How To Build Inclusivity in Venture Capital - Sarah Chen
Impact Investing, Impact Washing, Investment, Philanthropy
30208
post-template,post-template-elementor_header_footer,single,single-post,postid-30208,single-format-standard,bridge-core-2.5,exclusive-addons-elementor,,qode_grid_1300,footer_responsive_adv,qode-theme-ver-23.5,qode-theme-bridge,disabled_footer_bottom,elementor-default,elementor-template-full-width,elementor-kit-7,elementor-page elementor-page-30208

The undeniable fact —while things are changing in some pockets, largely, the venture capital industry as a whole continues to have a notorious reputation for its lack of diversity (while I often speak of the need for more women in leadership, I believe this cuts across gender, ethnicity, backgrounds, way of thought and so much more — we are the best we can be when we engage the best talents we have). 

 

The recent mishap of Bain Capital’s Crypto Fund and what it reveals beyond the obvious bad timing, is just the tip of the iceberg of what many of us are working hard to address across our organizations.


I sat down with Beyond The Billion’s (BTB) partner fund, New-York based venture firm Palm Drive Capital to discuss what we can do to build inclusivity in venture in a recent podcast. Here are some excerpts and some additional reflections on what needs to be done:

Cancel Culture is Not The Answer

Let’s first address the elephant in the room I mentioned in passing earlier. What happened for those not caught up, was Bain Capital’s Stefan Cohen announcing he was privileged to announce a special team (below). On International Womens Day, this was met with as you can imagine, huge uproar, that spiraled further downhill when he quickly deleted that tweet; before following up with a packaged apology, 8 hours later.

Playing spectator, I observed the comments that came in — too many that represented how harsh keyboard warriors can be. While many were well-intentioned and many reflected my own outrage, the best response by my rating was that of Ed Zimmerman, that spoke to my own thought process captured in this one question:

The answer is not jumping to cancel people who do not always hold our exact views. As a recent immigrant to America, one of my biggest takeaways has been and continues to be how important it is to engage on both sides of the coin. I’m glad to note that as of the date of this writing, Bain Crypto Fund has since added Lydia Hylton to the crew as Partner (the challenge of the first & only in a team— that’s for another piece). Here’s to her and the team’s success.


Now, for some tactical strategies, I look to our observations at Beyond The Billion from working with over 100 venture funds mission-aligned on investing in women (extracted from Our First Billion Global Impact Report):

“There are no women”

 


We’ve all heard this one before, and interestingly, in our seat with venture funds that have already made diversity one of their pillars, this has not been a gripe, at all. What can we learn from these GPs?


1. Focus on building a diverse network, resist groupthink. The firms who’ve built robust dealflow have thought carefully about the funnel at each step of the way: build long-term partnerships with leading accelerators, universities, prominent women’s networks that allows for a cycle of talent.

 

2. Diversify networks by hiring AND promoting women in the firm. Beyond tapping into the unique lens and networks women bring to the table, as in Bain example above, the messaging of whether a firm itself is female-friendly matters. Advertise for roles publicly instead of merely utilizing similar networks. Even while you’re getting started on hiring, be thoughtful about the path to leadership. What will it take for your new hire to be promoted? And I’m talking about meaningful promotions— to senior leadership with meaningful influence/equity/carry. Easy to slap on a title, harder to shift wealth & power. Power dynamics matter, beyond optics.

 

3. Build a target ratio of female founders per deal meeting. What gets measured gets done. Task associates with meaningful inclusion as a goal. One of our BTB partner funds, Golden Gate Ventures, even created a practice of fast-tracking female-founded companies directly to their GPs to ensure that they receive due consideration from the decision-makers.

“How many LPs diligenced the fund, didn’t blink and funneled $560million of fresh capital?”

 

This question posed by Ed Zimmerman, captures succinctly a big part of the issue we’re contending with in actually closing the gender venture investment gap. The key?


LP investors, even those committed to investing in diversity, must re-engineer their processes to increase the diversity of their portfolios. A mismatch today continues to exist between legacy LP structures and expressed goals to diversify portfolios; reflecting squarely that systemic bias requires systemic solutions. What can we learn from the LPs who have done well in achieving their diversity goals?

 

1. Make diversity a condition of your capital. Bake gender/racial diversity into the due diligence process. LPs can adopt standardized due diligence questions and forms which include questions surrounding initiatives, mandates, and policies for both General Partners and their funds’ portfolio companies. This is especially important to measure if fund managers that pitched have indeed made progress over the years. This has the potential to set the tone from the top. While 65% of LPs have said that diversity is important, only 25% raise the question in diligence. Beyond a diversity audit for fund managers, tie this data to performance and payouts for investment managers.


2. Broaden your assessment criteria. Track record should be redefined to include GPs past performance as startup operators, executives, and ecosystem players which reflect their ability to source, pick and manage investments.3. 

 

3. Apply term limits to GP selections. Use the Rooney rule to avoid automatic re-ups into the same managers without considering other candidates for allocations.

 

4. Build public data on diversity metrics at LP and GP level. Contribute to building on the work that data platforms such as Crunchbase has started to examine LPs and GPs. Crunchbase has proven the possibility of expanding data sets in a manner that prioritizes diversity.

 

5. Let your voice be heard. More than ever, your voice matters. As the last decade has demonstrated, venture capital has a tremendous influence in the future of society. It is critical that LPs participate and lead these conversations.

 

All said and done, remember that YOU have the opportunity to make a difference in the seat that you hold. What else did we miss? I look forward to continuing to conversation with you.