Silicon Valley’s Hidden Identity Crisis

If you look at the numbers, Silicon Valley definitely has an identity preference for its venture-backed founders. In fact, 82% of venture-backed founders are white, 92% are men, and 32.5% have a — specifically — Stanford degree.

Happen to be all three? Congrats: you’ve scored 3/3 on Silicon Valley’s identity-based advantage checklist.

via Techcrunch

Conventional Wisdom

Based on these slew of stats, someone could argue that conventional wisdom says when it comes to “founder identity” that the safest bet to make as a VC is to back a white male that graduated from Stanford.

That’s irrespective of growth numbers, usage, traction, business relationships, ability to market size, and all other mechanics that justify progress and opportunity.

A contrasting argument to that conventional wisdom would be that in recent years, Lucas Duplan, a 24-year old CEO founded a payments startup called Clinkle.

Lucas Duplan

Clinkle did extraordinarily well at fundraising, raising the highest seed round in Silicon Valley history of $25 million. Interestingly enough, Clinkle was basically a pre-product, pre-traction idea that didn’t necessarily end well. And I’m sure we can all come to some rather accurate conclusions on his identity.

WWJD: What Would Jeff (Bezos) Do

To be fair to both sides of this debate it would only be right to present the perspective of one of the most successful entrepreneurs and founders in modern history. Jeff Bezos says that,

outsized returns often come from betting against conventional wisdom, even though conventional wisdom is usually right.

So basically, if I’m betting on anybody I’m going to bet on an identity that gives me the best advantage. When it comes to conventional wisdom, that would be the best decision and that is honestly not a bad thing at all.

It just depends on what type of returns you’re looking for. However, when it comes to outsized returns, that might not yield the best strategy based on the identity of a founder.

I do believe that most consistent actions we as humans take are usually geared and dedicated toward conventional wisdom.

But just for clarity, that is only one example of betting against conventional wisdom and their are many other ways to still bet against conventional wisdom while continuing to invest in founders that have the best or close to the best identity-based advantage.

The biggest and most common example is the bet Peter Thiel made with Facebook. Mark Zuckerberg, at the time was only 19 years old. Based on what’s considered the best identity-based advantage (white, male, Stanford) Mark scores 2 out of the 3. Nevertheless, a clear identity-based disadvantage was his extremely young age — though he did come from an Ivy League.

We all know the rest of the story and the outsized returns made.

Most Investments Are Belief Driven

The more important point I’m attempting to make here is that most investment decisions that humans make (including VCs, founders, etc) are never purely data driven but mostly “belief driven”.

That’s why storytelling is one of most vital skills for founders. Data just happens to be one of the highly unwavering and clear ways to justify a founder’s story and hypothesis.

The ability of a founder to stimulate belief is, in my opinion, the most important skill for first time founders.

Often times, most of the components that can influence “belief” are deeply embedded into the identity of that person whether it be a founder, VC, or anyone frankly.

This idea is why pattern matching is such a common and reliable practice in developing some of the best vc-founder relationships.

For example, if I’m a VC and I can “see my younger self” in a particular founder, I’d be more willing to bet on them. Additionally, on the flip side if I’m a founder and I can “see my future self (or company)” in a particular VC (or portfolio company) I’d probably be more willing to spend time with and accept a term sheet from that VC firm.

The Role Identity Plays

Whether we like it or not the identity of a founder weighs heavily into the decision making of most investments, especially in the pre-seed/seed stage.

Seeing that identity plays such a pivotal role, the solution for more inclusion would be creating systems and pipelines that rely more heavily on non-identity based and influenced evaluations of investment opportunity and hiring.

What would that take? Not sure, but I’m willing to be a guinea pig. :)

The coding school 42 is a great example of a system and pipeline that is primarily based on non-identity evaluations.

It’s also drastically important to point out that identity is only one part of the equation and not the end all be all.

How Markets Favor Majority Interest

I believe the most efficient markets and systems in the world tend to favor majority interest and conventional wisdom, which is why certain groups with minority interest don’t necessarily thrive in some of the most efficient markets, industries and communities.

For example, if I am building a new feature out for a product I’m selling, it would probably be more beneficial to build improvements for the majority of users of the product or users who dedicate the most time to the product than otherwise. Conventional wisdom says these actions would yield the best returns.

However, betting against conventional wisdom would result in working on a feature that impacts a small set of users but subsequently results in outsized returns of usage or purchases better than any product or feature improvement to date.

Sometimes these outsized returns can be missed because we act on conventional wisdom too often.

Building A Better Ecosystem Based on Empathy

Now I’m not here to try and project my views on how I think founders, VCs, engineers or executives should curate and develop their careers cause frankly I’m not the guy for that.

I just think that their lies an importance of exploring an ecosystem where all parties are more empathetic toward one another.

Trust, in my opinion, is one of the core components of developing empathy and also an important foundation to any vc-founder relationship.

However, most relationships built on trust in the current ecosystem do not benefit founders with minority interest and the current data proves this. This is the problem that needs fixing and more empathy is the only way to solve it.

In order to create more empathy, the level and circle of trust has to widen on all accounts. In my opinion, for the level and circle of trust to widen an exchange and deep understanding of the focuses of each party would be a key solution.

More Empathy for Venture Capitalists

For example, for VCs and general partners who probably spend countless hours of time and sweat equity raising massive amounts of OPM during cycles and thinking about the changing and new markets they are looking to bet on, an exchange of focus would help with empathy.

An exchange of focus would be to explore deeper to attracting founders who maintain minority interest who are building better products or reinventing and capitalizing on a particular market.

More Empathy for Founders

As for founders, who probably spend countless hours of time and sweat equity into the progression of their product or service an exchange of focus would also help.

An exchange for us would be thinking thoroughly and more intuitively about the markets and market risk solely and independently of the progress we’ve made, regardless of the emotional attachment we have with our products and efforts.

Chasing Outsized Returns

While, it may be very easy to both defend and attack the identities or certain aspects of ourselves and others for both advantages and disadvantages, I think we can all agree on this one caveat.

The market typically doesn’t care who you are.

This is why I personally am confident about the progress being made with founders who don’t necessarily have the best identity-based advantages.

More empathy will indeed be very difficult, even for myself, but since we’re all collectively fighting against conventional wisdom anyway, let’s strive to work toward those outsized returns in accordance with but more importantly, regardless of identity-based advantages.