of deciphering who is who: do they fit your thesis in terms of putting actions behind their words? Spend time getting good legal advice from people who are progressive. It can be difficult, if you don’t have a legal background, to actually decipher whether legal counsel can be effective or not. If you have the right entity, set up correctly for the type of network you have, you could open yourself to high-net-worth individuals who can quickly help you get to first close. For us, that was not the case. We knew that we would attract women and underrepresented people, those with potentially smaller funds, but who are willing to do rather than speak, and actually believe in this investment opportunity as they might have experienced biases themselves. Next was the question of how we could create a structure that could accommodate the movement we were tapping into. A combination of legal understanding and your available networks is key, even though you can build your network of professional GPs and potential limited partners going forward.
MC: Be okay breaking rules that are no longer fit for purpose. Funds have been raised in the same ways for so long that people have stopped trying to innovate and think of different ways to attack the problem of some communities being locked out, or to figure out how to fundraise differently.
I am getting a lot of praise right now. Why? Because I am doing things that others have never done before. What I am doing has in turn created a generation of GPs coming behind me who are looking to raise their funds in the exact same way. If we all collectively start to think of different ways to go about raising our funds through different structures, using the things that were historically disadvantages to our advantage (within the spirit of the rules and laws of course), we might be able to see a lot more funds being raised. We either do that, or go back to the same old, traditional patterns. Get creative!
I would also say tell good stories. Too many GPs don’t tell stories when they pitch. Most have their deck and meticulously go through the numbers and what the performance is going to be, rigidly hitting the notes they know every potential LP wants to hear when they are raising a fund. Try something different. You could be really well served telling stories of founders that you have met, that you support, and speaking about how you support them. Give a real-world example or case study of a founder you supported: how you met them, how the deal came together, the things you did to support them and help them grow. Leaving those founders as references can have a strong impact on your potential LP and actually differentiates you from everybody else raising a fund with their pristine deck. Keep in mind, no matter how differentiated you think you are, you probably are not. You are all competing against others that are pretty much identical, just like companies are. There are other funds that are being raised with similar thesis, similar models. So really homing in on what makes you unique and special is key. If you can tie that into a story where you can emphasize what you do, how you do things differently, and the impact that has already created, it can be both helpful and incredibly memorable. That’s just a tactical thing.
Hsu, Villa, Jones: Investing Outside Silicon Valley
William Hsu (Mucker Capital)
Monique Villa (Launch Tennessee, formerly Mucker Capital)
Allan Jones (Bambee)
Mucker Capital has been investing outside of Silicon Valley for more than 10 years. We caught up with William Hsu, one of the founders; Monique Villa, one of the investors; and Allan Jones, one of the investees. We sat down with all three to better understand how Mucker was founded, how it invests differently from the status quo, and the impact of this on the founders receiving funding.
Interviewed February 2021
Building a Venture Fund Like Entrepreneurs
Erika Brodnock (EB):William, why and how did you start Mucker Capital? Was there a specific experience that led to your decision to do so?
William Hsu (WH): Starting Mucker Capital was part of a grand plan to conquer the world! Much earlier in my career, I had been a very young entrepreneur in my early 20s. It was the middle of the dotcom era and I had raised a ton of money, and honestly, had wasted away a lot of money for my VCs, too, and I had been fired by my board and my investors for being a terrible CEO. They were right. I was a terrible CEO. I was 22 and I knew nothing about building companies except how to throw parties and give away stuff at the office. I never had this affinity for VC because it felt to me like people who did not have a hard job. It was making bets and hoping things worked out. They do not quite understand the hard work and the travails of building a business.
In 2011, I was working at AT&T, in a senior role managing hundreds and hundreds of people. I thought, this is it, I am in my early 30s, this is the end. Another 40 years of AT&T and what happens next? I die and go to my grave? That is not what I wanted to do. My first instinct was to quit my job and go and start a company because I like that work, and last time, I was too young and not ready. This time, I should be ready because I know how to build a business, a product, a team.
I quit my job and started looking for opportunities to start a company. I was already in Los Angeles at the time. Then my partner, Erik, who I used to work with at eBay, moved down from the Bay Area and said, “I want to start a venture fund.” I thought, “No!” A) I hate VCs, and B) LA has terrible VCs. Then Erik, being the open-minded contrarian that he is, said, “Starting a venture fund is like being an entrepreneur, you are building something new from scratch. When the market is not great and competitors in the market are subpar, it is called an opportunity. Therefore, we can be entrepreneurs, and we are going to build a fund.” We went from that conversation to launching in the market within 30 days. We were not incorporated. We did not have an office, much less any money. We were two regular dudes, and we did not have much money. We just launched Mucker with about $500, we spent it on buying a logo on 99 Designs and building a website on Upwork. We spent $500 to get up and running, because, on the internet, all you need is a website. We then went to a couple of friends that we knew in the press and just announced our arrival in LA as an accelerator and a fund.
Our philosophy at the time was that we are entrepreneurs, entrepreneurs build MVPs, and we want to build what the market sees and test market reality on whether our thesis is correct. If it was correct, then we go out and figure out the rest of the steps. We wanted to build a business from the market back to the product. As a venture fund, money is the last thing you need. The first thing you need is a reputation, a brand, and a way to source deals. Can we at Mucker source good deals? Within 60 days, we knew that we could. We found ten companies we loved, and we wanted to invest in them. I mortgaged the house. Erik gave up his house and moved in with his in-laws. We then put together a million dollars of our own money and started investing. It took us another three months to find an office space. Another month or so to get completely squared away on the legal side. We launched first, found companies second, found money third. Finally, we got all the legal paperwork completed around six months later. We built a venture fund the opposite way of how most people build venture funds, which is to find the money first. We built it like entrepreneurs because that is what we have done in the past.
EB:You found product-market fit in making sure that you had the customers or the companies.
WH: We did it like entrepreneurs do with their customers. We found product-market fit first. We decided that we needed to figure out what our product or feature set should be before we told our engineers to go build it.
Telling a Different Story about Venture
Johannes Lenhard (JL):Monique, a question about the thesis at Mucker. What about it made you want to join? What about it also has to do with investing outside of Silicon Valley?
Monique Villa (MV): Venture capital is all about people. For me and Mucker, it was about the people. I had been following Mucker’s trajectory in Los Angeles since they launched in 2011. I did not know them personally at the time, but if you were young and building your career in LA, you knew about Mucker. Early in my career, I bumped into Will while working for a non-profit that he was advising at the time. I remember the way he was talking about market opportunities, and the people behind those market opportunities, that made me think: this is what venture capital should be. It should be very people-driven, and people-centric. He also looked at the world through a different lens, where typically, when you meet VCs, you will hear mostly cookie-cutter responses and backgrounds. Everything in VC historically fits into what seems to be a nice, clean box.
My previous experience working in venture capital was a bit jarring because I was new to venture. I had never heard of it before, as I did not grow up around venture capital and high-growth startups. I did not know what a startup was, I did not know what any of these company logos were on venture fund websites, I had to learn it all on the fly. When you enter the workforce that way, you tend to believe what people tell you: that you must come from a certain background to be in venture, you must fit the mold, and think the same way as everyone else. When I met Will, he was telling an entirely different story about venture. I thought, I want to stay close to these people and learn from their examples.
Fast-forward, and I found myself relocating to Nashville as an LA native. I was researching around the southeast and found that there was a tremendous market opportunity in the region, and it was being overlooked by investors. I naturally brought this to Will and did not know it would turn into us working together. I was eager to get his thoughts because he always had something different to contribute to a conversation. A month later, he said, what if you join our team and open an office for us in Nashville? The rest is history. It started with the thesis that it is all about people. It is about having unique insight, and about diving in and working alongside one another and taking out the traditional hierarchy and vertical structure that has been so present in traditional venture capital for decades.
WH: We faked it until we made it.
Allan Jones (AJ): It makes me respect you guys more. As an entrepreneur, I filter a lot of the advice I get from my investors through the lens of “they have limited operating experience.” The advice does not get ignored. It just gets filtered and then applied in its appropriate place. When you know that your investors have walked the operating road at a company, and then apply those operating principles of starting a business in their venture fund, it adds a different type of filter. I feel more comfortable taking the advice I get from the team and applying it in real-time.
Removing the Biased Checkboxes in VC
EB:You have just broken down how to make the impossible possible. You are not just diverse in terms of location, you are also investing in founders who have been historically overlooked for other reasons. It is super interesting that you have a Black and gay investee on the call, which is phenomenal. What is the makeup of your portfolio? What are your commitments to DEI going forward?
WH: We do not track the outcome. I do not think it is about the outcome. Off the top of my head, about 30% to 40% of our portfolio are either a minority or a woman. My partner Erik is, on the surface, Caucasian, conservative, male, and very religious. I am an atheist immigrant from Taiwan who is very liberal. Then we have a third partner who is a Muslim American born in Cincinnati, whose parents emmigrated from Syria. The partnership we all have is very strong; we have very different views about life in general, but we are very good friends. We believe in Mucker. We found a common ground in the firm we are trying to build. Yet when you ask us anything from guns to religion to abortion, we will all have very strongly different views. That has enabled us to understand that decision-making is best made when there is some disagreement.
Independent thinking is how you get to the right outcome. The fact that we have been investing outside of the Bay Area for over ten years meant that many traditional ways that people evaluate companies do not work. In the Bay Area, you ask, “Did that person go to Stanford Business School? Was their cousin roommates with Elon Musk when they were in college? Did they work at Google for four years as a director of product?” As much as I would love to have those checkboxes checked, I do not have those checkboxes to check in LA; I did not have those checkboxes to check in Nashville.
For us, diversity is not about purposely trying to create the outcome that we want. It is more about taking away the biases of the input that creates an unfair outcome. Those biases are the checkboxes that traditional VCs use to decide whether or not to invest. Is saying that you want to invest in a Stanford graduate a bad thing? No, it is not, but if that is all you do, you will not get a truly diverse outcome. From our perspective, investing in entrepreneurs is all about the market idea, how passionate an entrepreneur is, how persistent they are, and their personal story of how they got to where they are today. Someone that had a privileged upbringing and walked ten miles might seem that they walked a long way, versus someone who does not have an Ivy League college upbringing and walked 1,000 miles; they might be at exactly the same place in life on paper, but how far they walk is very, very different. For me, it is much more about how far they walked rather than whether they got to Stanford. We are unable to, and no longer desire to, use those benchmarks to make our investment decisions. Our portfolio has been the way it has been since the very first day we started. It is highly diverse for every single metric, whether that is cultural, religion, race, or what college people went to—I do not even ask that question anymore.
EB:What results and returns have you seen?
WH: Mucker passed our 10th year anniversary and every fund is a top 5% fund in all of venture. We went from a million-dollar fund, about 10 years ago, and today, our latest fund is about $260M. We continue to do what we do, which is we do not invest in Bay Area founders. I do not want to get sucked into the sweet temptation of just looking at, “Did you work at Google? Did you graduate from Stanford? Great, I will give you money.” That is a great shortcut, and it has hype. It is a total temptation. We do not want that. We want to train ourselves to make the hard decisions with good people rather than the easy decisions with potentially bad people.
JL:We have spoken to a lot of people, particularly in the US, that are not like that. There is some risk assessment happening by looking at these profiles.
Non-traditional Journeys into Entrepreneurship and How to Find that Talent
JL:Allan, tell us a little bit about your journey into the whole entrepreneurship game. Why did you decide not to go to Silicon Valley? How was it meeting the team at Mucker?
AJ: I did not make a choice not to go to Silicon Valley. I come from a blue-collar family. My dad is an electrician. My mom is a nurse and grew up in a family of entrepreneurs. They ran two businesses. One of them was a pager and cell phone shop. I grew up soldering pagers back together in a small store in Long Beach, California. I had no idea what I wanted to do. I did not go to college. I went to a semester of community college, and I barely went to school. Then I met a woman at a Mariah Carey concert in 2005. We talked for two hours. She said to me, “You are smart. I am going to give you a job.” I was building computers on the side. I had a technical interview for six hours for a quality assurance analyst position; I had no idea what I was talking about, bombed the interview, but got hired anyway. That was my introduction to technology, and that was sixteen years ago.
I very quickly realized I was terrible on the technical side, but I loved product. I got laid off. I read a bunch of product books, pitched myself to be a product manager. I had been in tech for seven months at a company called MyLife. I got hired by a guy named Ian Siegel, who is now the CEO of ZipRecruiter, a unicorn in Los Angeles. I realized I loved product management and I wanted to be an entrepreneur. Fairly quickly, my career progressed, I was 20 at the time and I then went on to be the director of a company called Docstoc, which was acquired by Intuit when I was 21. I started my first venture-backed studio out of a technology studio called Science. They invested in Dollar Shave Club, and HelloSociety, which was acquired by the New York Times when I was 23. I joined ZipRecruiter as their chief marketing officer when I was 26. I was employee number 20 at that company and the operating groups, new products and services, marketing, and customer service account management functions. Coming fresh from failing my first company at 23, I was hungry to prove that I was as good as I thought I was in my head. By the time I left ZipRecruiter, there were 750 people at the company, it is now over 1,000 employees and the company is worth about $3B.
I met Erik when I was 23, pitching my first business outside of a coffee shop. He passed on the business and I went on to fund that company somewhere else. At ZipRecruiter, I proved a couple of things. One, I proved I was very good at this. Primarily, I had proven that resilience matters. From a Mariah Carey concert, I worked my way up to being at a company that was acquired by Intuit and then being the youngest CMO of a billion-dollar business by the time I was 26. Most of that was driven by the desire to prove to myself that I was as good as I thought I was. My confidence always seemed to be much bigger than the skills I actually had, and ZipRecruiter was the turning point where my skills started to exceed my confidence. After three years of being the chief marketing officer and running 50% of ZipRecruiter, with hundreds of people in my team, I realized I wanted to start another company. I realized I was not going to be the CEO of that company, and I had a different vision. I wanted to create something from scratch that I thought could be a behemoth and could create a world of difference in my lifetime.
I met up with Erik again. Will and Erik were the earliest committers to the business. From the gate, they basically said, we want to write you the biggest check our firm will allow us to do. They did. They have been deeply without doubt about my potential as an entrepreneur. They have had questions, but they have never expressed an ounce of doubt. One of the things I have learned is that the early questions an investor asks me, when I walk into the room, expose to me how high the hill is that I have to climb to let them know that I am as good as the person that they would have automatically assessed is good from Stanford. There is this list of questions that I get asked, and most of them are around proving that I even deserve to be having a meeting. The first 30 minutes is going to be me flexing my intellect, so that they can finally lean into the table, and give me the conversation I deserve. The next 30 minutes is talking about the business. I have been fortunate to say that I have moved forward enough to not have those meetings anymore. From Will and Erik, it was straight to talking about the business, speaking about the problem you are trying to solve, and the opportunity you see in the market. It was noticeably absent of the sometimes unconscious biases that are introduced in a lot of investor meetings. That has been the tone of our relationship since that first meeting.
EB:What could other VCs do to open themselves up to talent like you? We are “underrepresented” and there is something about the under that makes it seem as though it is our fault. Instead, we are “overlooked,” and putting the emphasis on the venture capitalists to make sure that they are allowing themselves to have the opportunity to invest in us is the framing that we need. What would make you want to provide that opportunity to other venture capital firms? What would they need to do to attract you?
AJ: Diversity is not a favor to the diverse, it is a favor to the business. On the founder side, the truth of the matter is, if you are a diverse founder and you are trying to confine yourself to the parameters that investors are looking for, to decide if you are good or not, you will never be able to meet them. When I first started, I tried to talk and look like an MBA. I was spending so much time trying to look and be someone else, no one was taking my place in this God-given body. The truth is, you are perfect. The sooner you realize that the unique things about you are the things that will make you a majestically good founder, the better the likelihood that you meet investors that not only fund your business—that is only the beginning of the relationship—but also see you as you progress through your journey to help you become a good entrepreneur. The first check is the easy part, although it does not seem that way. That journey is where all the grit is necessary. The right investors to see you through that is extremely important. There are not as many of them that are looking at the right indicators, but there are the right ones. “All money ain’t good money,” as my Grandma Jones used to say. Partnering with people that see you for who you are, and see those measures of you as a person, being Black, being gay, being from an underprivileged background, they all makeup just your normal human element. The reason I talk the way I do, and I am brave enough to have my hair on the side and blonde at the tip is precisely because of my experiences. I just do not care; I like it. It is uniquely me. I feel free in that. Investors who see that are the investors I want. As soon as you as a founder see that as an intrinsic value, that type of intrinsic value is unavoidable for investors to see too. That is my advice to founders.
On the investor side, it is going to be harsh—spend the time asking yourself why the majority of your current portfolio is homogenous. Before you try and blame systematic failures, be accountable in realizing that you are part of that system. If you are going to look at the components of the system, point out and analyze how those components could be better, to drive more diversity, you should not do that until you analyze yourself as one of those contributing components. You are a part of the bias problem. How you make decisions about talent, though they feel intrinsically right, are intrinsically biased. Until you realize that, you will have 1% of all VC dollars going to Black founders. Until you realize that, you are going to potentially end up with a larger percentage of an investor’s portfolio being African American, but not nearly the success rates that should offer, because you are investing for the wrong indicating factors, because of some skin tone checkmark versus seeing the value based on the removal of biased filters. The honesty there is what investors must confront to truly be able to find talent and unlock the market in terms of diverse value. The indicator is not about the diversity. It is about uniqueness. Unique founders are the best founders. Authentic founders are the best founders. They come in many shapes. The shade is not the metric. It is the uniqueness and authenticity that is the ultimate measuring factor.
Diverse Investment Volume and the Retention Problem
JL:Monique, do you see any early signs of positive results of what is happening? What does the future hold for you as a firm, specifically as one that is willing to invest both in terms of partners and fund managers like you, and entrepreneurs like Allan? Is there anything that you are already seeing that is going to be successful and is there anything that you already see that you want to do differently, particularly through the lens of diversity, equity, and inclusion?
MV: When we were talking about resilience, and what founders and CEOs were up against in the middle of March 2020, and into May, our portfolio founders who went through some of the toughest moments, post COVID, had profitable businesses, and had cash in the bank and runway. Not all of them, but a good chunk of them. The companies that were excelling through some of the most incredibly difficult moments in 2020, all came from underrepresented backgrounds in the venture-backed world. That resilience, that extra 999 miles traveled, carries over into positive unit economics, which translates into cash flow management, cash in the bank, resilient teams they are managing that could think on their feet and be nimble in some of the most difficult moments that any startup has probably ever faced. This all happens behind closed doors and are not the types of things that are celebrated in news headlines. Venture capital is a long game and these companies will be the future unicorns.
To the question about the future, what we need is a volume of checks being written for founders who are closest to unique market opportunities. It cannot be about checking a box and having your one diverse investment for the year. One of my biggest bones to pick with how diversity is talked about today is looking for recognition for “diverse investments” made and leading with that when publishing your VC blog post announcement about your most recent deal. If you are trying to check that box by making one “diverse” investment for the entire year, you are putting an outsized amount of stress and set of expectations onto that single CEO and founder. We all know this is a numbers business, this is a volume business, you have to have volume, and writing that one check a year is not going to do it.
We need to focus on fixing the retention problem. From the venture capital side there are multiple times when I could have left this industry and said this is not for me as a half-Mexican, female, non-pedigreed, aspiring VC. Post-Mucker, I am so glad that I stuck it out, because we have so much work to do. I wrote about diversity recently in a TechCrunch op-ed. There are lots of VCs that are talking about diversity now, talking about investing outside of Silicon Valley. Over Christmas, I kept getting calls from people saying, “We want to pick your brain on the Southeast, or Nashville, or Latinx founders.” Apparently, I know all of them, but I do not.
When we are talking about investing outside of Silicon Valley, we are talking about America, and America is this bigger idea that is known around the world as being a place for everybody. Why are we so set on investing in this seven-by-seven-mile footprint of San Francisco, when you have the entire United States? There are also obviously lots of opportunities around the globe, but what if we just started there: instead of fixating on this concept of “outside of Silicon Valley,” outside of purely Stanford and Harvard grads, instead of finding yet another way we can make life more convenient for everybody who already has money, maybe there are market opportunities outside of that. This is why I show up every day. This is why I did not give up. I want to solve the retention problem. It is not a pipeline problem. It is the retention problem of scaring people away who have been told that they do not belong, and also recognizing there is a whole world out there to invest in. It is our job to go and invest in that world. Let us stop talking about one diverse investment for the year. Stop patting yourselves on the back and get to work.
Yin: Hustle Fund
Elizabeth Yin (Hustle Fund)
We caught up with Elizabeth Yin, co-founder and GP at Hustle Fund, about her experiences growing up in Silicon Valley. From working in big tech and starting her own company, to becoming a partner at 500 Startups and raising her own fund, Elizabeth has really seen it all. With Hustle Fund, she’s now on a mission to democratize wealth by investing differently (earlier, quicker, and to a wider pool of people). Together we explored how, as an Asian woman, she has been able to navigate the culture in Silicon Valley and, in spite of all the assumptions and stereotypes she regularly comes up against, she has attained investor positions where she can “try to change the system.”
Interviewed November 2020
Getting Started in Silicon Valley
Johannes Lenhard (JL):Let’s start with the very beginning, when you started in tech in the mid 2000s. What was the tech world like then? How bro-y was it back then in San Francisco?
Elizabeth Yin (EY): Wow, what a question to start out with. So I’ve grown up in the San Francisco Bay Area and in what they call Silicon Valley; I’m from Mountain View, California, which is the heart of it. So, I’ve been in tech in many different ways, for a very long time, even before my professional career through a variety of internships, even before college. Even from that time, the stereotype of white and Asian men with geekier tendencies very much resonates, and I think that that’s the foot that the industry got started off on. From there, it just flywheeled into many other ways.
I do think, just intuitively, there is something to the fact that people tend to hire people who are their friends and their friends tend to be people who are like them, which certainly extends into race and gender. So that is also where I got started, even way back when I was a child in the 90s. It has just bloomed into what we see today. Where we are today, we are playing defense or catch up [to the people the industry started with]. The way out is to get other flywheels going and to get them going fast and to the same scale. That’s just a very challenging problem.
Combatting Assumptions and Stereotypes
Erika Brodnock (EB):How does this relate and work with the idea of meritocracy? For instance, you started your own company quite early, LaunchBit, where you were the CEO; you managed to exit that in 2014. How was it being an American-Asian female entrepreneur and founder of a tech company, and what was your experience raising capital?
EY: So sometimes, one of the challenges is that you don’t know if people are responding positively or negatively to something about your company or because of who you are, your race or gender; it’s really hard to separate that. In other words, if an investor passes, you don’t really know why it is. And I would even go as far as to say that sometimes the investor may not know because unconscious biases are a real thing.
That being said, on occasion, you are given a little bit more. I’ll tell you a story about how I pitched an angel investor for my company LaunchBit. At the end of the pitch, I asked him, so what do you think? And I’ll never forget his response. He said, “I don’t want to say the wrong thing and call you a meek Asian woman, but I question how you’ll lead a company of 100 people.” And at that very moment, just all kinds of thoughts were going through my head. I studied engineering, I went to work at big tech companies, including Google, all of those places are very skewed in demographics. In many of my classes, I was the only woman, and even at Google, there were not that many women. I just actually had never heard anything like that before. Nobody ever said anything like that to me, even if people felt like, “oh, she’s incompetent,” or even if people felt like “she’s just here because she’s the token woman.” So that was the first time I had ever heard anything questioning my competency because of both race and gender.
After that experience, I really thought very deeply about it. I actually walked away from it rather positively, as weird as that sounds, because it made me think: if this person is thinking that, then perhaps a lot of people are thinking that, either consciously or unconsciously. Maybe everyone out there thinks I really am a meek Asian woman and am unfit to lead a company. Therefore, if I want to do this, I must do everything I can to combat that stereotypical impression. After that, actually, I started focusing on my posture, sitting up in my chair, speaking even louder, even though often I felt like I was shouting, just bringing extra energy to the table—all this stuff that is stereotypically associated with being a good leader. It actually worked out a lot better; I started closing checks. I don’t think he should have said that; it was very inappropriate. But it actually was a gift in a weird way.
Can Fitting in as a Leader Mean Behaving “Like a Man”?
JL:So, the takeaway is that you have to behave like a man, stereotypically speaking, in order to be successful in this world.
EY: Oh, 100%. And, to be clear, I’m not saying that either his behavior was right, or that the stereotypes people have around what is a good leader are right. I’m just saying that from that particular situation, for the situation I was in, I was able to take something away from that, and apply it to that at hand.
At Hustle Fund, we are trying to change how people think about what a good leader is. A good leader, almost by definition, is somebody who can lead a group of people to execute well, right? That says nothing about what you look like, or how you talk or how loud you are. And I know plenty of CEOs who are not charismatic people, but have led very effectively. But people do have all these stereotypes, and that was one of the first times somebody explicitly said that to me. I had heard all these murmurings of how people think about things, but that was an experience where somebody explicitly just laid it out.
A second example, where I left actually dejected, also involved in fundraising for LaunchBit. I was pitching a VC and my contact at the VC firm was very excited. He took me to the all partner meeting. The firm is big—they had seven partners, two of whom were remote, five were in the room. And you can imagine video conferencing back then was not that great. So things kept on dropping all the time. All the partners were also men, and the reason I bring that up is, I think, from a physiological perspective, it turned into a big shouting match. You have seven men yelling, two on video conference yelling, and I’m trying to get a word in edgewise and yell over them, which is entirely impossible. I knew leaving that meeting, I did not get the money, because I just could not even be heard. I felt like, “Okay, this is an example of where gender does not help me, for sure. The whole setup of that meeting did not work in my favor, already I was going in at a disadvantage.”
Seeing Funding from the Other Side of the Table
JL:After LaunchBit’s exit, you switched camp in 2014 and became a partner at 500 Startups. How was it to look at it from that side of the table, from the perspective of an accelerator?
EY: It gave me a lens that I think a lot of people don’t have, because 500 Startups has invested in so many companies over the years—at this point, it’s well over 2,500 companies. They invest all over the world, all across demographics such as race, gender, age, types of people, just everything. So basically, I got a snapshot into a lot of different teams. That was very informative for me, because as I mentioned before, when it’s just you, and you’re pitching your startup, you’re a data point of one. But when you see larger sets of data, then you can start to see very interesting patterns. One of the interesting patterns that got confirmed for me was the following: if you’re a white male who worked at Facebook and went to MIT, it almost doesn’t matter what you’re working on, it will be really easy for you to get funded.
The other interesting thing about working at an accelerator is that we would fund all these companies, and then they would come into my office to work. So I had information that many other investors didn’t have. How did these teams actually work? Do they get along? Do they actually work hard? Are they focused? Are they executing with speed? You see the day-to-day, the week-to-week; that granular level of information that investors don’t see is very telling. After every batch for me, I could pick a subset that were really interesting. And time and again, the companies that I thought were the best did not necessarily overlap with the companies that other investors thought were the most interesting, because they were making decisions based on very different methods.
Different Founders and Companies Don’t Get the Same Shot
EB:The companies you chose from the batch looked different—can you give us any example of what one of them look like?
EY: Yeah, so actually one of my best companies from 500 Startups was passed on many times. In fact, she basically couldn’t raise any money, but now is doing incredibly well. She owns most of the company, she raised a large Series B from NEA, which is a big VC firm here. She raised on her strong traction at this point, rather than based on a pitch deck. The company’s called Mejuri; they make custom jewelry. The founder is a kick-ass female, originally from the Middle East, but she has made her home in Canada.
Why was she not able to raise money for a long time? A lot of VCs just don’t understand jewelry, or women’s products; certainly direct-to-consumer is not a big thing for them, just in general. Female founder, more or less solo founder, not from Silicon Valley; she didn’t really fit the mold.
But now, I think in retrospect, after she’s grinded this out for many years and eaten glass to get to where she is, things are wonderful for her because she now owns most of this wonderful business. It’s a good example of somebody who was able to do it partly because of a specific trick in her business; she didn’t get VC funding, but she did get debt funding. What underwrites the debt funding is the jewelry. She was able to stay on for that long because of receiving financing to get to that stage, even if it wasn’t VC financing. Think about all the other entrepreneurs who, like her, don’t check a number of those boxes, but just cannot get any financing. They just don’t even have a shot on goal.
Change Is Starting, but It Will Be Long Term
EB:Since you joined 500 Startups, has the number of investments in companies led by diverse founders increased?
EY: Intuitively and knowing some of the data, it feels like there are just more founders in general, including more overlooked founders. So I think numerically, I do want to believe that more people are getting funded that come from diverse backgrounds and don’t tick all the boxes, but not relatively speaking.
Now, that being said, it takes like seven to ten companies to build a big company. So when we go back to this concept of flywheel, I know a lot of people are really frustrated. Not a lot of funding is going into overlooked founders, and not a lot of overlooked founders are building big businesses yet, but I think it just takes time. You start the flywheel now, you find some people, a percentage of those people will build big businesses, and then will become funders, and then they’re starting another cycle in another ten years. You cannot get this flywheel going in this manner fast enough. There need to be other solutions here. I do think that flywheel is starting, but you’re talking about like a 30-year process or more.
Advice for the Next Generation of Diverse Entrepreneurs
JL:Looking back at what you’ve gone through and knowing the world as it is now, if you were asked for advice from your own 18-year-old self about going into entrepreneurship and venture capital, what would you say they should do?
EY: One person said it very elegantly to me recently; he said, “My melanin does not work for me.” Other people in my portfolio have been very blunt like, “They’re not going to fund me, if only if I were a man.” I’ve heard a spectrum of comments now from my own portfolio. The data is maybe not in their favor, statistically, but the problem is, you cannot go in psyching yourself out. Statistically speaking, you should not be building a business if you’re looking for your optimal chance of, for instance, making a lot of money. There are much better ways to make a lot of money. You go into entrepreneurship to play your own game—maybe you’re going into it to solve a particular problem you’re really passionate about. Along the way, you just get inundated by all these other people, rightly or wrongly, and mostly naysayers. The way to play the game is to mostly ignore them and take in some tidbits of feedback here and there. Too many people, especially overlooked founders, end up getting into this weird mind trap of what all these other people are saying to them. That’s a problem, because most of the battle with entrepreneurship is with yourself. You are just psyching yourself out. But the way to succeed is to just focus on what you need to do and ignore everything else.
I completely agree that the landscape is unfair, everything from the pattern matching to even the setups of how investment meetings work. But that being said, that isn’t the thing that a founder should be trying to address right now or even necessarily be worried about. It’s probably because I have gone through this myself, where I know that the best path forward is you have to just work with the system and just plow through it for now. Once you have been successful, maybe you can come back and we can work together and try to change the system.
Kapor, Kapor Klein: Equitable Access
Mitch Kapor (Kapor Capital, Kapor Center)
Freada Kapor Klein (Level Playing Field Institute)
This conversation features a power couple that truly deserves the name: Mitch Kapor and Freada Kapor Klein have been leading the charge of VCs investing in companies that close the gap to access in low-income communities and communities of color for several decades. Mitch tells us how after founding and leaving Lotus—the Microsoft of its day—and meeting Freada, the two decided to dedicate their time, influence, and money to funding people and startups for underrepresented groups. Kapor Capital has done so, and has not only been incredibly financially successful, but has also inspired a whole social movement.
Interviewed February 2021
The Origins of Kapor Capital
Erika Brodnock (EB):Tell us about the thesis at Kapor Capital. How did it originate?
Mitch Kapor (MK): I was a tech entrepreneur from the ’80s who built a very high growth company, Lotus; Freada was hired to make Lotus the most progressive employer in the US. We did a lot of things back then that people still are not doing in terms of diversity and having an inclusive culture, while being a responsible corporate citizen in a very affirmative way. For instance, we were the first tech company to adopt the Sullivan principles, which were the principles by which a company refused to do business with South Africa during apartheid.
I have a long history of angel investing. Freada and I worked together in the ’80s and got together as a couple in the mid ’90s. She had been doing independent consulting. As I ramped up angel investing activities in 2008–2009, we began to have a dialogue, and she urged me to think about the social impact of the companies that I was investing in. I was initially skeptical, because I was concerned that we would be missing out on the good deals, but Freada could be very persistent. We conducted a set of experiments and I actually found that there was a different and better way to look at it, which was that all companies have impact, some positive, some negative. There is no such thing as neutral. There was a class of companies with their founders who simultaneously created value that had an economic dimension and a social dimension.
Over a period of a couple of years, in the early 2010s, we brought some other people in to help with the investing, and we began to put it into an investment thesis with the idea of selecting companies that closed gaps of access or opportunity or outcome for underserved communities.
Freada Kapor Klein (FKK): A very important dimension of how this evolved was rather organic. Our San Francisco office brought together and housed a non-profit that I started called the Level Playing Field Institute, which sponsored the IDEAL Scholars Program at UC Berkeley. This was explicitly started to counteract Proposition 209, which, in California, ended affirmative action in public institutions. We started a scholarship program for underrepresented students of color who were admitted to UC Berkeley race blind, and then we created a race-conscious scholarship program for them. That is important for a few reasons. Our Kapor Capital partner, Ulili Onovakpuri, was in that program and we met her as a high school senior.
Level Playing Field Institute was a non-profit that I had started in 2000–2001 as a research organization to investigate why diversity in corporate America had failed so miserably. That was now 20 years ago. I had come to that conclusion after leaving Lotus in 1987. I then started my own consulting firm on issues of bias, harassment, and discrimination. It was global. I had as clients the UN, World Bank, Goldman Sachs, McKinsey, Harvard Business School, and Sanwa Bank. I did proprietary surveys and customized training. In that context, I said, “If it is serious, corporate America gets done what it wants to get done.” Obviously, it did not want to get it done. That was the purpose of starting that.
One of our first major research studies was the Corporate Leavers study in 2007. It was part of my book Giving Notice. Ten years later, we did it for the tech sector as the Tech Leavers Study, which is on the Kapor Center website. Housing together Mitch’s foundation, Level Playing Field Institute, and Kapor Capital meant that ideas already started cross-pollinating. For instance, I met a woman through my consulting practice named Sherita Ceasar who was the highest-ranking Black woman in cable. She had grown up in the Chicago housing projects, and was in a program for underrepresented high school students of color. She credits her trajectory change to it. Sherita and her brother came in to pitch a math app for kids, and we knew that Ulili had been talking about how to keep her little brothers engaged in math. Ulili was working on the Corporate Leavers study. She had a full-time job at Level Playing Field Institute. She had no idea what venture capital was, but all of us hung out at lunch together and Ulili would always go hang out with the geeks. She was a natural and loves tech. She designed her own major on international healthcare and leads our healthcare investing. Mitch invited her into this pitch of the math app.
MK: I could see she had an instinctive feel for what would make a good app. She had the basic perspective and skill set, and I was impressed. I went to Freada after the meeting and said, “Can I get 50% of your time to work on deals?” If we had not had the cross-pollination, this never would have happened. Ulili was not looking for this kind of job, but she fell in love with it. She was good at it. She wound up working as an analyst for Kapor Capital, going to business school, working for a couple of other venture firms, and then coming back to Kapor Capital and becoming a partner. We look for talent in places that people do not otherwise do, in terms of our own team and the founders we support.
FKK: The other thing is the melding of philosophies and programs. What Ulili did first as an analyst at Kapor Capital is start a summer associate program. A traditional analyst, “pre-MBA, I want to be a VC,” it just would not have occurred to them.
MK: Even if it had occurred, they never would have gotten permission to start that kind of program.
FKK: She got the financial support, the readjustment of her job responsibilities, and she did it. Our first summer associate in 2011 was Brian Dixon, who is our other partner now.
How To Move Talent Up the Chain
EB:You seem to have a great way of inclusively moving people through the ranks. One of the things that we have seen from research is that people make diversity hires, but they do so at an intern level and scout level, and then they stay there. What would your advice be to anyone who wanted to actually actively start to see more diversity at the top of the chain?
FKK: Homegrown talent is really important. While it is usually used as a way to exclude people, there is a kernel of truth about culture fit. You are much more likely to get culture fit if you have homegrown talent, as opposed to bringing someone in who was at Goldman Sachs for many years, for instance, where you have to undo that culture and redo your own. After the George Floyd murder in the US, many VCs reached out to us for help—both for help hiring their internal teams and help with deal flow. We had a call recently with a whole group of Seattle and Washington VCs about how to run a summer associates program. The problem that they have is they do not have underrepresented talent on their team to be mentors or to guide the program. For a summer associate program to be successful, not only do you have to commit the time and money, but somebody must shepherd them through. Ulili said we are getting 700–900 applications for our summer associates program and we take seven. We do not want them to go into a firm with no diversity, because that is not going to succeed. If that firm does not have diversity, how do they start? One thing we are doing is saying, “Only take a pod, never take an only.” They also need to leave their Fridays open. Every Friday, we bring all the summer associates together under our leadership for training and support, like an employee resource group.
EB:So, it is a hybrid model that gives them experience of working in a firm, but then also keeps them in a supportive network where they can be nurtured and shielded from some of the lack of inclusivity that is out there at the moment.
Inclusivity Is an Asset, Not a Risk
Johannes Lenhard (JL):There was this fear in the beginning that you had to trade off being an inclusive fund and being diverse in your investment decisions in your team and hiring decisions, vis-à-vis make money. You have proven that it is not a tradeoff. You are showing you out-perform most other funds by far. What are the most important attributes to that success?
MK: It is a combination of things. It is the mindset and the understanding of how you create value. I have come to the conclusion that conventional wisdom is just wrong. Conventional wisdom says that if you think about anything else, besides making money, it is going to be a diversion. You will introduce risks, and you should not take risks. We just happened to be in a period of time where there is widespread ignorance about that. We have been very rigorous in learning from our mistakes when we analyze investment opportunities. We think about the things that other VCs think about—such as total addressable market, how strong is the team—but we also really ask ourselves, if this business succeeds, who will be better off and who will not? Will it increase the gaps between the haves and have-nots between the people at the top or bottom? Or will it narrow them in some fashion? Which specific demographics will get served and how will we measure that? We have these dialogues with our founders before we make the investment commitment to see what the quality and depth of their thinking is and what their quality of their commitment to their mission and strategy is. We have such a different process because of that. It differentiates us and it has helped us create a brand by which we have enormous amounts of inbound deal flow. Conventional wisdom puts tremendous latent demand among founders for value-aligned investors. Conventional wisdom says take out any mention of diversity impact from your deck, because it is not going to help you get funded. We say, “Bring it on!”
It gives us an enormous competitive advantage. We are about to get into a deal where we wound up beating five other firms to the deal. It was highly competitive, oversubscribed, with multiple term sheets. We established a relationship with the founders, and they know what we stand for. They understand what help we can provide.
FKK: If everybody is hiding, we cannot find each other. They did their due diligence and talked to other founders in our portfolio. It is a company with two Black women co-founders. For many years now, an Atlanta-based group has put out the Project Diane report on who funds Black women entrepreneurs. The first couple of reports were done two or three years apart, but the first one was eight years ago. We were always at the top of the list, which is appalling when you think that a billion-dollar fund does not invest in as many Black women as we did when we were a $50M fund. This company just won a challenge sponsored by a couple of foundations at MIT, and they made their decision after talking to everybody about who they wanted in their round. We got into a company late last year called Welcome. It is a next-generation virtual events platform, which is far superior to doing a big event on Zoom. The Latino CEO and co-founder is Puerto Rican and grew up with a single mom in a low-income neighborhood in Philadelphia. A program in high school got him on his trajectory. He has done a couple of startups, one of which was bought by Yahoo. Ten years ago, he moved through the ranks, managing all of mobile for Yahoo. He came and spoke to our SMASH scholars, which is the STEM college access program I started almost 19 years ago, for low-income, underrepresented high school students of color—half of them girls. We got in and beat out Sand Hill Road firms because he knew who we were and what we stood for.
MK: In this business, success begets success. You develop momentum and your networks get better. Your brand gets better and your deal flow gets better. While there is never an excuse for complacency, at this point, as a firm, we built an array of intangible assets that give us an ongoing competitive advantage.
Lessons from Research at the Kapor Center
EB:Tell me a bit about the Kapor Center and what you would define as some of the most compelling research to emerge from the center thus far?
MK: There are a lot of different organizations with different names, because we have been at this for a long time. Level Playing Field was renamed to SMASH. The Mitchell Kapor Foundation is also the same thing as the Kapor Center. It is the home of the research.
FKK: The research group started at Level Playing Field Institute and migrated over to be with the foundation in Kapor Center. The way to think about it now is that we are all co-housed; SMASH, Kapor Capital, and Kapor Center are in the same building. We collaborate on several activities. In 2019, the last full year we were in the building, we sponsored 185 events in the building. We have an auditorium that seats 125 with a roof deck that we can pack about 200 on. There is wonderful weather in Oakland and you can have evening outdoor events at least six months of the year. We have a wonderful Oaxacan walk-in restaurant on the ground floor, and an elevator between the restaurant and our rooftop.
Kapor Center was doing First Fridays, which was an open meeting that was always oversubscribed, primarily for first-time Black and Brown entrepreneurs. We bring Black and Brown successful entrepreneurs, VCs, and others to this, with a program and we implement an “ask me anything” format. We have invested in companies that came through that network. Level Playing Field Institute is where the research started. As research moved over into the Kapor Center, all of the publications are actually on kaporcenter.org. We have a website, leakytechpipeline.com, where we put all of the rigorous peer-reviewed research on leaks in the pipeline to tech and VC, starting at pre-school. A study done at Yale, for instance, found that preschool Black boys were labeled completely differently than preschool white boys engaging in identical behavior.
There is this huge debate often going on Twitter: “There is a pipeline problem” or “No, it is a racism problem, it is a bias problem.” That is the wrong question, because there are biases and barriers that underlie both. One of the studies that the Kapor Center did is about access to computer science education in California. When you see the number of Black or Brown kids that have access to computer science in public education, it is minuscule. By definition, that is a pipeline problem. The bias problem comes in when tech companies only hire from Stanford or MIT, and when a third of those students are legacy admits. The Leaky Tech Pipeline framework and the Tech Leavers study look at who leaves tech and why, with an intersectional lens. It analyzes the single greatest reason that Black women leave tech is being passed over for promotion. That is a different reason than why LGBTQ talent leaves tech or why white men leave tech. Unless you have taken an intersectional view and put in intersectional solutions, nothing is going to change.
I often talk about tech approaching diversity as though filling a bathtub with the drain open. There is a study that won Best Paper at the International Computer Science Education Conference in Bologna a few years ago that looked at barriers to pursuing STEM for girls of color. Mitch used to call us the home for wayward PhDs as we have a lot of PhDs hanging around. We believe in rigorous research that answers very practical questions.
What’s Next for Kapor?
JL:In terms of Kapor Capital and the Kapor Center, how do you intend on moving the needle in terms of DEI when it comes to tech and investing? Can you share some ideas for the future?
MK: Talent development is central and where we will get the most leverage, because what matters is who is sitting around the table when the decisions are made. Until there is really more diversity in VC, we are not going to see as much diversity in the companies that get funded. Our summer associate program, which we are now trying to make industry-wide to allow other firms to participate, could have the effect of giving many more underrepresented folks a foot in the door and into VC as a first step. If that is done well, and there is the right follow-on over time, it can have a big impact. The industry has to hold up a mirror and look at itself. The successful white male VCs have to do this. Getting more diversity in your firm is not going to a big store, heading to Aisle 12, and picking a diverse founder up off the shelf. You have to be willing to look at the ways your firm has actually perpetuated the lack of diversity and how it continues to do that. Holding up a mirror is a hard process. It is a journey, and it does not happen all at once. If we can find better tactics to encourage self-examination, people can begin to understand that power can act differently to produce different outcomes.
FKK: There are external forces that play to our strengths. An emphasis on stakeholder capitalism* in the mainstream financial services world is helping because you cannot engage in stakeholder capitalism without looking at employees and impact on the community. The tendency towards looking at [Environmental, Social, and Governance] (ESG) factors in investing also helps us. The changing demographics also help. This suggests who is going to be your customers and employees. Your ability to attract and retain them, as customers and as employees, is critically important. Brian and Ulili are our two partners of homegrown talent. Brian was promoted to partner in 2015 and one of the youngest VC partners ever. It took him four years from summer associate to partner. Ulili was made partner in 2018. She hired Brian as a summer associate, but she had not yet gone to business school. They are our two partners, and Kapor Capital is for the first time raising outside funds. Brian and Ulili, two Black GPs will be the co-managing partners, and Mitch and I are stepping back to be the anchor LPs.
We still have 178 companies that have not grown up yet that we will still help tend, but we are not going to be making the new investment decisions. That is part of how we are going to continue to grow and evolve. As the summer associates program grows from a Kapor Capital program to an ecosystem program, it is going to move over to the Kapor Center. This way it can have more philanthropic support. We test all kinds of ideas and we move the ones that stick over to the foundation or elsewhere. We have done some pioneering pitch competitions, which will be taken over. One was our People Ops tech that I started six years ago. People thought it was nuts that we were going to fund seed-stage tech companies whose purpose was mitigating bias in any stage of employment or education. In 2019, you had to have a product in market. It could not just be an idea. You could not have raised more than $2M. In two weeks, we had 150 applicants. We would like to pioneer things of this nature, and then let other people work with us or just take them and run with them.
Reflecting on Social Shifts in the Industry
MK: Let me amplify one thing. I would identify an area that is ready for some intentional experiment on our part. We have not done this yet, but we want to think it through. There is so much interest among allocators of capital for ESG investments. I would not say that their understanding of what that means is in depth, but there is an opening. They are coming to the funds that they usually invest in the big PE growth firms saying, “What have you got?” There is a scramble going on. Everybody now has an “impact” fund, but I do not think it is meeting the underlying need. There is an opportunity now to do something, given a social shift in desire among the capital allocators.
FKK: We work closely with London-based Generation Investment Management. They have 25 billion under management.
MK: It was a firm started by Al Gore and David Blood.
FKK: We have worked with them since the beginning. We were their second client in terms of investing foundation assets. We have a survey in the field which we are closing up in a week. I have done every employee survey Generation has ever had done in seventeen years. We work with them on human capital issues, but they have a very rigorous view of sustainable capitalism. Although their primary focus is environmental, one of the first things I worked with them on 16 years ago is for their public equities investing. When they go to a public company, they are trying to figure out how to measure a sustainable approach. They know how to measure a sustainable approach to carbon, but now how to measure a sustainable approach to employees. I gave them a series of questions and issues that they have updated and iterated on over time. When they are doing their diligence, and they ask to speak to the Human Resources person or the chief people officer, people get really nervous. No one ever asks in diligence to speak to the chief people officer. If everyone agrees that we are in a knowledge-based economy, and people are the greatest asset of nearly every firm, the fact that nobody ever talks to the head of people in their diligence is all by itself remarkable. Generation did not release their returns for the first ten years, because they are against short-termism. When they did, they were the third-highest in terms of financial returns fund in the world of all categories. They have maintained being in the top five for their existence.
FKK: The focus on people. Lila Preston is a white woman who heads their private equity. They do growth and they do not do seed stage. They are a billion-dollar fund, and they led the Series C in Asana, where we were the seed stage. They led the Series B in Nest where we were an investor. They now ask to meet all of our companies at the seed stage and follow them. They think we are a great feeder of talent. They have asked me for help on racial equity. There is a group of impact private equity investors with about a dozen people. Lila sponsored a meeting in December where I did the opening framework on how impact investors are all billion-dollar-plus funds and ought to be thinking about racial equity.
MK: That is a new conversation.
EB:It is a new conversation, although it should not be. In 2020, we saw that investments in women went down. Is that alarming? Is there a problem for diversity? Are we going in the wrong direction as a group or as an ecosystem? What are your predictions for where we are at the moment, what we need to do next to make sure that we continue the upward trajectory and get issues such as ethnicity to the table?
FKK: Despite being a white woman myself, I am very critical of white women and white women in the investment space. I am the only one who spoke out critically on record when All Raise formed a few years ago. There is a fundamental issue. In the US context, the majority of white women voted for Trump in 2016, and a greater number of white women voted for Trump in 2020. Until you talk about all the white women who tried to overthrow the US government at the Capitol in January 2021, we cannot have a gender lens conversation that makes sense to me, unless we have an intersectional lens. The gap-closing framework makes much more sense than a demographic framework. We should look at the impact on communities if a business succeeds. Kapor Capital implemented a founder’s commitment in January of 2016. For five years, we do not write a check, unless the founders commit to hiring a diverse team and building an inclusive culture. This is not a check-the-box, and it is not a test. We want to help them. We emphasize that there is not a one-size-fits-all. We look at the demographics of the team, we help them set goals. We will help them hire, as we have a full-time talent person who helps our companies hire. The goal should be to have the employees look like the customers. If somebody does not have that goal, I would question their ability to design the best products and services. Some people think we are just about political correctness, but we see it as the best possible business strategy. We see it in our returns as well. The majority of kids in kindergarten through 12th grade education are kids of color in the United States. If you are an EdTech company, the majority of your employees ought to be kids of color, because they are going to design the most effective educational materials.
Hudson, Omoigui, Groves: Black Fund Leaders
Charles Hudson (Precursor Ventures)
Eghosa Omoigui (EchoVC Partners)
Paula Groves (Impact X Capital)
Charles Hudson, Eghosa Omoigui, and Paula Groves, are venture capital titans. With careers spanning multiple decades, each of them has cut their teeth in traditional venture capital, both managing and amassing multiple millions for their respective funds, before venturing out to create their own. We talked to them about their experiences in the venture ecosystem, the perils of raising funds while Black (despite their qualifications, credentials, and experience), and their desires to see peers invest in the best founders—irrespective of background—alongside them.
Interviewed January 2021
Career Journeys for Three Black VCs
Erika Brodnock (EB):To start with, we would love to hear about your journey to becoming a venture capital investor. Tell us about your pathway and whether there have been any roadblocks or headwinds to overcome.
Paula Groves (PG): I began my career at Stanford University, where I received my undergraduate degree. I then moved to New York City to work for Credit Suisse First Boston on Wall Street. I loved being in New York, by the way, and afterwards went to graduate school to get my MBA at Harvard. One day, I received a call from one of my former bosses at First Boston, who said that he was starting a venture capital firm in Boston and asked if I would like to join. I said, “Sure.” It was a double bottom line fund that we started back in 1992. It was probably one of the first of its kind. Social impact investing and double bottom line investing are more mainstream today. Back then it was quite novel. The State of Connecticut pension fund wanted us to focus on both job creation as well as financial returns, and that was the mission of the fund. We then secured a second mandate from CalPERS [California Public Employees’ Retirement System], and ultimately grew the fund to about $800M of assets under management. I then spun out and launched Axxon Capital, which was focused on women and minority-led businesses, in 2000. What is most interesting is that, in 2000, less than 1% of venture capital dollars went to African Americans and less than 4% went to women-led businesses. Unfortunately, that data has not changed. Even today, those numbers are still the same. The question is, what can we do to make a difference, to raise the bar with regards to getting access to capital for women- and minority-led businesses? That has been the essence of my career.
A partner and I ran Axxon Capital for a number of years. Unfortunately, the dotcom crash happened, and we shut the fund down in 2004. Then I moved out to Oakland, California, and ultimately ran a US Small Business Development Center, set up by the US Small Business Administration. Over time, a team of us secured a contract with the City of Oakland to provide capital to minority-led businesses in the most marginalized part of Oakland society. These were entrepreneurs who had been formerly incarcerated. They were entrepreneurs who had 80% of the median income in Oakland. It was really focused on trying to provide access to capital for those who do not find capital in any other places to launch their business. I did that for a number of years before I received a call from my partner, Eric Collins, who is the CEO of Impact X Capital, who said he was launching a venture capital fund in London to provide capital to underrepresented entrepreneurs. We launched Impact X in December of 2019, and I have been working in the London space since then.
Charles Hudson (CH): I grew up in Michigan and moved to California for college. Like Paula, I went to Stanford, and I studied economics and Spanish and thought I was going to go into international development work and get a PhD in economics. I decided not to do that because in the late 90s, being at Stanford, the internet was all around you. Startups and tech companies were being started on campus all around us. I did not know anything about technology or startups until I took an internship at a company called Excite, which later merged with a cable broadband company called @Home. I worked there for the summer between my senior and junior year and decided that instead of going into development work or public equities, I was going to focus more on tech because I thought it was a really interesting space. I thought that the internet was going to be this huge economic force. It was going to radically change markets, and I decided that was going to be what I focused on.
While I was at Excite, I worked for a woman whose husband, it turned out, was running the CIA’s venture capital fund. When I told her about my interest in going into investing, she said, “Hey, you should really talk to my husband. He has this fledgling venture capital fund, and he could really use some help. In terms of resources, you could do some great work for him.” Instead of taking a more traditional job on Wall Street or consulting, I ended up working for In-Q-Tel, the CIA’s venture capital group, for three and a half years. It was a lot of fun and I invested in a ton of really interesting companies, including companies like Keyhole, which is the team behind Google Earth, Palantir, and a number of other really interesting companies, some of which are still going to this day. That exposed me to venture capital and made me interested in learning more. As a newly minted undergraduate, I did not have all the work experience or business experience I wanted to bring to the table. I went back to business school at Stanford, came out and worked for a number of startups, some on the enterprise side and some of the consumer side. In 2010, I started angel investing on my own and made a couple of investments that worked out well, and quickly realized that after about eight years away from investing, I was ready to get back into the business.
I joined a firm called SoftTech VC, which is now Uncork Capital. At the time, my business partner Jeff had raised $15M for his first institutional fund and was looking to scale up that enterprise. It is pretty crazy that back then, they had $15M under management, and just 10 years later, they have half a billion dollars under management. The firm has really grown—we went from Jeff, to me and Jeff, to now they have three or four partners over there and have completely built out staff and have raised much more funds. While I was there, I noticed that early-stage investing was changing. When I first joined Uncork, we routinely wrote small checks—a couple $100K, to $1M or less—and that got us into companies like Postmates, Eventbrite, Fitbit, and Postmark. As our fund got bigger, it was harder to write those smaller checks. We needed to write bigger checks to make the math work for our fund. The thing that went away as we increased our check size was our appetite for writing small checks to people that were out of our network, or we did not know so well. Those were mostly first-time entrepreneurs. I felt that all of the early seed funds that had been successful were going through the same process of growing up, raising larger funds, and moving away from that early first check investing. That was the work I wanted to do.
Five years ago, I left and started Precursor Ventures and we have raised three funds plus a little sidecar vehicle of about $100M under management. In total, we really focus on finding early-stage entrepreneurs that are oftentimes pre-launch and pre-traction but are also outside of our network, or not coming out of Pinterest, Square, Stripe, some really obvious company where they get the benefit of the doubt. When you have that strategy, you end up backing a lot more women and people of color because many of them as entrepreneurs fall in that bucket.
Eghosa Omoigui (EO): My path to where I am today was a non-traditional one. I went to law school in Nigeria and then worked as a lawyer at a corporate oil and gas and general corporate for two years. I then decided to go to graduate school to pick up exposure to cross-border work. I left Nigeria and went to the University of Pennsylvania, and I was able to craft a degree that was mostly corporate law and quite a bit of corporate finance. This was on the East Coast and I was not steeped in the Stanford startup world. I was lucky, as I had a professor at Wharton [the University of Pennsylvania’s business school], who talked quite a bit about the startup world because his wife was on the West Coast. That exposure got me thinking. It was intriguing, but I did not think I would focus on it. When I finished studying, I had two options to go down the traditional path: work at a New York law firm or Jersey Big Four firm.
There was a small company out in California that wanted a business development corporate lawyer, and I said, “I am going to try that for a year. See if that works.” It made absolutely no sense to my parents in those early days. I went there for about a year and the company ended up being acquired. At that point in time, I said, “This is super interesting. What should I do next?” I was in LA; I was still not in San Francisco or Palo Alto. I was then recruited to join a corporate law department, and they were doing a lot of very interesting transactions and securities. I said, “Let me go beef that up.” I do not think I was designing a career path at that point, not as much as I was just trying to increase my surface area of exposure to different things. It turned out that just because I left the next gig, I was hired by a law firm to do more venture work. I became really interested in venture and decided that I wanted to create my own startup. This was in 1999, 2000. Weirdly, I left the firm around five days before the NASDAQ crash. I am always saying that timing is everything.
I ran the startup until around November, but it was obvious that we could not get anywhere or secure financing. At this point, Intel Capital called and said, “We would love to have you join us on the Intel Capital legal side.” I said, “Great, I would be able to get a salary again.” I started off with Intel in the portfolio management group, which is the group tasked with managing the post-close portfolio. From there, because of the timing, I started realizing that there were other things we could be doing. I started a patent purchase group, where we were essentially buying intellectual property from companies that were failing. I also restarted a bankruptcy and restructuring group for the startups that we managed. I was in the Bay Area at this point in time and realized that it was going to be almost impossible for me to break in, with a non-traditional background, without a strong signal of belonging to the tribe, which would be an MBA. I could not figure out for the life of me how to do an MBA—the opportunity cost was very high, as I had a family. I decided to do a fully employed, full-time MBA. I did that over a two-year period, flying back and forth between the Bay Area and Boston. It was a really hard trade, because it cost me my marriage, even though I still have my kids. I realized that I had to pay those dues to be able to break in. Fortunately, one of my bosses at Intel Capital decided to offer me a job to become Chief of Staff for Intel Treasury Global. I did not have my MBA at that time. I did not have anything. There was a lot of internal resentment that I suddenly fell into, where people were saying, “He does not have a CFA. Does he have an MBA? Why did you pick him?” It was interesting, because he had me on this interview process for three years, that I had no idea was going on. From there, I blossomed.
I hit escape velocity when I wrote a thesis for Intel, “Investing in the Next Generation Internet,” and I was told, “You can do this, go and find some good companies.” Over the course of a four-year period, I was able to bring in many interesting companies, but the big ones were Facebook, LinkedIn, Pandora, and AdMob. Intel did not invest in any of them, so I left in 2010 out of frustration. I made my reputation at Intel for being able to craft the pieces for doing those deals, and it turned out to all be great. I left in 2010 and my thesis was that investing in underserved economies and emerging markets was going to be the next big thing. Africa and Southeast Asia were going to be highly correlated and will be interesting, but no one believed it. I formed EchoVC and went to Africa first in 2014. In 2016, we formed a strategic partnership with TPG Growth. We have been running for six years and it has turned out to be incredibly successful.
The Barriers Holding Back Black Venture Funds
Johannes Lenhard (JL):Charles, you began this whole journey at Stanford, and have scaled to all kinds of heights, but how do these early networks play into the ecosystem as it stands, and the reproduction of the status quo? How did you raise your first fund and your own capital? Did you find that the connections that you made at school or in the early years in software help with that? If you had not gone to Stanford or Oxbridge or the Ivy League, how could you do the same thing? How important is networking? How do you get that network together?
CH: Network work is really important. Richard Kerby’s last survey said around 40% of all VCs went to Harvard and or Stanford,* and my guess is 30% went to both. For a long time in venture, there was more of a focus on insularity as a benefit. It meant everybody knew everybody. That was considered a good thing, not a bad thing. It was high trust and comfort. People did not think as much about, who are we keeping out by having these barriers?
When I left Uncork, I thought I would have a reasonably straightforward time raising my first fund. I had been a partner at the firm for five years and I had done some good deals. I knew our LPs. It was the opposite of what I thought it would be. I thought it would take a year or a year and a half to raise. It was not at all what happened. Most of our existing LPs from my old fund were just not first fund LPs. They are the folks who want to see some track record and see some cards get turned over.
The main reason I was able to raise the fund is because I was already part of the network of other VCs. I had other people from other firms who connected me with their limited partners and investors who helped me refine my pitch. They did it because they knew me, I do not think they did because they just generally want to help the world. They helped me because they knew me. When I think about the barriers that keep other Black venture funds from getting started, network is the big one. Without connections to other VCs or limited partners, it is very hard to raise the funds. The other thing I have been fortunate in is that some of my angel investments had worked. I had enough of my own capital to be able to float myself for the two years it took to get our first fund closed, and then to continue to absorb the well-below-market pay that you make as a new fund manager on your first fund.
I tell people it takes about a million bucks to start your own fund, and that those are hard dollars that you will need to part with. If you just look at the wealth creation statistics by race, there are not a lot of Black people that are going to clear that bar. There are just so many structural barriers that get in the way for people starting new funds. People are beginning to recognize that when I got into venture, it was okay to just say I can only go to invest in people I know. That was an accepted wisdom and best practice, and investing in people outside of your network was considered borderline negligent. That is changing, but it is changing slowly. It is changing probably faster for VCs than it is for LPs.
The other thing people said is, “I want to invest in companies that are close enough that I can ride my bicycle to go visit them.” If you think about that, where does venture capital happen? For the most part, it happens in Silicon Valley, one of the most expensive and least racially diverse—in terms of Black people—places in the United States, and New York City, which is more diverse, but also expensive. For a long time, I would say venture capital was geographically isolated from communities of color. I would also say the barriers of getting into the business were financial and just did not allow for much entry.
The third thing is the easiest way to become an independent venture capitalist is to be a venture capitalist at someone else’s firm first. If you look at the statistics of our industry, putting aside partners, there are not that many analyst and associate principal Black investors. All of the places, the mechanics for the pipeline, front doors, all the things that work, none of them really include us right now.
EB:There are not many Black investors that have the credentials and qualifications that you have. If you find it hard, it makes me wonder what hope there is for the people who have not had that educational background or have not had the doors opened by Index, and the various funds that you each worked at before you started out on your own.
Leveling the Playing Field for Diverse Entrepreneurs
EB:Paula, you have previously given me an example of when a state-led intervention positively impacted access to diverse entrepreneurs, and particularly those of Black and mixed heritage. Could you tell us a little bit about the Equal Opportunity loan program and what you think that might look like today, if it was going to be recreated to level some of the playing field?
PG: This goes back to the civil unrest that occurred in the 1960s, just as the civil rights movement was starting in the United States. One of the insights that the federal government had was that the key to solving the problem of civil unrest was providing economic opportunity. They decided to establish what would ultimately become the US Small Business Administration, where they provided loans to underserved communities and underrepresented entrepreneurs. Access to capital creates opportunity, and with opportunity, there is hope. With opportunity, access to capital, and hope, you can spur entrepreneurship, which allows people to provide for themselves and their own communities.
There was a study that I did working with the City of San Francisco back in mid-2015. I wanted to understand why the percentages of African Americans living in San Francisco had declined. It had become fairly expensive to live in San Francisco, and people had to move out to the suburbs to find their own economic opportunity. Most interesting was that there was a high correlation between the repeal of Proposition 209 and the decline in African American population in the city. Proposition 209 said that San Francisco was no longer allowed to consider race when allocating government contracts to businesses. Historically, a lot of government contracts had been allocated to underrepresented entrepreneurs, and when the city was no longer allowed to consider race as a factor in allocating contracts to diversify their supplier base, those contracts went away. Many of these contracts had been awarded to entrepreneurs who had in turn become pillars of their community. They had contracts with the airports, for example. These successful entrepreneurs were then able to employ people that look like them, which is an important factor when you consider diversity and entrepreneurship. Diverse entrepreneurs tend to employ diverse employees. When these contracts went away, these companies declined and were no longer pillars of their community, which had led to the barbershops, restaurants, and the thriving economic environment. Those companies went away, and those communities ultimately went away. There was a high correlation and evidence in the US that says that when you focus on diversity and entrepreneurship, backed by the federal government, that can indeed lead to diverse communities and higher economic growth within those communities.
EB:If we were to recreate that today, how would you feel about overlooked founders being provided with interest-bearing loans, when compared to their counterparts who are being provided with equity financing that is non-interest-bearing and they do not need to pay back straightaway?
PG: Access to capital is access to capital. If we provide interest-bearing loans as a means of helping companies get started, that type of access to capital can be a lever that can be very effective. That is one of the other tenants of the US Small Business Administration in the United States. I used to run one of the business practices for the US Small Business Administration in Oakland, California, where we served over 4,000 entrepreneurs. One of the tools that the US Small Business Administration uses is low-interest loans, specifically for young entrepreneurs and startup entrepreneurs. It is a tool that has been used very effectively in the US. Now, loans versus equity, that is an important consideration, in that equity tends to be risk capital, and we absolutely need risk capital to help underserved communities and underrepresented entrepreneurs. If the choice is low-interest loans versus nothing, then I would take the low-interest loans, but we need both. You need loans as well as risk capital to get the economic engine going and empower our communities, but low interest is better than nothing.
Change Has to Go Further than First-Time Funds
JL:You often hear that 90% of funds are invested in white, all-male teams, and that is true across the board in the European landscape. Eghosa, what steps have you particularly taken at EchoVC to change this? What are you already seeing and having early success with, in your strategy?
EO: There are so many things that get conflated when we talk about the statistics. When we speak to LPs and other participants in the ecosystem, there seems to be confusion as to what to do and how to do it. There is activity now, where more diverse first-time fund managers are emerging. These are very small teams to begin with. A lot of folks say, “Okay, let us invest in these new managers.” Venture is a statistics marketplace, in the sense that nearly 99% of these companies will need further, larger financing. As a new seed manager, if you do not have a network that allows you to push the companies you invest in at the pre-seed stage, downstream to later stage investors, you then do not get the track record that LPs like to use to measure success. Investors are much more interested in things such as, who could invest with me in this deal? Who invested later? The key is, they want to see brands that they like. An LP who does a little bit more work may dig into the portfolio companies themselves and say, “That is an interesting company, let us invest in it.” A lot of them do not do that work and they are looking for very high-level superficial signals. It is all pattern matching, all along the way. The VCs pattern match the founders they bet on. The LPs pattern match the funds they bet on. You see this all the time. If you decide to be non-consensus, you might be out in the cold for a long time, until you have enough of a track record.
I have a friend who started seven years ago. He is not white, and it has been interesting to talk to him about his fundraising dilemma, and how six unicorns into the portfolio, LPs are still telling him that maybe he is just lucky! This kind of feedback is all too common. How do you change this? It is something that I try to figure out, because as a Black fund manager, you carry a lot more weight on your shoulders. In many cases it is invisible, but everyone is looking to you to be solely investing in diverse founders—Black, Brown, women. The truth is, you actually want to be able to have some flexibility in the types of companies you invest in, because of specific interests. If you have an interest or expertise, and you see a company that could really drive impact, how do you balance that out? Are you better off trying to improve that company’s management team from the inside by becoming an investor and bringing diverse talent to the attention of the founder? That is one way to do it. The other way to do it is to figure out how to encourage these founders that are sitting inside other companies that do not have the confidence to come out, because they do not think there is anybody out there who will fund them. Being unapologetically diverse in the approach to investing takes a long track record. You have to not care. You just have to do what you want to do. You have to have enough of a return, or the kind of track record where people say, “I get why he or she does that, and they have shown an ability to do it consistently.” There are interesting interplays here and being able to have more managers in the ecosystem, more emerging managers, that is great, but we need more managers at every tier. We need more managers at seed, at A, and at B. Here is the funny thing, as you start going downstream: it is a smaller and smaller group of GPs that know how to do those deals. I like to ask people: how many Black GPs can do Series B or Series C? It is probably less than 50. It might be less than 30 in the total of the entire US.
JL:The NVCA [National Venture Capital Association] put out a report with Deloitte, called the VC Human Capital Survey, and the first version that they put out in 2019 had zero Black VCs in it. They went away, found some, and put them in there. The second version looks a bit more polished now and has a percent or so. That is how bad the numbers are. You are absolutely right, if you are going downstream, it becomes even thinner.
EO: The answer has been there. When people say, “what should we do?” There are interesting things. One is, for some of the bigger firms that will do the later stages, how do we impanel diverse investors in those funds? The weird thing about those funds is that the few folks who are in these funds, that I mentor, keep running into the same problem, which is: what is the quota of diverse founders you can bring in before people start to wonder whether that is all you came into the fund to do? You run into this, “I do not want to get pigeonholed, because that means that I do not get advanced. I want to bring the deals that I think I can sell to the IC [investment committee].” You then find that they do fewer and fewer of these diverse founder deals because the fund does not invest in them. There was a fund; their actual coverage in their entire portfolio for Black founders is less than 1%, but they are one of the most active on LinkedIn and Twitter about BLM matters. You would not believe that they are less than 1%, if you correlated it to how much noise they make.
For us, it is getting the LPs to say, “How do we get more of these investors to ‘invest’ rather than talking about investing in diverse founders?” The truth is, as Paula says, until you invest in people who look like them, you are never really going to see any traction. We have about 30–40% women in my firm, and we have had interesting pieces of feedback from women founders who say, “The most interesting thing interacting with your firm was seeing women on the other side of the table.” These are soft elements that do not show up in slides, data, or graphs, but matter in terms of how accessible you are and how amenable you are to listen to experiences, and not punish them because they do not match patterns. That is a real issue.
Until LPs essentially make it a mandatory KPI that funds invest in diversity, things will not change. LPs need to build a process or a pipeline where they are looking at the deals and the funds they are investing in. The money needs to start to talk. That is going to be important. A lot of LPs in some of the very best funds are afraid to say anything, because they do not want to get kicked out. The truth is, there will always be big wins that these funds miss. If diverse fund managers are able to pick up the wins, incumbent funds completely missed or discounted, then they begin to trust diverse judgments. In the end, that is what venture is about: trust in judgment, whether it is on the investor side or on the founder side.
Stanford released a study about how difficult it was for diverse fund managers who were on their second and third funds to raise money, and it is absolutely correct. Even when LPs tell you, “Come back in fund two, with your track record.” You go back with fund two and the track record, and then they will have you come back for fund three. The goal posts just keep moving. In reality, they are much more willing to invest in first-time managers because losses can be subsumed under a “special program.” However, once you look for fund two, fund three, then it means that you are now saying, “I really actually want to do something here and I am going to match the record.” It is not some unique giveaway program.
Charles is probably one of the most experienced VCs. He deserves to manage a bigger fund. LPs are giving money to mediocre managers, and I do not understand it. Charles has paid his dues over and over and over again and is an outstanding investor, and he is still struggling to get support. The system is broken. We keep pushing, and we keep talking, but it won’t change until there is some externality that makes one or two or three LPs say, “I am going to deploy money fairly. I am going to give it to folks who are willing and able to invest in diverse founders without apology.” The unapologetic investor.
Will Investing in Black VCs Diversify the Funding Pipeline?
EB:I 100% believe that, if you are the only person in a room of your hue or of your gender, survival instinct kicks in and will force us to try to conform, so that we fit in and do not lose the food out of our own mouths in order to put it into someone else’s. That is a well-known phenomenon. Does LPs investing in Black GPs en masse and investing it in Black funds actually work? Is the pipeline broken in various different places? Or is it just that if LPs gave more Black GPs money, then the Black GPs would then give it out to more diverse entrepreneurs? What is the broad thesis of your funds and how does this set you apart from other funds in the market?
PG: Yes, absolutely. The more money you give to Black GPs, the more Black entrepreneurs that would be funded. If you look at the Silicon Valley model, GPs tend to invest in people that they know and people that they are comfortable with, rowed crew with, or have attended their son’s wedding with. Getting to know you is one way in which people gain comfort. Venture capital investing is a high-risk business. At the end of the day, despite all the spreadsheets, reference calls, and Google research that you can do, you must still come to that final gut decision to make an investment in an entrepreneur. If you know them and if they are known to you, then making that gut decision adds a level of comfort and makes the decision a bit easier. If you are not in those networks, then it is hard to be known and hard to get through that subjective evaluation process. If you are Black, you tend to have Black networks. I am stating the obvious. It is easier for you to do the reference checking, because if you do not know the entrepreneur directly, you certainly know someone who does know them. If your venture capital investing model is based upon investing in people that you know, then if you are Black, you have the Black network, and therefore, you have access to the Black entrepreneurs who you can gain comfort with to make the investment decision. That makes the subjective decision easier. Intuitively, it just makes sense that if you give more money to Black general partners, then more Black entrepreneurs will have access to capital.
Diverse Funding Shouldn’t Fall on Black VCs
CH: The expectation right now is that Black VCs are going to fix the Black founder funding problem, and it does not look like that is actually going to work because Black VCs are not large, and they are not given nearly enough capital relative to the opportunity. I want to pick up on two things that Eghosa said that are really important to understand. There are not that many Black VCs at the later stage, which means all of the activity ends up happening at the early stage, such as with what I am doing. The problem with that is, it takes five to seven years for an early-stage fund, generally speaking, to start to bear fruit, which means you probably have to be good enough at the job to get two and maybe even a third fund done on very limited realized performance. There are a lot of LPs who will back you on that first fund as Eghosa said, “Oh, we have a mandate, an allocation, a thing to do.” When it comes to that second and third fund, you are swimming in a different pool. My fear is that there are a lot of first-time funds being created that are subscale, that by the time those people go back to raise that second fund, that the people who were enthusiastic about that first fund will have moved on to something else, because they are not really long-term backers in venture. Those funds will not have enough realized performance to make it a no-brainer for new money, and they might just die on the vine.
It is also worth saying that not every Black VC wants to invest in Black people. I do not think they should have to, honestly. There are some Black-led funds that have almost no Black founders in their portfolio, and it is because eventually the market needs to mature to this place where all Black VCs can be diverse within the Black VC tier, and you will have some people that are impact oriented and very focused on funding Black founders, because the strategy they have either yields a lot of those or explicitly focuses on those. You will have Black-led venture funds whose portfolios look, maybe embarrassingly, not diverse. We need to separate having Black venture capitalists and leadership positions at firms from the responsibility of Black VCs to fund black founders, because we cannot give the rest of the venture industry a pass and say, “The funding of Black founders, that is the Black VCs’ problem. We can outsource that to them, they are responsible for it.” That is a cop-out approach. I just bring it up, because I do think when you walk in the room as a Black fund manager, people’s default assumption is you are running a diversity impact fund, no matter what is in the deck. I know this to be the case, because it happens to me all the time. The irony is we do not have an explicit focus on diversity, we have a focus on finding people that are out of network that the market does not know how to underwrite, because in a world of a thousand early-stage venture funds, the only way you can make money is either be first round capital, top skim the best repeat founders, or you have to have confidence in your judgment that you can pick people that other people either do not see or do not value, and to be right. Anything else, it is a hard way to make money in this business. We are at the first inning of this conversation around Black venture capital. Right now, it is a bit of a straitjacket. The LP expectation is that if you are a Black fund manager, you are going to invest disproportionately in Black entrepreneurs, and not everybody that I know has that as an important and core piece of their strategy. Even if just by their lived experience, they are going to end up doing better than our industry, which basically is 0%.
For Us, By Us—Building the Missing Ecosystem
EB:The follow on is that people who do invest in Black founders end up putting those founders back out into a “toxic” market, and some will fail simply because they cannot secure the next round of funding they need to be able to survive, rather than because the VCs made the wrong decision in the first place. What can be done about that? Further, what needs to be done to keep the momentum?
CH: We do not have a vertical Black venture capital ecosystem where I can do the pre-seed, and then I can hand it to Richard Kerby at Equal Ventures, and then he can hand it to someone else. I would argue that on the gender lens, you could probably go full-stack female, female GP, from VC to IPO. That ecosystem is developed enough that it can be totally self-served. Black venture capital is not there yet, which means at some point, these companies are going to have to either get profitable or grow like a Calendly. Or they are going to have to be able to bridge back into mainstream venture capital firms, and that happens with relationships. Yes, company performance matters, but right now everybody is drowning in deals and drowning in things to look at. A lot of people are saying, “I am going to pay attention to stuff that Paula and Egohsa send me, because I know them. The person I do not know who sends me something could be a great company, but I do not have time for it.” Without those bridges back, particularly at the Series A or B, which are really the choke points in the system … And, of course, the question is where do those relationships come from? The circles and relationships come from being in the business and getting to know people. If you cannot get in the business and get to know people, you cannot build those relationships.
My hope is that this new generation of Black managers that we are launching into business, that they are able to build those relationships with people fast enough to help their portfolio companies when they need them. Otherwise, I do think it will be difficult. Unless you have outstanding, out-of-this-world performance, then you can probably still get financed even with the weak network. That is not most companies, most companies do need help. They need help from their investors to grease the skids with these other conversations. You also need an investor who knows what a Series-A-ready company looks like. You only know that by getting Series As done and working with good investors. Everything in this business is this really unfair, brutal information feedback loop, and the real question is, will this new generation of Black investors who are finally getting the opportunity to show that they are good, will they get enough time to run that loop, before investors make a decision about their next fund?
PG: We as Black investors have a real opportunity here to create the ecosystem that Charles has identified as missing. If we can develop it ourselves, build it ourselves, and prove the model, that would go a long way towards validating the marketplace. I resist the notion that the only way for Black entrepreneurs to make it to the IPO is a model that is reliant upon mainstream VCs. I want to do the “For Us, By Us,” the FUBU approach, and work really hard to get there on our own, and to get the exits and generate money for LPs. If our model is reliant upon Silicon Valley for success—Charles is absolutely right—we are never going to get there. I look for the opportunity to do the “For Us, By Us” approach and do it full stack. If we do not know how to do it yet, we are smart enough to figure it out. That is my belief. If we do the full stack from launch to IPO, and do the hard work—so that we are not dependent upon Silicon Valley—that could go a long way towards providing access to capital and attracting more capital to the space of underrepresented entrepreneurs.
Bendz: Atomico’s Angels
Sophia Bendz (Cherry Ventures, formerly Atomico)
Sophia Bendz already became famous as the chief marketing officer at Spotify and one of tech’s first female big-name executives; she started using her power at the latest since joining Atomico as a partner in 2018. It was at Atomico where she rolled out the Angel Programme, which is the focus of the conversation here and also something she is looking at repeating at her new fund, Cherry Ventures, where she joined as GP in 2020.
Interviewed November 2020
From Spotify C-Suite to Atomico’s Angels
Erika Brodnock (EB):Sophia, please tell us a bit about your background.
SB: I’m a storyteller and marketer at heart and by trade, and was lucky enough to join Spotify early on. We were just eight people in a tiny flat in Stockholm and I learned a lot. That was my segway into the startup world. I spent seven years as the global marketing director. There was lots of blood, sweat, and tears—it’s hard to start a company and grow it from zero users to 100 million users. I helped launch the service in 56 markets. During my last five years with the company, I lived in New York City. When my firstborn arrived I decided to move back to Sweden and started angel investing, bumped into Niklas Zennström, joined Atomico, was promoted to partner looking after the Nordic Region, and was fortunate enough to also head up their angel program and be part of their Diversity and Inclusion Task Force. That is one of the best things about big funds: they have resources.
I ended up coming back to the early-stage investment landscape because I am an operator and not a traditional banker per se. That is why I joined Cherry Ventures. I have been with them since September 2020, based in Stockholm. I am still interested and very much involved in the angel landscape, as well as being an advisor to Atomico.
EB:How did you come up with the idea for the original Atomico Angels program, and what were your motivations?
SB: It stemmed from frustration in me. When I met Niklas Zennström, I was proud to show him my track record and that was my ticket into the VC world. I was on the ground in Sweden, good at sourcing deals. I said to him, I think Atomico needs to be closer to the angel community. From a personal perspective, I was frustrated because there were so few women on company cap tables. Normally when you do a deal, you share it with other investors who could be interested in it and that could potentially help from a strategic point of view. So, as an angel, I grew my network and actually expanded my contacts. However, many of them were men and I wanted to see more women on cap tables. I wanted more people like me and my friends to be able to invest. The closed ecosystem presented a huge frustration for me. It was almost like a little boys’ club that invested together, and while I was invited in, I felt like the only woman in the club. I wanted to open the doors, and I wanted to talk about it, because it’s not rocket science. And if you have money to spare that you can live without, I think it’s an interesting investment class. I wanted to demystify it, I wanted to tell the world this is one way of spending your time and money. I think it could lead to more people that were exposed to potentially considering a career as a VC. That was my long-term goal. But if we open up an angel program for more people, my dream was that some of them would continue to invest, as we move along and after that year is done.
Success Through Opening Up Deal Flow
JL:Can you go a little deeper on how you designed the program? What principles were in mind? And what do you think now, having done two batches, what is most crucial for the success?
SB: My colleague Will Dufton is an absolute star and is equally passionate about this area. He and I created the Atomico angels’ program together. The aim is that angels connect, share experiences, and do deals together. Niklas thought it was a great idea and asked us to come up with a proposal. Will and I created the proposal together. Our main aim was to avoid repeating what the Silicon Valley VCs were doing, because it seemed to me, and maybe some say different, but in my view, they were reinforcing a closed boys’ club atmosphere. They were not transparent about where money is coming from, and for me, it is all about trust. If you cannot be honest with where the money is coming from, that really isn’t a great way to build a relationship. Transparency is key.
Moreover, they were backing founders within the exact same circles they were in and giving money to many who had already achieved a liquidity event, most of the time. A great number of deals happen at barbecue parties in the local neighborhood, many of the founders and investors live on the same street and are already friends. I think that is just a way of putting more money into an already closed system. I wanted to create and put money into a new system, or a new group of people, or new individuals. I wanted a rotating program so that we would not ever stagnate or become an elite club. I wanted it to be open. We wanted to reach and engage people and talents that we normally would not have met—people we suspected had access to good talent and lots of entrepreneurs, what we refer to as “good deal flow.” So many of these people are company builders, sector experts, or community builders. The common theme among them is passion for what they’re doing. Normally they’re helpful and good at connecting with people, they have an excellent network. So, we decided to create a rolling schedule with a new class each year. We also wanted to provide training so our angels felt supported. Finally, we wanted to create network and mentoring opportunities that paired new angels with an alumnus and encouraged them to do deals together.
EB:On the second program, was there a wide array of people from all sorts of cultures and backgrounds as well as gender?
SB: This was super important for me, because I realized that’s essentially untapped business. If we, as investors, normally invest 98% of the capital into the same type of profile, we understand that there are so many other interesting businesses out there that we are not getting access to. We wanted to get access to pockets of talent that we normally wouldn’t meet. Normally we go and source deals at conferences, and incubators and accelerators, and many times, you see the same type of CEO or founder profile. We wanted to broaden that perspective and put a bigger network in play that could help us access a more diverse and interesting set of talent.
Measuring Success and Cherry’s Next Steps
EB:How would you judge its success so far? Did it fall short? Did it meet your expectations? What do you think the reasons are for either the success or not? And what’s next with Cherry?
SB: I would definitely call it a success. One proof point is that it still lives on, even though I left Atomico. And now we’re preparing for next year’s batch. It’s hard to determine if a company is going to be a big success, because it takes time and you start investing early on. The biggest milestone is seeing if they get good follow-on investments from top-tier seed or Series A investors. So far, the stats we’ve seen have been really good. That’s why I would say it has been a success. Also, from my personal view, it has been successful in getting new people to find VC interesting. Seeing that someone like Roxanne Varza, for instance, is now a scout for Sequoia. I got a message from one of this year’s angels and she wanted to share some news … I’m expecting that it’s an offer that she wants to brief me about. So that also feels like it has sparked something in more people. I really take great joy in seeing that.
I have not defined what we’re going to do at Cherry yet. It’s something that I’m working on now. The relationships that I have gathered from the angel program are incredible, they helped me with sourcing across core geographies in Europe. I think that it makes more sense to run an angels program when you are a seed fund, because then you can invest in the follow-on round. The deal flow that I have from angels was harder for me to harness when I was at Atomico, because they needed to grow through a pre-seed, seed, and then Series A. The investments of the angels can quickly turn into pre-seed or seed, and that makes perfect sense for Cherry to do.
What Funds Can Do to Improve Their Deal Flow and D&I
JL:Would you say other funds can put similar things in place? Where would that be most needed? With what focus? Let’s talk angel first, and finally, what other initiatives do we actually need?
SB: When it comes to angel initiatives, it’s an easy way to engage in the community. If I was starting my own VC fund today, I would definitely do it. You want to have good relationships, so that your companies can get funding from the best follow-on investors in the next round. On the other hand, you also want to have good relationships with the people investing earlier than you, because you want to get the best deal flow. It’s very much a system where everyone is interlinked and exchanging information and deal flow. I think finding a way to connect with angels is crucial. Rounds are getting much more competitive. The earlier you build a relationship, the better chance you have at investing in the very best companies.
EB:Knowing what you know now, how would you go about creating a new D&I initiative? What would be the steps to setting it up? Is there anything specifically around how much you give the angels?
SB: I think it depends on what type of fund you’re working at and the size of the fund. If I think specifically about diversity and inclusion initiatives, I would go about it the same way, but maybe be more confident this time around. Setting up the D&I Task Force internally, have the right stakeholders at the table. It is not a women’s issue that should be run by women, it should be coming from the top—everyone needs to walk the talk. It needs to be something that is interlinked with the company’s overall objectives. It helps a lot that here in the Nordic countries, we have a lot of LPs who are very good at driving the diversity question. This forces most VCs to have a strategy for it. Once you have that group set up internally, it’s good to have bi-weekly meetings. Listen to others who have already done it well, to learn. List the activities that could be done, then decide what can realistically be done from that list. There are a few essential areas: you need to ensure a pipeline of diverse founders, and set targets for how many female founders or how many diverse founders should be in your pipeline.
Then you can also begin to support your existing portfolios with their diversity work. That is the role that VCs can play if they take responsibility. If we back an all-male team, for instance, I think it’s my job to ensure they think about how to fix that and implement a diversity plan before growing the team. I know one VC firm here in Sweden called Kinnevik, they have linked diversity to financial targets, stipulating that there will be no follow-on investments unless diversity goals are achieved. It is the best example of putting money where your mouth is. At Cherry, we have specified in the term sheet that our investees must have a diversity plan in place. This is proving to be a strong way of ensuring diversity is on the agenda, talked about, and prioritized.
Funds can impact diversity in three key ways:
Portfolio companies: How you influence and support them.
Pipeline: See all good deals rather than hiding behind the fact there were too many companies to look at. Then,
Internal team setup: Female investment partners lead to more female founders. The same can be applied to other forms of diversity too.
Tech plays such an important part in how we build society moving forward. If we only allow one portion of society to build that tech, then it’s going to be a really weird world that we build. I feel like we need to back men and women equally when thinking about the future, and we are not today. So, shame on us. We need to do better.