Monica Spencer (formerly Mellon Foundation)
Darya Henig Shaked (WeAct Ventures)
Savitri Tan (Isomer Capital)
Interviewed January 2021
GPs and LPs: Who Sets the Rules for DEI?
Johannes Lenhard (JL): Let me start with a strong provocation from the research that I have done with venture capital investors. A lot of them, when I asked them about decision making and why they are doing certain things and not others, they said “Oh, it’s the LPs”—so people like you three—that set the rules. How true is that when it comes to DEI?
Monica Spencer (MS): My immediate reaction to that is: have they asked? I do think that things may not be priorities on the agenda because people are assuming they know what other people think, but have not actually taken the time to explore it. One of the things over time that we have worked hard in our conversations and in our work to address is this idea that maybe there is a trade off, and that managers feel they have to compromise investment results in order to accomplish a DEI goal. It has been very much the bedrock of our position to say that broadening the opportunity set, both theoretically, and in our experience, leads to better returns. Having more diversity around the table mitigates risks in helping teams to make better decisions and to identify issues proactively that might not be identified if they had a more monochromatic team. That is a very fundamental difference of view to what some folks used to say. As more and more people are talking about diversity and inclusion, they are realizing that there may be assumptions about what their counterparts think that are not quite accurate.
Darya Shaked (DS): The responsibilities of GPs and LPs to lead the venture industry into action, in this case, into a more diverse and inclusive social fabric and thus to better financial outcomes, is a complicated issue. I personally see it as a high priority and a mutual responsibility and believe it will take both groups of us to create enough pressure, to lead an accelerated change. Diversity in venture has historically improved in 1% more women for every decade and we can’t afford waiting 400 years to achieve equality.
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I also know that many in the industry tend to act only when pressured or when they feel at risk. a female GP told me that the only time she was ever asked about anything DEI-related by an LP, was in a board meeting, when a very young guy around a table of experienced men and women LPs, around the rise of the #MeToo movement, asked: “Am I going to be embarrassed by anything that is going on in your fund, which I invested the state’s money in?” That was the first and only time that question was raised in her career. First, I felt bad for the women around the table that never had the courage or felt secure enough to raise a question in that sense, and I believe that is now much more common. Secondly, I realized that VC D&I actions started in Silicon Valley due to a liability concern, raised from LPs, and not as part of understanding their responsibility to maximize returns. So, we see LPs have an impact just by raising the question. Once LPs realize that the homogeneity problem is not only a liability issue but is also translated into the funds’ financial bottom line, I believe they will be more outspoken about fulfilling their and GPs’ responsibilities to avoid missing financial opportunities due to lack of diversity in the decision-making team.
I started my journey with the goal of pushing the industry into a more equal one, to make the industry more diverse from its original 90% male GPs and ~99% of capital managed by men. I believed that change had to start at the top. It is unfair and inefficient to leave this problem to struggling founders to solve. In 2018, I decided to start a fund of funds to become an LP, raise funds, and invest in the best and most promising diverse VC founders. I believed that once LPs raise the questions, GPs would have to act. We know now that when all criteria are similar, diverse VCs outperform.
From what I see of the very few women who were able to make it onto the Midas List of the world’s best 100 venture capitalists, they outperform because they attract a wider range of opportunities, they collaborate better, they evaluate opportunities differently, and they create added value in a wider scale, which is different than the majority of VCs. The women who made it to the top are inherently much better, and I decided to raise money and invest in female venture capitalists who left the biggest name VCs, such as Accel and Kleiner Perkins, to start their own funds, they will be over motivated and most equipped to outperform the previous fund; they will invest in a wider range of founders, and they will create a different story. It is a much bigger story, with more financial potential. Having more women starting new funds, diversifying the industry, and making innovation more inclusive will create more female success stories, more role models, and more money (and confidence) in HNW (high net worth) women.
I agree that LPs should be, as a first step, asking the right questions. We should be moving from a liability question to grabbing the financial opportunity that is left on the floor, still. When you talk to LPs, who are independent thinkers, family offices, or high-net-worth individuals, they are much more inclined and have strong conviction in the advantages of D&I focused investments, and are taking steps to enforce that thesis. The problem is still with institutional LPs who are slower and late adopters. I see the non-institutional LPs making that progress and leading the way in creating that change.
Savitri Tan (ST): I think you’re right, Johannes, many GPs do make certain decisions because of an LP’s influence, but that makes things sound very passive. I don’t think GPs only do something about D&I when an LP tells them. When it comes to D&I in Europe and pushing forward the agenda to a) invest more diversely, and b) to have more diverse investment teams, I believe that some of these decisions are motivated by the interests of some partners in VCs and junior members of their firms, who have really been motivated to band together, highlight D&I issues, and create data-driven reports to show the status quo when it comes to D&I. I’m thinking of Diversity VC, which was set up in 2017–2018 to highlight D&I gaps in VC. I believe it now has a chapter in the US.
I think it’s important to look at a few areas to assess D&I: the first two are a little subtle, and the final one is direct. It’s important, during initial meetings, to spend time digging into team background, plans for growth, and how the partnership thinks about who and which skills to hire for. As an LP in early-stage managers, in the same way a VC may invest in a pre-seed founder, you are making an investment based on potential, thought process, and confidence to build effectively and attract different backgrounds and opinions around the table to make what already exists more robust. The second is in scrutinizing the VC’s decision-making process, how they evaluate companies and founders, and where they look for dealflow. It’s also important to ask direct questions to the VC. I think that many LPs, even institutional ones, may ask questions about D&I, but to work and make a conscious effort towards making a difference, this “question asking” has to be systematic and part of the process. Isomer is a 50:50 male to female ratio, we are a mix of different nationalities, span a wide age spectrum, speak a number of languages, and all had different career routes into becoming an LP, so asking questions around D&I may come more naturally.
The “Default to Yes” Approach
Erika Brodnock (EB): Monica, we were really impressed with your “default to yes” approach to all of the diverse managers that contact you. What has your experience of operating in that way been, and do you know of any other LPs that are doing similar things?
MS: It is enormously time-consuming, but it is also very generative, and certainly has opened up a new network for me and has led to a number of lessons for us in our investment process. For context, our mandate on diversity extends primarily to underrepresented minorities, which as defined in the US Census data is Black, Latinx, and Native American. That is a particular focus of our diversity initiatives and of our “default to yes” approach to meetings with GPs. I do not think that anyone on our investment team intentionally imposes barriers—“Oh we only want established funds, we only want funds run by white men.” We’re understanding the implications of some of the traditional checklist items, such as: What do you expect your GP to commit to the fund? How do you think about how they are going to finance the startup expenses of the firm, and a GP commitment, if they do not come from a background where they were a successful partner at an established firm before they start the fund? Thinking through things like that, thinking through who are like-minded investors.
EB: My follow-on question on your approach, Monica, is whether there are specific things LPs need to abolish to stop emerging fund managers that are also diverse from being unable to raise?
MS: I do not know that I would say there is a particular metric I would abolish. I do think that there are reasons why these have been established over time as good markers for important qualities you are looking for in a manager, but you have to go back to first principles and say, “Okay, why do I care about the GP commitment?” I want to know that the general partner is aligned with me, and that they are more focused on delivering investment return than capturing fees, and current income, right? I want them to be focused on generating gain over income, because that is what my priorities are. That is what the GP commitment is reflective of. Rather than saying, I need a hard and fast number for that, or I need it to look a certain way, I go back to first principles and say, “Okay, how can I understand the motivations of this new group?” That they are aligned with me, and that they are mostly focused on generating gain, and they are not focused on their own current income. You just have to think of a different way to answer the question. There is another example, when you think about follow-on financing for venture-backed companies. If you are early stage, a lot of the markers of success are who came in after you. If you are early stage, and you focus on diversity of founders, it is much more difficult for those companies to get follow-on financing. This is well established in the literature. What other metrics are you going to use to understand the success of those companies, if the founders for a variety of reasons, largely related to systemic bias, have had trouble raising funds? Again, you have to go back to first principles to understand why we are looking at this metric—to see if there is a different way you can get to the same answer.
DS: I agree, if you go back and think through the metrics and missions, you will have a better understanding of the ways those actually work together or against each other. You have a chance of preventing your focus from narrowing down. There are many examples, where people—even governments—meant to invest in one way but created rules that resulted in the opposite direction or in an inefficient way. Several institutional investors have a ~$50M mandate to invest in diverse emerging managers. But their procedures direct those funds to a familiar, old, homogeneous advisors firm, which was approved by one or two state boards decades ago and is given a mission to invest in diverse VCs. These firms are expensive and with a relatively low ability to source for that mission in comparison to other newer entities, who are diverse and have that knowledge and networks, but haven’t been historically approved. And so the mission of the mandate is expensive and inefficient but it is almost impossible, or nobody has the motivation to change the procedure and go through the two boards again.
Another example is when a government establishes a committee to invest in unique tech funds that allow citizens to participate in the innovation cycle. The requirement of experience for a committee member is twenty years of investment experience in venture. Twenty years ago, there were almost no women in VCs. Just making that condition for committee members excludes women from participating in the process of deciding where those public funds will go, preventing female GPs from being recognized for their potential and receiving those funds. Again, going back and discussing those metrics would eliminate many biases and blind spots in decision-making processes.
Concrete Measures That Can Strongly Encourage Diversity
JL: Let us go into one more specific thing that I have seen LPs do: make GPs report the numbers. That is something that you do at the Mellon Foundation and that the Princeton endowment does, but not everyone is there yet. What are other measures that you could take very concretely, either, again, that you already have taken, and that you in whatever way use to put pressure on managers to invest more diversely and become more diverse themselves?
MS: I am glad that you brought that up. I do think that as we have thought about collecting the metrics, we have always couched that as a component of an ongoing conversation. We have been very clear with the managers that it is not to publish them, or berate them publicly in any way about them, as it is to measure progress over time. We want to see: How are things progressing over time? Is this a priority for you? Where are the missteps? If you lose ground, it is not like we are going to kick you out of the portfolio because you have lost ground; we want to understand what the issue is that came up and how you are addressing it, and how that is going to lead to better metrics over time. We have always couched it in the context of a conversation.
We have also always felt it was important in that conversation to hold ourselves to a high standard. In hiring for our team, we have made a big effort to be more diverse in the sources of candidates who come through, and to be very public about showcasing the diversity of our own team. In that way we have more credibility, as we sit down with managers and say, “We want you to think about your investee companies and their diversity, and we want you to think about it in a holistic way.” Demonstrating that we are doing the same puts us in a different conversation.
ST: I think I answered some of this before, but we see quarterly reporting and informal updates as an essential part of measuring progress across all areas of a manager’s work. We want to understand how things are going. It’s that classic case of “show your work, it’s not all about the answer.” Do you notice that a lot of your deals come from the same sources, how can you change that? How are you hiring for talent within your firm and how are you proposing to train up that person? You ran an initiative to encourage more diverse founders to seek investment, how did it go? We ask these questions, not to beat a manager over the head, but to understand the full context of their work and progress. And it is important to do this formally, through reporting, LPACs, and AGMs, but also to ask these questions informally and to catch up with managers to see how things are going. We operate an open-door policy with our managers, there are no assigned point people that a manager absolutely has to speak with first, who acts as some kind of gatekeeper to the team. Having trust and flexibility makes understanding the full context that a manager is operating in a lot easier.
As a team and as a fund of funds, we have always been open about hiring for different points of view and backgrounds, so that we can work with our managers in a holistic way. There are absolutely those in the team with institutional backgrounds and asset management experience, but we have exited founders, tech startup operators, those who worked in seed funds, and those with experience of working with startups in Africa and Asia. Demonstrating that we value a range of backgrounds and experiences is powerful for our GPs to see—we’re in this together and learning too!
JL: Did you want to talk about any other measure that you are thinking of taking or already are using in order to go on that level of change?
MS: One of the things that, as an LP, we are in a very good position to do is share best practices. Having couched this survey effort as the beginning of a conversation, we started to get inbound questions like, “Oh, gee, you asked us if we had a DEI policy, we actually do not, but what have you seen from others? How should we think about putting one together?” Or, “Our team is really eager to have someone come in and talk about unconscious bias. Do you have a recommendation for a firm, a speaker, or a curriculum that would be helpful to our team?” And because we can compare across not just VC, but a wide array of investment managers, we can say, “Look, we do not know any other VCs that have hired a great consultant in workforce diversity, but we do know of this other firm that has a much larger employee base. They have been super successful with this group; you might talk to them. Here is a list of three others.” Trying to be a resource has also come out of those conversations.
ST: I agree with that point on best practices. Of course, we can share things based on our own experience and what we see others in our portfolio doing, but we’ve also started to bring some of our portfolio together to learn from each other directly and connect to share contacts. We’ve also been running community events, for our portfolio but also for the wider VC ecosystem in Europe, where we organize around a topic that VCs tell us that they are interested in—we’ve had talent and diversity, sustainability, amongst other topics—and try to bring in domain experts to talk about these areas and take questions from the group. That’s been a great way to share and enhance collective learning efforts.
Driving Change in the Markets as LPs
EB: LPs are often believed to have lots of choices as to where to put their money. How much do you use that choice to drive change in the markets, personally?
MS: It is hard to say—I have to be pragmatic. Looking after a $7B foundation portfolio sounds like a big number, but in investing markets that are trillions of dollars globally, there is only so much change that I can be responsible for. I am trying to be influential, trying to share best practices, and being very mindful of when we add a manager to our portfolio, how are they helping our metrics? Or are they not? It’s a super important role that we can have. If every investor had the same approach, things would move very quickly. These things happen glacially, and then all at once, because people are watching, particularly the events of the last year  and some of the notable successes of venture-backed companies, like the examples that Darya had, that are led by women and underrepresented minorities. We are on the precipice of a sea change, where we are going to be at the all-at-once part of the change, but no one person can influence that particularly. Other than trying to make sure that you are investing in line with the institution’s values and trusting that history will bend toward justice.
DS: Monica and I are on the two furthest away edges of the scale, she is a part of a huge foundation, managing large sums of money; it is a lot of pressure, and a lot of metrics. I am a free spirit, I manage $10M to date of my money and funds that I raised under the social-financial thesis that my LPs are aligned with. Even though my AUM assets under management is not even a fraction of what Monica is in charge of, I feel I have significant ability to make a difference. Not only in my capacity as an activist and a speaker, writing opinion pieces, going on panels, etc., but I talk to GPs daily from Israel, Europe, and the US. I have the privilege of asking, “Who are the founding partners?” If they are all white men, I make sure they understand I am not a believer in a group of all-male, homogeneous GP teams. I tell them that once they have a diverse founding team, I’d be happy to talk to them again. It is OK if it takes 18 months or more, I see it as my responsibility to let male GPs hear it from me directly. I personally would not invest even if the funds brought in a female GP, a female partner, if they can fire her. LPs invest in funds they believe in. In the changing landscape, having an all-male founding team leaves too big of a blind spot, which will not maximize return potential and will not move the industry forward. GPs should know that when all other factors are similar, diversity outperforms homogeneity.
I know some LPs that refused to even ask their GPs about their diversity efforts; they used to say, “I will not ask difficult (D&I) questions because I will be called a troublemaker and may lose my allocation. The GPs can find other LPs from Europe, they don’t need me,” basically saying, “I’m not strong enough to create that change.” I was thinking, “Oh my god, you are one of the biggest LPs in America. World-known GPs are bragging about having you as an LP. If you do not think you have enough power to lead change, nobody has enough.” Plus, this is not really maximizing returns, as such a fund will see a limited dealflow, and will have less ability to DD and see the potential of a wider range of solutions for a wider range of clients. But today, after long conversations, these LPs realize the responsibility they have and they promise to ask those questions in their own way. But the questions will be raised once you realize the power that you have to make that difference, and the GPs that are confronted with this will have to prepare a good answer and eventually also act on it.
MS: I do not think we disagree at all. I just have a more pragmatic view—there are a zillion other LPs out there who are happy to not raise questions, and so I have to be cognizant of that. At the same time, the power of a long-term partnership, and of asking the questions of the managers in our portfolio, on an ongoing basis gives us a different kind of leverage, right? We say, “Look, we have worked with you for 15 years. We have been asking these questions. We have seen modest progress. We want to understand what is blocking you. We think it is terrific that you have hired your first female partner, and we want to know how you have changed your processes internally to make sure that she is successful in that role.” You cannot just send a survey and publish metrics; you cannot be viewed as trying to call people out who are your partners. We are trying to make everybody better. We understand that we have the same challenges ourselves on our own team, and among many of our grantees. We are fighting all of these issues on many levels. We feel like some of that experience we ought to be able to bring to bear to help the managers in our portfolio.
ST: In some form or other, a fund of funds structure lends itself towards diversity as a way to maximize coverage and optimize for returns. As LPs, I think to answer this question, it goes back to not underestimating your own power and influence. Even with smaller funds like Isomer, we are one of a very, very tiny number of fund of funds that are 100% venture capital focused and do not shy away from investing into emerging managers. The decision that we make to invest, and then the long-term partnership journey that we embark on with managers to help them build their firms, have a ripple effect. Early decisions as a result of questions and challenges will become ingrained as processes in the future funds of these managers, so asking questions, monitoring over time, and working together with managers from their earliest years makes a huge difference in how they approach raising and managing their next funds.
Next Steps for the Role of LPs in DEI
JL: Looking forward, what do you think is still missing to go to the next level? What are the next steps not only for you, but for the industry as a whole, for the role of an LP?
DS: I see many brilliant and accomplished women struggling to raise money. It is a lot about perception. LPs (still the majority are men) tend to invest more and bigger checks in emerging managers that look like their younger selves, just like direct investors having a “gut feeling” when it comes to startup founders. An experienced female GP told me she received a $100K check from an LP who invested a million dollars in her male colleague, who had no investing track record.
There is still a difference in LPs’ perceptions and unconscious biases. When comparing emerging GPs’ journeys to raise their first funds, a survey conducted by First Republic Bank showed that it takes a male GP on average 11 months to raise $35M, and only 20% of them had investing experience, while female GPs raising their first fund took 16 months to raise $30M and 80% of them had investing experience. It is still harder for women to raise money, and it is up to us to keep pushing. We are all part of the process. We now have a female vice-president, and so we are moving in the right direction. Perceptions will eventually change; returns will continue to prove diversity outperforms homogeneity, and institutional LPs will follow the money and social-economic changes.
MS: That is right. It is mostly from here building momentum. One thing that we are very mindful of doing is highlighting successes. For example, among the larger managers—not so much in VCs who do not have quite so much infrastructure—but if there is a really terrific vice-president or principal who is diverse in some way, we always make an effort to establish a relationship with that person at the GP early, and to make sure that the leadership is aware of our interest in that person’s career. There are a lot of opportunities to highlight and spotlight successes that shine a light on the good work that people are doing. For some reason, people tend to have a “don’t ask, don’t tell” policy on their diversity efforts. Maybe this goes back to where we started and the GPs saying, “Oh, we are just doing what the LPs tell us to do.” It is because people are not having an open conversation, and mostly that they are not shining a light on the successes. Those kinds of stories go a long way in terms of communicating the missed opportunities, as opposed to being stuck in this liability mitigation backwater, where GPs are worried about being called out for a lack of diversity.
ST: I like your line on highlighting success, but it’s also worth highlighting examples of learning and gradual progress as well. Highlighting that everyone is on a journey can be really useful. It is so easy to look at the glossy media story and think that a firm has nailed diversity or, worse, to overinflate what is going on behind the scenes. One, it might not be true, and two, it probably took a ton of mistakes to get to a good place. We’ve become brilliant as an industry about talking about diversity, the big hurdle of asking questions about D&I is largely gone when it comes to LPs asking managers. However, there is a tendency for us to think about D&I in “obvious” terms, particularly gender and ethnicity, but the conversation has to move forward from this and we must adopt a more intersectional approach to be able to measure real progress or we risk further marginalizing many groups. It is all very well, being able to ask managers about their approach to diversity, but we must also ensure that that conversation is happening at home in our own funds too, and that we are practicing what we may outwardly preach.