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.
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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.