Domino Effect
In August of 2015 I tipped a first domino when I committed to being the first LP in Backstage Capital. My vision is that when this chain of dominos ends, the complexion and demographics of venture capital and entrepreneurial opportunities will be a true reflection of the market and consumers for which new businesses are created.
A critical step on the path that lead to tipping that first domino was the day I met Arlan Hamilton when I participated in the inaugural cohort of what has become 500 Startups’ and Stanford’s joint program VC Unlocked.
[The story of how I got my start with investing and advising early stage startups is a longer one that I’ll save for another day, but VC Unlocked was a turning point for me.]
The good people of VC Unlocked — particularly the amazing Bedy Yang — had deliberately included in that first cohort a group whose demographics stand out even now, a year later in the industry-wide awakening around VC demographics, for it’s diversity. Indeed, one of the things that drew me to the program was that they were looking for 50% female enrollment, and they went out of their way, and out of their own pockets, to make sure it happened. So I experienced first hand from that incredibly diverse group, how much there is to learn and gain from having a variety of perspectives. And I also had a fine example from them of what putting your money and energy toward diversity can produce.
Following VC Unlocked, as I made investments and built my pipeline for several months, I was also considering a proposal from Arlan to invest in her nascent fund for underrepresented founders. We’d bonded over our interest in helping increase entrepreneurial opportunities for groups that lack them and she was passionate about tackling the funding side of things. She had the hustle, passion and attention to detail and complexity that I look for in founders that I consider investing in. But this would be my first experience as a limited partner, and it was her first time as a fund manager. I had a lot to consider. When it came down to it, once I understood the mechanics of being an LP (what a weekend of reading legal docs that was!), the compelling nature of the opportunity drove me to write that check, and so far the reward has far outweighed the risk.
Here’s the thing about who Backstage is focused on funding: Underrepresented founders are an incredibly innovative and hardy bunch. Many of them have had to work harder to get funding and had to do more with less. They build businesses with sustainability and long term gains in mind. They are likely to be more resilient and to thrive in a down turn. When I think about them as a group from the perspective of an investor, I think they’re a great bet.
Then there’s what I think of as the “Arlan Network Effect”: She had an incredible pipeline of opportunities to work with amazing founders. These are founders, companies and entire businesses that are often going unnoticed by the finance community. The often quoted research that suggests that investors are predominantly straight* white males that like to invest in other straight white males — while perhaps played out in terms of message, if you pay attention to what’s written about diversity and VC — is still very true. It simply hasn’t been long enough for actions and opportunities to catch up with the growing awareness of the issue. Arlan saw the potential gains for her fund that other investors may have missed because they didn’t cast a wide enough net.
In addition to the compelling opportunity for gains, I wrote that first check because I wanted to do more than just talk about diversity, and I wanted to do it in a way that produced solid products, services, and businesses (that’s the 15 years in product development and operations in my background coming out). In every founder and business that Backstage Capital invests in, there is another example for the whole industry and aspiring entrepreneurs to look to. There’s another potential leader or mentor to join our ranks and grow the finance and entrepreneurship community.
So in the end, I get both financial and social impact returns from my investment. There are all those “dominoes” down the line, waiting to be knocked over: the businesses that will get off the ground, the founders that will have the resources to execute on their vision, the gains for me and the fund from great new ventures, the successes that will inspire people who might not otherwise have thought they could take the leap into starting their own company. And one by one, the effect of that first check will be felt as each domino falls…
*I think there’s notably less quantified data about sexual orientation demographics in the entrepreneur and VC communities, but for the purposes of staying focused on Backstage Capital’s charter, I’ve included it here.
