Investing in Diverse Founders
The fun of angel investing is that there are (almost) no rules. I can decide to invest because I like the company’s founders or because I’m excited about what the company sells. I can decide not to invest because I don’t like the company’s name or because I was in a bad mood during the pitch meeting. Totally up to me (and my partner, since it’s her money too). The idiosyncrasy of angel decision-making can be a blessing — entrepreneurs who cast a wide net can usually find someone willing to put in money — and a curse, because investors can say no for any reason or no reason at all. For entrepreneurs from underrepresented backgrounds, that can provide a barrier to capital at the critical early stages. Angels will often invest in founders who remind them of themselves — and since the majority of angels are white, male, cisgendered, and heterosexual, the majority of founders they fund are white, male, cisgendered, and heterosexual too.
As an angel, my “thesis” (i.e., the limiting criteria I use to make it easier to screen companies) is investing in startups founded by women, founders of color, or founders who identify as LGBTQ+ who are making products or services that achieve some social good. I believe that companies reflect the values and perspectives of their founders. Especially at the earliest stages, the founder/CEO makes most if not all of the major decisions that establish the company’s DNA. The founder’s priorities are the company’s, including in hiring. So if we only support and fund companies created by founders who look a certain way (or grew up with certain privileges or attended certain schools), we’ll only have companies that reflect, understand, and serve those values and perspectives. That’s why I’m passionate about diversifying the group of people who start and lead companies, including with my investment dollars.
Setting a limiting criteria for the startups I invest in doesn’t mean I’ve been limited in finding opportunities. But I have had to be more conscientious about my approach. First, I have tapped into diverse sources of deal flow. I love Lolita Taub’s matching tool — she sends out an email every Monday with a curated list of startups with underrepresented founders. I’m also a fan of Backstage Capital, which offers a syndicate to invest in diverse entrepreneurs. I’m a member of a number of other organizations and syndicates that prioritize diversity, including StartOut, Gaingels, Stella Angels, and Interlock Capital. (If you’re an entrepreneur, make sure you’re also joining groups and pitch competitions that champion diversity so you can help find the right investors).
Second, I began to understand and appreciate my own biases. Prof. Dana Kanze has done incredible research on why female founders raise fewer funds. She found that the types of questions investors ask women focus more on downside risk, through what she terms “prevention-focused questions” (e.g., “How long will it take you to break even?”), while investors tend to ask male founders “promotion-focused questions” that highlight potential upside (“How do you plan to monetize this?”). In Prof. Kanze’s dataset, entrepreneurs who were asked mostly promotion questions raised 7 times more money than those who were asked mostly prevention questions. Check out her TED talk or this helpful Harvard Business Review article about her work. I’ve also found anecdotally that angel investors tend to view female founders and founders of color as earlier-stage than comparable white, male founders.
Third, I’m working on actively checking those biases. I have found it helpful to create a checklist of questions I ask every entrepreneur to make sure I’m not disproportionately directing prevention-focused questions. In general, I try to ask mainly or only promotion-focused questions. I might not invest anyway, but I want to give the entrepreneur the best chance to convince me that the world really needs their product or service, and their team can execute on the vision.
Angel investing is still very much a white, male sport: according to one survey, 78% of angels identify as female, and 88% identify as white. And diversity does matter in investing; over half of the female angels considered the founder’s gender as “highly important,” compared to 6% of the male angels. Female angels were also twice as likely to consider the social impact of the businesses they invested in. (The survey did not break down investor perceptions by race). But the lack of diversity among angels doesn’t mean that angels shouldn’t care about the diversity of their investments. Diverse companies are more innovative and more profitable, according to research by McKinsey. So if you’re an angel (or aspiring angel), it makes financial sense to expand your deal flow, examine your biases, and consciously invest in more underrepresented founders.
