People with the true innovations that will build a better world very rarely have control of the resources to make those innovations possible.Ross Baird, *, Village Capital
Because Silicon Valley is extraordinarily expensive and remains the center of the venture capital ecosystem, the barrier to entry is a lot harder for founders who come from challenging socioeconomic backgrounds. Some founders and investors are taking heart that this barrier may be diminished as more companies and venture capital firms move to more livable cities across America—often closer to new communities the companies are aiming to serve.
But the problem is bigger than location alone. A lot of people talk about an “entrepreneurial gene,” some penchant for risk-taking that separates entrepreneurs from the rest of the population. Certainly there are some characteristics that make great founders—risk-taking, passion, tenacity. But the number one predictive factor of entrepreneurs today is having grown up with money. It costs $30K to start a business. 80% of that typically comes from savings, friends, and family. Citing multiple studies, Quartz determined that “the most common shared trait among entrepreneurs is access to financial capital”—they are often people who come from money or have access to a moneyed network.**
This expectation amounts to a biased barrier to access. In an article on the cost of bias and racism in the venture funding ecosystem, Daniel Applewhite writes, “Although entrepreneurs are expected to raise friends and family rounds, this expectation is born of bias. African-Americans have an average net worth of $11K compared to $144K for white Americans.* With this lack of access to early capital and generational wealth, most family members and friends can not invest, regardless of how great the idea is.” Early-stage funding is decreasing at a significant rate, meaning founders have to rely even more on moneyed connections to get their businesses off the ground.* It’s important to understand that being underfunded in an early round makes it harder to raise what you need in later rounds, even if you do eventually meet with investors who understand the impact and needs of your idea.
Applewhite cites the Center for Global Policy Solutions, which reported in 2016 that the racial gap in business ownership is costing the U.S. economy big: “If the number of people-of-color firms were proportional to their distribution in the labor force, people of color would own 1.1 million more businesses with employees. These firms would add about 9 million jobs and about $300 billion in workers’ income to the U.S. economy.” Correcting the funding bias for early-stage founders of color is one important step that can be taken to correct this loss.
Of course, privilege is not absent on the funding side of the table either. A full 40% of active venture capitalists graduated from either Harvard or Stanford, according to data gathered by Richard Kerby.* Reflecting on his finding that over 50% of Black investors went to these schools, Kerby writes:
“The bar to create a more diverse industry is difficult when one looks for folks that most resemble themselves; and while talent is evenly distributed, unfortunately, opportunity is not…When you couple the lack of gender and racial diversity with the lack of educational institution diversity, you not only end up with teams that look similar, but you also end up with teams that think in a similar fashion. Not only is our industry lacking in gender and racial balance, but we also suffer from a lack of cognitive diversity.”
Privilege and access have as much to do with networking culture as they do with money. Money, especially having grown up with money, is more often than not the single determining factor in whether a founder can make the connections they need to successfully finance a company. Some investors no longer think a warm introduction to founders is necessary (see more in Getting the Meeting), but the majority of investment deals come out of investors’ networks. People who have been historically kept out of privileged networks—including people of color, immigrants or first-generation founders, women, the disabled, and anyone from a disadvantaged background—are unlikely to have the same connections to wealthy investors that generational wealth (and degrees from Stanford and Harvard) can build. Pattern matching exists as much in networking as it does in closing a deal; the system favors the familiar, and many founders face difficulty getting accepted into the networks that dominate the startup and VC ecosystem, where men make up 91% of VC firms and where executives and employees are overwhelmingly white.**
Jane VC, a venture firm that invests exclusively in women-led startups, surveyed 500 founders on their experiences in fundraising and tech. The results, which they released in 2019, demonstrate an awareness among founders that access to networks can be a huge barrier to (or determinative of) the success of a company.* Overall, 48% of the women surveyed reported feeling supported by the entrepreneurial community; among the demographics included, Black women felt the least supported, at 39%, while 67% of men felt they had a strongly supportive community. When it came to support from the venture capital community, 19% of men felt supported, while 17% of Asian women, 7% of Latinas, and 3% of Black women felt support among that community.
One criticism of Silicon Valley is that its largely homogeneous, club-like atmosphere contributes to the feeling that it’s a cultural bubble—out of touch with the rest of the world, even as it’s dictating the world’s priorities.* Ross Baird, founder of Village Capital, writes in his 2017 book The Innovation Blind Spot, that it is the immense privilege of the venture capitalist class (generally speaking) that blinds them to the next great idea. Baird details stories of founders whose companies aim to serve low-income communities being turned away by VCs who simply didn’t believe (and didn’t bother checking) that low-income Americans make up a significant market for technology. Baird quotes Jerry Nemorin, who founded one such company, LendStreet, to help this population get out of debt: “[Venture capitalists] want to solve my-world problems, but forget about real-world problems.…I find that people are dismissive of ideas that they don’t empathize with. It’s much harder to make decisions, and take the time, to diligence a problem you’ve never faced.” In 2018, Nemorin secured $117M for their Series A.* (We share further examples of this disconnect, as well as the power of harnessing your unique market knowledge, in our section on the “founder’s secret.”)
Startups aiming to help people from backgrounds rarely represented on either side of the table are increasing in number; indeed, there are viable businesses of this kind operating at venture scale. Organizations that seek to make the world of venture funding safer, more open, and more inclusive are gaining traction in the media and in the startup world. Chicago Blend and NYC Blend are two examples of VCs collaborating in their individual cities to change the numbers and foster and support inclusive environments. Founders for Change is a coalition of founders seeking to push investors to diversify their ranks, with some members refusing funding from firms that are too homogeneous. Founders for Change was started by two VCs, Aileen Lee and Jenny Lefcourt, who had heard so many of the founders they work with wishing that the other side of the table was more representative of the world around them. They offer tips for diversity and inclusion (such as creating a diverse board) and maintain a list of diverse investors.
Another organization seeking to increase diversity in venture capital funding and in founders who receive funding is All Raise. The organization is involved with Founders for Change and was also started by a group of VCs. They focus on increasing visibility, mentorship, and access to networks and funding for women, and maintain a list of partners, resources, and related organizations you can turn to for help.
All Raise has received criticism, however, from women in the field, including impact investor Freada Kapor Klein. This criticism maintains that All Raise lacks an intersectional approach in their focus on numbers of women represented in firms and portfolios, largely ignoring racial and socioeconomic diversity. Klein audiohas said about All Raise that celebrating a firm for adding a woman partner isn’t enough if that firm continues to focus on the problems of the white and well-to-do. A 2019 Vox piece on All Raise quotes CEO Pam Kostka, who called Klein’s criticism of the organization “fair,” and says she has been working to improve that relationship. Klein’s firm, Kapor Capital, is a prominent and leading firm working to support founders who have been historically kept out of privileged networks. To that end, rather than focusing their investments in companies who happen to have a woman founder, they invest exclusively in “gap-closing startups”—companies working to fight for more equitable access to knowledge, technology, and services, and companies that work to fight income inequality.