Harbach, Shu: Investor Education

34 minutes, 5 links


Updated February 11, 2023
Better Venture

Jeff Harbach (Kauffmann Fellows)

Lisa Shu (formerly Newton Venture Program)

The default pattern-matching that skews the venture capital industry in favor of elite, white, male founders can as easily be ascribed to a lack of investor education, acumen, and skill as it can a lack of worthy pipeline or ability to source diverse deals. The apparent issue the industry has with the former is that it places the buck in the court of the LPs and GPs who are overlooking diverse talent, rather than on the diverse talent themselves, as has historically been the case. We were delighted to sit down with Jeff Harbach and Lisa Shu to learn how the Kauffman Fellows and Newton Venture Program plan to disrupt the venture capital ecosystem by training the next wave of GPs to be more inclusive than those who have gone before them.

Interviewed February 2021

Changing VC Is Not about Quotas

Johannes Lenhard (JL): VCs happen to be mostly white men with Stanford, Harvard, and Oxford degrees. Is that something you want to change with your respective organizations?

Jeff Harbach (JH): At the Kauffman Foundation, the way that we think about diversity in venture is not about quotas. It’s important to remember why the organization came about: we have long believed that in order to best understand the world’s greatest challenges, the future of the VC industry must be diverse and more reflective of society as a whole. The Kauffman Fellows Program originated as an endeavor of the Kauffman Foundation, from which it was spun out in 2000. The Kauffman Foundation was started by Ewing Marion Kauffman, who cared a lot about two things: entrepreneurship and education. Since the early 1990s, the Kauffman Fellows have pushed to build a global fabric of smart, connected capital that will fuel entrepreneurs everywhere and support entrepreneurship as a catalyst for economic growth and social change.

We recognize that many people do come from Ivy League institutions, however we think about it in terms of how do we continue to be a catalyst in making sure the venture ecosystem is more inclusive, equitable, and reflective of society as a whole? Over the next 25 years, we think that the venture ecosystem will continue to be a catalyst in supporting high-growth entrepreneurship. One of the key ways we think that venture is going to evolve and continue to change is that venture as a vehicle for supporting entrepreneurs is going to be more easily adaptable to businesses that are solving the world’s biggest problems in areas such as healthcare, education, food, water mobility, and energy, for example.

Due to Moore’s law and Metcalfe’s law, with technology getting faster and cheaper and people being more connected through technology than ever before, we will now be able to develop companies that are actually addressing some of the world’s biggest problems that we have not been able to do in the past because of some of these limitations. If that is true, and we believe it is true, then we believe the entrepreneurs that are going to be launching companies that are solving those problems are going to be individuals that have experienced those problems. Those individuals are going to be more reflective of society as a whole. If we are not as a venture ecosystem also more reflective of society and [with experience in] those same issues, we will miss those opportunities, some of those category-defining, and frankly, world-defining companies that will be built over the next five, ten, twenty years.

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For us, this is not about quotas—it is about making the venture ecosystem more reflective of society as a whole, because it cheapens the conversation when we talk about quotas. It enhances the conversation when we are truly talking about economic development, in terms of building companies.

Lisa Shu (LS): I have to echo Jeff in the notion that decisions made by VCs trickle down throughout society and who gets funding determines which of society’s problems get solved. In its current form, venture excludes too many, and it serves too few. Newton has the explicit mission to make the venture landscape fairer, more inclusive, more representative of the population it serves. While we all agree that no one group has the monopoly on talent, overwhelmingly one group does seem to have a monopoly on power in the venture ecosystem. We take a quantitative approach with the Newton Venture Program in terms of looking at the investment landscape.

At the very top, we need to ask ourselves: who is in the rooms where decisions are being made, and who is left out of those rooms where decisions are made? We share the same ethos with Extend Ventures. Through this quantitative approach, we measure who is not in the room, and we ask: how do we get those individuals into these rooms in order for more of society to be served? It is the representation that is so important to capture among the decision-makers at the very top of that ecosystem.

Best Practices for DEI in VC Education

Erika Brodnock (EB): How exactly are you tackling diversity, inclusion, and equity in your educational programs? Are you able to share a few of your best practices and initiatives?

LS: We set a very clear mission from the outset. Newton was incorporated in September 2020. Kaufman has 25 years of history ahead of us. Our vision is that by 2030, venture investors will be 50% people from currently underestimated and overlooked groups. Working backwards, what do we need to do to get there? In every cohort of Newton learners, we ensure that at least 50% of our learners are female, and at least 50% of our learners come from Black, minority ethnic, and other underrepresented backgrounds. We also focus at the top of the funnel to ensure we attract candidates who might not otherwise naturally see themselves as a venture investor. Most of us do not naturally see ourselves as a venture investor.

We were very specific in planning our content, in partnership with like-minded partners such as Colorintech and Black Tech Fest, to make sure that we build content on how to build a more inclusive venture ecosystem for investment. We communicate that this is for everyone; venture is for everyone—it should be for everyone. We also have to acknowledge our own decision-making biases. I have a background in behavioral science, with a PhD in judgment and decision making. We have to acknowledge that we all bring our biases to the table. We have to guardrail against that in our selection process. This is where the beauty of technology comes in to help us with this.

At Newton, we use Applied, which is a blind recruitment platform. We rate our applicants through a blind selection process—no CVs, no names, and no demographics are attached to any individual’s application. We know the group demographics in terms of how they self-report—but we have no idea who’s who, where they went to school, where they are employed, if they are employed, etc.—when we admit our applicants. We are radically transparent about how we do our selection. The radical transparency involves blinding ourselves from who we are actually admitting to our classes.

EB: Will the use of Applied extend to how venture capital investments are made via the fund?

LS: There has been some traction in that direction. I know the fund Blackbird VC (based in Sydney, Australia) selects founders to meet with based on this blind process. There are some indicators that more and more firms will use this blind selection process—either for their own hiring needs, the hiring needs of their portfolio companies, or deal sourcing.

JH: We have two things that we focus on with Kauffman Fellows, and we are developing more. The first is our core program. It does not necessarily focus on the top of the funnel, but it rather focuses on individuals that are in venture right now. The median fellow is a junior partner in their firm. Some are more senior partners, some will go down to maybe principal, but the average investing experience is five plus years. The average operating experience is more like ten plus.

Each year, Kauffman Fellows identifies and develops a new cohort of accomplished investors who attend the two-year program part-time while they are investing full-time. The Kauffman Fellows Network spans six continents, representing over 50 countries globally—and is nine times more diverse than the industry average. Each year, we intentionally recruit, build, and design the incoming cohort with diversity as our north star and driving force. We focus very much on who we select, and we want to involve ourselves with all the different communities of individuals that are not our standard, typical communities that are, for instance, my network as a white man. We focus on talking to all the different groups that are working on diversity and getting individuals that are working in the business.

One of the core beliefs that we have is that it is actually easier now than ever to get into venture. It is hard to stay in the industry beyond five years, and it can feel darn near impossible to stay in VC beyond ten years. The reason why is because to stay in the industry beyond ten years, you have to start returning capital to LPs. I hate to say it but your tenure in venture is not measured by how many blog posts you write or how many speaking gigs you do or any podcast you launch. It is measured on a spreadsheet and on how much capital you returned to your LPs.

Our goal is to ensure that we surround these individuals once they are already in venture, to help them succeed. One of the ways we help them succeed is to learn beyond the rate of their own experience. We do that in two ways. One is we understand that networks in venture matter. With the Kauffman Fellows Research Center, we did some analysis using a network betweenness algorithm that actually put numbers to strengths of networks. We did this not by using weak social media data, but rather, taking how closely people are connected with individuals that have worked together multiple times either on boards, executive teams, at venture firms, etc. If they have worked together multiple times, the strength of that connection becomes that much stronger.

If you have a top 1% network in venture, your average realized multiple is over 10X, if you drop down to a top 10% network, your average multiple drops down to a 6X, which is still great. If you drop down to a top 25% network, which is top quartile, your average realized multiple drops down to about a 2X, which is under the industry average realized multiple. What we do with Kaufman Fellows is we try to make sure that we surround these individuals with a diverse, trusted network of individuals that are going to help them succeed. What I mean by helping them succeed is helping them with due diligence, helping them think about their next LP conversation, or helping them with situations like bringing on a new partner to the firm. It is having that trusted expert network around them that will help accelerate their learning and growth. These pieces are critical to helping these individuals learn and grow faster than they would on their own.

The second at the top of the funnel is we have a program called Venture Deals. It is a free program that we have been offering for seven years now, most recently in partnership with Techstars. We run it in partnership with Brad Feld and Jason Mendelson from Foundry Group, and it is open to everyone. That is our way of saying, “If you are interested in venture, and want to learn more about the industry, either from the perspective of an entrepreneur, aspiring venture manager, or established manager, you can learn this through the Venture Deals course. It helps you shore up your knowledge about term sheets, diligence, and all the pieces around venture.” That is how we think about it programmatically and it is the way that we approach DEI in the business.

The magic around any kind of conversation around DEI goes to getting a group of individuals together and creating what we call a brave space. It is not good enough just to have a safe place, but rather a brave space, where we are able to share all the messiness around this conversation. Having DEI conversations are uncomfortable, and they are hard. We all use different language. As a white man, am I supposed to say this? How do I recognize blind spots? How do I improve my knowledge and broaden my perspective on the things that I do not know? Those discussions are where we really think the magic happens. It is a best practice that anybody can do.

Considering Class and Social Mobility in VC

JL: Let us address one specific area that is not talked about much in this space, which is class and social mobility. Supposedly, one even more so than the other is very expensive. Is that something that you think about, because it makes it harder for certain groups to participate?

LS: Our programs are at different price points, but they are expensive for some. It starts at £2,000 for the digital program and up to £20,000 for the on-campus at London Business School program. In creating these programs, we wanted to ensure that inability to pay does not pose a barrier to entry, because there are already too many barriers to entry into the venture ecosystem. We are very lucky to have partnered for our initial cohort with founding sponsors who have underwritten 30 of the 60 spots for our first cohort, and we have lined that up for the next ten cohorts. It does not matter what the amount is; we do not want to add to the barriers into the venture ecosystem. We are explicitly eliminating it by partnering with like-minded partners, and the beauty of partnering with multiple sponsors is that you form this collective action. We have many different parts of the ecosystem engaged from all different fields, whether it is law or finance or government. It is really wonderful to see the collective movement building within the venture ecosystem. The more inbound requests I receive to sponsor a spot, the happier I am. It is about the number of firms, organizations, and individuals that we can mobilize towards collective action—even more so than the actual number of scholarships that we can deliver.

JH: Venture Deals is a free course for anybody that wants to take it. The core program that we have, which is a two-year program that is measured by nine different experiences or events, is $80K. Number one, we do not want this to be cost-prohibitive for individuals, especially those that are launching their first-time funds. When you are a first-time manager, and you are launching a $10M–$15M fund, and you have your GP commitment that you have to do as part of launching your fund, you do not have management fees and other cash flow to be able to pay for an $80K program. We understand that. We are aggressive in the way that we focus on scholarships.

The Kauffman Fellows Program is a non-profit with a tuition-based business model. Historically, we have granted scholarships almost entirely off of our own balance sheet. Over the last couple years, as we have increased the number of scholarships that we are giving, we have been grateful to individuals and organizations that have sponsored scholarships alongside us, allowing us to further increase access to our program. This year, between KF-sponsored scholarships and partner-sponsored scholarships, we were able to provide almost $1M total in scholarship funds.

What we want to focus on is merit. We look for candidates with an entrepreneurial spirit, deep domain expertise, leadership potential, and an appetite for risk, ambiguity, and the unstructured environments that the innovation ecosystem requires. More important than these traits, however, are core value traits like integrity, humility, empathy, service orientation, and a deep sense of gratitude. All of these “behavioral fitness” components distinguish outstanding finalists from the pool of extremely capable nominees. We want people that we believe are going to have a long-term impact on this business. If the cost of the program is the only thing that is holding them back, we won’t let this be a determining factor. We care a lot about there being access for all that are really on the path to making a long-term dent in venture.

Helping Underrepresented People Make It to the Top

EB: Are there any plans to create an emerging fund manager program that is specifically catered towards combating the issues where people from overlooked backgrounds tend to fail to progress to partner stage?

JH: Yes. We are always looking for what we should be doing to support our mission of helping the venture ecosystem look more like society as a whole. If you just have an emerging manager program, then you’re going to miss out on the important discussions that you get from having emerging managers, established managers, geographic diverse managers, and new managers all in the same room. We define diversity not just on the basis of gender and ethnicity, although those are two very important characteristics of diversity. We try to take a more inclusive position on diversity and view it through the lens of characteristics like gender, ethnicity, sector, stage, geography, and age to name a few. We want there to be an inclusive nature around all these discussions so that we are getting the value from seeing how different people are viewing this from different stages and different perspectives. I understand the purpose of an exclusive emerging manager program is to really make sure that we are focusing on the fact that oftentimes emerging managers or overlooked managers are not making it through that glass ceiling or making it to the partner level. We think that we are meeting that by seeing many of these new managers—especially over the last two, three years, and even at an accelerating rate over the last six months, based on what is going on in the US—becoming first-time managers, launching their own funds, getting to partner.

Our job is to make sure that they stay there. They are successful in that role, because that is ultimately the long-term vision for us. As of right now, while we are always open to new ideas, we are never going to get so set that we say no to something. As we measure this, and we think that we are not meeting the demand for the emerging managers that we think are out there, then we would either look at expanding the size of the class or starting a new emerging managers program. We have to balance that with our deep belief that it is not good enough to just have an emerging manager program, a Black VC program, or a women’s only program. We need them to be part of the entire conversation, because that is the way that we are truly going to advance this.

LS: I agree. I have been heartened to see programs such as VC Include develop a BIPOC fellowship, specifically to target these overlooked groups. As we build out Newton’s learning ecosystem, we have thought about what kind of custom programming we could develop for emerging fund managers. When you look at a cohort size of 60 individuals, and you look at the number of one-to-one relationships, that is 1,770 relationships. Take the perspective of a learner: who else is in the room with me? There’s 60 people but 1,770 relationships; 1770 is the real denominator, because venture is not done in a vacuum. Who raises from whom, who co-invests with whom, who sources from whom—all involve multiple parties; there is no individual contributor in VC. If our mission is inclusive representation, I do not think that we can limit it to just specific groups.

Goals and Challenges for the Future of VC

JL: What is your specific vision for the VC industry in five to ten years, and what do you think is the biggest challenge to get there?

LS: We have a very specific vision that by 2030, venture investors will be 50% people from currently overlooked and underestimated groups. The biggest challenge that I see right now is: we can create the best investor training programs that £2,000 or £20K or $80K can buy, we can provide the supply of the most talented diverse pipeline into the venture ecosystem, but what we cannot control is the demand for this talent. The rate at which firms hire is very slow. That is changing and there is an unprecedented amount of capital in both private and public markets. There is a macro shift from public equity into private equity.

To truly change what is “market” in the VC industry, you have to shift the status quo and shift that towards equality by design, and not as a mere afterthought. It is not enough to just create this brilliant pipeline; they have to have somewhere to go. There are more stages than just attraction and selection of diverse talent; there is also retention, belonging, and promotion. It is that ten-plus year journey after your first fund, whether or not you can raise your second, whether your LPs commit to this vision, that is the piece that poses one of the biggest challenges.

JH: One of the major challenges that we face in venture is the reality that less than 5% of the industry ever cashes a carry check and that most venture managers are going to fail because most startups fail. Going from fund one to fund four and beyond is really hard. It does not matter what background or stage or anything else you come from. It is making sure all the energy that we have around wanting to see the venture ecosystem look more like society as a whole, sticks to signal and turns into a signal, and it stays. The staying power means we must help more of these emerging managers.

We have to spread the success beyond just the relative few. That is not democratizing returns, it is instead making sure that we are looking in places that typically have not been looked at and that the venture managers are looking at those types of companies, because they recognize them, because they also come from those backgrounds. The biggest tragedy that we would see is if all this energy put around supporting diverse and emerging managers ends up seeing little success coming out of there in five to ten years and ends up reverting back to the mean or where we have already been. It is hard because the people that are realizing success have been doing this for 20–40 years.

Another worry is anybody out there who views venture as the cool job or easy way to make money or trendy cool thing is kidding themselves. One of the very first questions that I ask any manager that wants to be in venture is, “Why do you want to do this?” What is driving you to want to be in venture capital when the trends would say that you are better off learning something about another industry before coming into making investment decisions, and then ultimately mentoring and coaching decisions for the people that are building companies in that industry? It isn’t about where you get your experience, but it is about some sort of experience. It tends to mean that the more that you bring to the table, the more you are going to be able to both help evaluate and help those companies grow. That is tricky because we do not want to select only on education or experience. If we do that, then we end up reinforcing the biases that have been there in the first place. How do we make sure that we are supporting the individuals that are going to continue to drive more diverse outcomes, as opposed to just people getting in the business? How do we ensure we sustain this long term?

What Businesses Need to Reach Escape Velocity

EB: I have this analogy that if there is a fish and the fish is sick, if you do not change the water, the fish continues to be sick. This is the venture partners or emerging fund managers that are setting up new funds that are going to invest in new businesses, if we do not ensure that those businesses have a way of being successful, by potentially ensuring things like supply chain practices are changing. I have spent a lot of time thinking about what is needed to ensure that some businesses can reach escape velocity because once they do, the founders can become the LPs and even the GPs that are creating that cycle. We need to create one full cycle to do that. How would you say we need to go about ensuring that other pieces of the puzzle are in place so that it does not result in the failure that you just described?

JH: I am not going to pretend like I have the answer to this. My initial reaction is that I get antsy around everybody thinking that venture is the most important piece of this puzzle. It is not the venture layer; it is a service layer. Let us just put things in perspective, venture managers come and go, the true heroes in our story are the entrepreneurs. They are the ones who are solving the world’s greatest problems. They are the ones that are creating economic independence for many and are going to help solve these things from the supply chain all the way up and down, where we need systemic change.

From a venture perspective, we can help change that by overshooting the influence that venture has. I do recognize that there are power dynamics in all forms of life. That is where the power dynamic exists in venture is that between the entrepreneur relationship and the venture relationship, oftentimes the venture manager has more capital and they are perceived to have more power, because they have that checkbook. Any entrepreneur that has ever had a hot round or had their choice of venture managers would tell you that they really did possess the power in that dynamic. That power dynamic is only perception. It is not reality.

To think that venture can change all the systemic areas where we need change is overselling the impact of venture can have, and underselling the impact that the entrepreneurs can have. Do we play a role? Absolutely, but this is going to take all of us working and rowing in the same direction to ensure we are focusing on how things can change from the past, in order to succeed in the future.

You could not have imagined even ten years ago that Zoom would have the kind of impact that it has today, because of what we have seen in the democratization of technology. What do 2025, 2030 look like? Whether you are in NYC, Austin, or Johannesburg, it is going to look like having the same access to products and services because of this democratization through technology. We have to ensure our supply chains and everything up and down the stack are also representative of society as a whole. We all play a role in making sure that every part of this ecosystem is more reflective of society as a whole.

LS: I love the notion of the full-stack venture ecosystem. It brilliantly illustrates how so many pieces have to come together to enact systemic change. It starts with governments, with the tech transfer officers at universities, the R&D budgets that are invested into the innovation ecosystem. Then you have the LPs, the angels, accelerators, incubators, and the venture capitalists all working together. As the tide rises, all boats rise together. Every single piece of the stack needs to work together towards greater inclusion and belonging and representation in the ecosystem.

When we think about Newton’s role in that, we think about who is not in the room: in our cohort of learners, we want to fully integrate pieces of the venture ecosystem. We are very explicit about including public servants. We are outreaching to civil servants to tell them, “You play a pivotal piece in the very start of this innovation economy.” The decisions that governments make determine how big the pie actually is—not who gets a slice of it yet, just how big the pie can grow. Integrating the end-to-end venture ecosystem is a way for us to work together to get there faster.

Wehmeier, Teare: Data Collection and Analysis

Tom Wehmeier (Atomico)

Gené Teare (Crunchbase)

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