Bianca St. Louis (Black Innovation Alliance)
Heather Matranga (Village Capital)
Ben Younkman (Village Capital)
Dahlia Joseph (Village Capital)
Village Capital has been doing things differently in the VC world since they started in Atlanta in 2009. They have always been strongly focused on impact and equitable access—with a lot of success; almost 50% of companies they have invested in or that went through their programs are run by women. We spoke to four representatives of the Village Capital team (Heather Matranga, Ben Younkman, and Dahlia Joseph) and the Black Innovation Alliance (Bianca St. Louis) about the structural issues in the VC model that prevent access for people, their work to overcome some of these problems, and their overall focus on “process innovation,” i.e., radically rethinking how VC works.
Interviewed September 2021
Changing the VC Model or Making a New One?
Johannes Lenhard (JL): If we want to really have diversity and inclusion in this industry, do we need to change the model of venture capital and rethink the structure of GPs and LPs more generally?
Bianca St. Louis (BS): We need to not look to those stakeholders as the only people in the conversation. We need to think not just within the realm of the venture ecosystem, but also to who supports the work of enabling the next generation of entrepreneurs. We need a more holistic conversation, asking: what does it mean to support diverse entrepreneurs?
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Heather Matranga (HM): We cannot expect a one-size-fit-all funding model to work in all circumstances. We cannot take this old model and use it to solve structural inequities that have existed for a long time. We need to be more creative about deploying capital, not only in terms of what structures we are using, but also in terms of who is managing that capital, where it’s directed, and who is making the decision on how to deploy capital. For example, the traditional fund model worked for a particular type of investment focus and type of company, but it has limitations for supporting very early stage companies and aligning incentives for fund managers.
JL: What are other non-traditional funding channels, and who are the other stakeholders that need to be elevated?
BS: I am of Haitian descent, and we have a practice in the Haitian community called sou-sou. It is a money pot, like a savings club. Some new FinTech companies are leveraging similar models. There is this desire to reinvent the wheel, versus leveraging the work that has already been done, just slightly differently. How do entrepreneurs already interact with funding and information? We need to step back and look at where the gaps between the currently powerful system and other systems that people are already engaging with are. Many times, these are accelerators. We need to understand where the people that you are looking for are and why they are within those systems. How can we overlay some of the current structures to find that middle ground to close the gap?
Ben Younkman (BY): The decision-making process of how venture capital is deciding how to allocate their capital and what their criteria are is opaque. Increasing transparency is a step in the right direction to helping people understand what they need to come to the table with, to be attractive to that individual funder.
BS: Programs that have a sheer level of honesty remove a lot of friction. The best entrepreneurs have quality information, and they have great access. Mentors are giving them the truth. People are currently so mindful about not “looking bad” that they may not be telling the truth and not enabling the entrepreneurs. People that are leading the accelerators and managing entrepreneurs can help fill in the gap.
JL: Coming through the initial gap does not necessarily mean that you are able to then become the unicorn. That is another question in and of itself. Do we want to create unicorns, just led by a more diverse set of founders? Or do we want to focus on something else, for instance, more sustainable zebra companies? Do we want a secondary, alternative system, or just to make the current system more inclusive?
BS: We need to get more participation for companies to grow, whether that is mentorship, capital, or something else. It is analogous to saying to a young child, “Good luck. See you when you graduate and I have all this money waiting for you here. Good luck getting there.” What does it look like to be invested throughout the lifecycle of these founders? Is it participating in the entrepreneur support? Is it being in conversation with a different ecosystem player? I do not think it requires a second system, what we see are massive gaps that illuminate the opportunities.
Supporting the Organizations That Support Diverse Entrepreneurs
JL: Dahlia, at Village Capital, in collaboration with the Black Innovation Alliance (BIA), you just launched Resource, a project to focus on minority founders. Can you tell us about it?
Dahlia Joseph (DJ): Resource was born out of COVID. We all know that COVID disproportionately affected the BIPOC community systems like health care, education, finance, housing, all of which were meant to protect us and our wellbeing, and that really let communities of color down. We also saw that in the venture space and entrepreneurial space. There tends to be a lot of focus on entrepreneurs, which is great. Yet there was not a lot of support for organizations that support those entrepreneurs. It is all a system—if one is unhealthy, it can trickle down. Village Capital and Black Innovation Alliance came together to address that problem, specifically around unclear practices. When it comes to running accelerator and incubator programs, there tends to be many siloed resource networks. There tends to be secretive conversations and inequitable funding.
BS: These entrepreneur support organizations (ESOs) are the front line of defense—listening to the entrepreneurs and supporting them on the late nights. As we think about Resource, we wanted to create a community of support, and be a resource for them along this journey because it has a deep impact on the entrepreneurial ecosystem.
JL: We know much of VC is about having the right relationships; is one part of Resource about making the connections that can help strengthen people?
DJ: A big part of this program is Village Capital and BIA being connectors to both stakeholders and entrepreneur support organizations that would not necessarily have the opportunity to connect with such large funders like JPMorgan Chase or UBS. The funders in this program play a big part in building this network together, and they also have the opportunity to engage not only with the ESO but also the ESO’s network—their startups, entrepreneurs, and community. We act as a bridge between the two.
BS: We also do not rely on the same networks. If success is being a white male VC from Stanford, then we are failing to include others. What are the different pathways to success? Once we start to invest in different pathways and different resources, we create a different conversation around success for entrepreneurs.
How Village Capital Has Improved Access
JL: At Village Capital, DEI has been at your core from the very beginning. What are the ways you have increased access for diverse founders and funders?
HM: Our mission at Village Capital is to go big—to reinvent the system to support the entrepreneurs of the future, which are the entrepreneurs that have lived experiences, are impact oriented, and want to solve some of the most pressing global problems. We cannot continue to maintain the status quo, and we really have to re-evaluate the way that the system works. The current system is not supporting the types of entrepreneurs we want to support.
Our core innovation is a process innovation. Rather than just thinking about who or what we are supporting, we look at how we are supporting them and how we are investing. One focus was peer selection—where we democratize entrepreneurship and increase access, by changing who makes the decision. We facilitated that process for ten years and made over a hundred investments that way. A few years ago, we looked at whether the hypothesis that peer selection would lead to more equitable and inclusive decisions was true. We did a data-driven evaluation with an academic partner from Emory University, and the top line message is that entrepreneurs are well suited in forecasting which of their peers will be successful, and they do so in a way that does reduce bias. They are evaluating the companies according to the company’s merit, and less about the demographics of the founders. It is not perfect and there is more work to be done; bias is not completely eliminated, only mitigated.
We are also pushing ourselves in continuing to think about ways to improve the way capital is allocated. We have launched other research studies, some around capital structures. What investment tools and structures can improve inclusion? Can we tweak the way that investors evaluate companies? Will that lead to more inclusion? The ecosystem needs a lot of testing and experimentation to push the status quo and, ideally, scale those solutions to mainstream investors.
HM: Peer selection has lots of benefits. It is also pretty resource intense and is risky in the eyes of many institutional investors. There has been friction in getting them on board. The more fundamental question is, is there a different process than what currently exists to reduce and mitigate bias?
Ignoring Diversity Leaves Money on the Table
JL: Many GPs and LPs say, “I have one thing to do in this world. That is not to fund diverse entrepreneurs, but it is to make money.” Erika and I argue that by not funding diverse entrepreneurs, VCs are losing out on financial returns, in fact. Would you make a similar argument?
HM: Yes. For traditional LPs and investors, investing in diversity is not about what makes you feel good, but because you are leaving money on the table. It is an uphill battle to make that case to those who rely on pattern recognition. The way we have tackled changing the investing process is not inclusion for inclusion’s sake, but so that you are identifying the highest potential company that is going to make you the most money. We continue to point to success stories and do the work of demonstrating through data that more inclusive companies and diverse founders are leading to higher returns. We have done a study that demonstrates that, on average, for every dollar invested in a woman entrepreneur, they outperform in terms of revenue generated for the company.
BY: How can you improve network access for these entrepreneurs? Can you improve the visibility of different companies and how they are being evaluated? We have created something called Avoca, which tries to connect people and investors who care about a particular theme such as gender, sustainability, or something else. We want to cluster those investors and highlight entrepreneurs that might not have visibility yet. To do this, we must be really intentional with partnering with people who have deeper networks, like the Black Innovation Alliance or Female Founders Alliance. That helps us improve our pipeline, and then we can highlight how these entrepreneurs have great ideas. We are much more intentional about our sourcing process and expand that network to be as inclusive as possible to get the best ideas, not diversity for diversity’s sake.
Next Steps for Moving the Industry Forward
JL: Is there anything that you have not tackled yet that is an important piece to move the tech ecosystem as a whole and that you are looking to as an important lever going forward?
HM: When one part of the system is unhealthy, it infiltrates the whole. One big missing piece of the system is policy and regulation from the government side in the US and abroad. For example, the US passing the ability for individual investors to invest in companies through crowdfunding can be massively impactful, help launch innovative businesses, and create more access to capital. More research needs to be done, but there is a role for government and policy to play.
BY: Another challenge that impact faces is a unified way to measure and track. It is also not incentivized by investors. There is an attempt with ESGs [environmental, social, and governance criteria], but it is a big challenge that we are trying to explore. This needs to happen to move us to an inclusive and impact-focused investment community.
HM: The other piece is the people who control money. If we are demanding more of where our money is going and more of our institutional investors, you will start to see more systemic change. With the Black Lives Matter movement and protests against police brutality, there was an awakening among many institutional organizations in the US who are making commitments to support racial equity. This has resulted in many Black-led funds raising more capital. In ten years, we might see, as a result of what is happening now, a number of diverse founders getting more capital and scaling businesses. This leads to more success stories.