How To Blitzscale Solutions For Diversity In VC Funding

By Sindhya Valloppillil and Chip Hazard

The colossal disparity in venture capital allocations is disheartening considering how outspoken Silicon Valley diversity groups and VCs have been in the wake of the #MeToo and #BlackLivesMatter movements. The problems are well-documented, yet actionable solutions are only starting to be implemented.

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While there’s no silver bullet, several solutions concurrently applied can scale diversity quickly. We can apply the lessons from Reid Hoffman’s Blitzscaling course and prioritize speed over efficiency. By tracking behavior, creating new habits, and re-enforcing them, solutions come in four categories: Technology tools, financial infrastructure, ecosystem alignment, and auditing and certification.

Technology tools

Peter Drucker famously said, “If you can’t measure it, you can’t improve it.” While tracking is essential to progress, industry adoption has been slow at best. VC funds can do more. They should require partners to track the number of people they meet. If only 1 out of every 100 people is an underrepresented founder, that’s bad.

Algorithmic startup/VC matching portals such as VC OpenDoor and Startup Investor Matching Tool can help facilitate less biased deal flow pipelines. These tools make the fundraising process more efficient, since they filter according to type of business, stage and sector.  The portals scale with time, volume of deals, and across VC specialists and geographies, though it’s worth keeping in mind that while some VCs are using it earnestly with intent to increase diversity, some don’t deliver on meetings once VC OpenDoor matches them with founders.

Crunchbase’s Diversity Spotlight also raises awareness for underrepresented founders by adding race/ethnicity data and gender tags to Crunchbase’s dataset for leadership teams at companies and investment firms.

Changing financial infrastructure

The new VC and PE firms created for underrepresented founders are an emerging asset class unto themselves. These financial infrastructure solutions take three forms: a VC fund focused on diversity, multi-investor organizations that increase diversity in the greater tech community, and LP mandates focused on diversity. Examples include:

• Softbank’s Opportunity Fund is a $100 million venture fund dedicated to building a community of BIPOC founders.
• BLCK VC, an organization founded by Storm Ventures associate Frederik Groce and NEA associate Sydney Sykes, advances black VCs. The group aims to turn 200 black investors into 400 black investors by 2024.
• First Close, a firm founded by Ed Zimmerman, tech practice chair of law firm Lowenstein Sandler, and Theresia Gouw of Acrew Capital, invests in underrepresented fund managers. It has backed two dozen venture funds and expects to invest in more than 60 by year end.

Last fall, Yale University’s $32 billion endowment informed its 70 money managers across asset classes about its new diversity mandate. Firms were told that they would be measured annually on their progress in increasing the diversity of their investment staff, specifically hiring, training, mentoring of women and minorities plus their retention.

These financial infrastructural changes are good because they simplify the process for underrepresented founders to find potential funding, and diversity-focused funds have shown strong initial returns, resulting in a virtuous cycle of capital raising.

It’s important to note, however, that these products are just a drop in the bucket compared to the amount of venture capital allocated per year to multibillion-dollar generalist funds. Even if there were 10 Softbank Opportunity Funds, that would only amount to 1.4 percent of the $69.1 billion raised by U.S. venture capital funds in 2020, per Pitchbook.

Ecosystem alignment

Hoffman has said that cultural, strategic, operational, financial and leadership philosophies required for success in blitzscaling a growth-stage company are often diametrically opposed to those of an early-stage startup. So, while all parties involved can participate, many actions may be uncomfortable initially.

In our view, a series of steps across the ecosystem is necessary to collectively drive change.

Accelerators should:

• Identify and mine sourcing pools to drive underrepresented candidate flow
• Measure pipeline and portfolio diversity
• Have a focus like Visible Hands

VCs should:

• Hold open office hours
• Hire underrepresented talent in investing roles
• Hire underrepresented scouts, interns
• Measure pipeline and portfolio diversity
• Set goals for building an underrepresented network
• Demand portfolio companies be more diverse as they grow

Founders should:

• Screen funds based on D&I commitment (when oversubscribed)
• Mentor underrepresented founders and share network/expertise
• Focus attention on management team diversity representation when teams grow

LPs should:

• Support underrepresented focused accelerators/incubators
• Develop screening standards that go beyond pedigree
• Relax standards for fund size
• Reject funds without focus on D&I and intent to improve

The government should:

• Ensure that public pensions be stringent of their managers’ D&I initiatives
• Direct SBIC funds to underrepresented managers
• Relax accredited investor standards
• Extend QSBS for companies meeting a diversity standard

Auditing and certification

Sadly, performative activism—e.g., hiring diverse non-investment partners and under-tracking diversity KPIs—and the positive efforts noted above in aggregate have resulted in even less funding going to underrepresented founders between 2018 and 2020, according to VC Human Capital Survey. Thus, a third-party auditing and certification process is necessary to blitzscale solutions.

The Diversity VC Standard

The newly launched Diversity VC Standard is an assessment and certification process that sets a benchmark for best practices for diversity and inclusion (D&I) in VC and sends a signal that a fund follows the best practices to the ecosystem. It provides VCs with recommended practices to open their networks and make funding available to underrepresented founders alongside a publicly recognized certification.

500 Startups, Bessemer Venture Partners and Toyota AI Ventures have all received certification, according to Pitchbook. Certification indicates that a firm has backed up its diversity commitments within the workplace and its capital allocation. Since it’s the investment equivalent of the Fairtrade mark, it will hopefully become a FOMO-inducing aspiration of excellence for VC firms and a brand signal that founders and talent can seek when fundraising or deciding whether to join a fund.

Summary

VCs must recognize that diversity is good for business. Research has shown that diversity improves business opportunity, performance, and innovation.

To create a paradigm shift, VCs should lead all stakeholders by example. They must pay attention to the role they have played and the work they must do to support social justice. It’s time that VCs show us their traction.

Sindhya Valloppillil is the founder and CEO of Skin Dossier, a venture partner at NextGen Venture Partners, a contributing writer to TechCrunch and BeautyMatter, and formerly a beauty industry executive and marketing professor. You can follow her on Twitter at @sindhya.

Chip Hazard is co-founder and general partner at Flybridge, co-founder and investment partner of XFactor Ventures, a fund focused on underrepresented founders sponsored by Flybridge. Disclosures: Flybridge is also the sole LP in The Community Fund and he is,an investor in Visible Hands, an accelerator focused on underrepresented founders. Follow him on Twitter at @chazard.

Illustration: Dom Guzman