tl;dr or just the listening type? Here’s a nice static-y recording for you (maybe still scroll down for the doodles though!)
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I like solving problems, and I also really like the feeling of making people happy, or at least un-sad. So VC’s big old diversity problem was perfect bait; an issue so messy and tangled it had defied solving for so long, and one which if solved would make lots of people un-sad. In other words impactful work I could involve myself in and feel like I was doing some good, even while collecting my cash at the very heart of capitalism 💀.
Note that I’m not talking about the co-related but distinct problems of diversity within tech companies, or even diversity within the teams of institutional VC funds. I’m talking about diversity in VC portfolios, i.e who receives investment from investors. In particular at the early stages, given it sets the starting numbers that later-stage investors subsequently act on.
I spent a long time thinking, if we could fix this bit, it would help trigger a bunch of other (imo) much needed changes in the overall system of modern society. The realisation, long overdue, is that this is backwards. We can’t fix the diversity problem, because it’s not a problem in and of itself, it’s just a symptom of something else. Something I think few, even among the staunchest critics of the industry’s status quo, seem prepared to engage with.
Spoiler alert: the real problem is capitalism; more specifically ‘venture-scale returns’ from the financial market.
A Brief History of the Diversity Movement in VC
The diversity efforts within this industry are straight from the playbook; tried and tested across many a social inequality battleground throughout history. The affected (and sympathetic to the affected) gather to validate each other’s experiences and understand the issue, then they get cracking on how to explain and prove the injustice to those collectively holding the power to improve the situation; and on top of that, run around making recommendations for how to actually implement the changes needed.
The most critical part of the whole thing is that third bit: persuading the powerholders to do what needs to be done. This is usually accomplished through the narrative that it’s not only morally just, it’s actually in their own self-interest to allow or institute this change. Note that this argument can be made in the sense of: ‘this change will not only be morally just, but it will also bring a whole bunch of incidental benefits to you guys’ (win-win), or ‘this change is the only thing you can do to stop the problems we’re going to keep causing for you’ (protests, strikes, violent revolt etc).
In our present case, the affected and their allies are not really in a position to cause the sorts of problems for the powerholders that would coerce them to the table and inspire surrender/acquiescence. Which leaves the win-win narrative angle. These truths and the data to support are being pushed left, right and centre. Companies with mixed management teams are more resilient; female founders are more efficient in how they spend money to make money; talent is evenly distributed across all identity categories of human beings, and those who might build the very best solutions to key problems and indeed build huge companies on top of that, might come from anywhere, so to not cast a wide net is a waste of available potential. So on and so forth.
Plus ça Change, Plus C’est La Même
Why then, are things not going according to plan or usual progression? After over a decade of active discussion and commitments to change, we’re looking at single-digit percentages of total investment going to female founders, below 1% in most cases for black founders. We hardly even have data for identity categories around age, socioeconomic class, sexuality or disability, but I bet my left tit it’s not much better on those fronts either.
Now of course negligible change is not no change at all. Some things are happening on this front, but I wager most of those are incidental. Everything is interconnected after all, and quite often an outcome occurs not because of direct effort to make it happen, but rather because of something else altogether (which triggers something else, which triggers something else). For instance, post-investment support, platform and operational efficiency becoming a competitive advantage for early-stage VCs, opened the floodgates to hiring more women (organisation and empathy woo!). Some of those women moved immediately or eventually into investment teams, some of those women set up the sort of robust hiring processes that moved things out of the realm of just bringing onboard your mate or mate’s mate, and into the realm of public job ads and proper interviews, which also resulted in more women in investment teams. More women in investment teams strongly correlate with more women invested in for a number of reasons.
In any case, besides incidental progress and the like, fair to say there’s not much change afoot, certainly not as a result of intentional and targeted effort by our powerholders.
Maybe they’re all just Racist, Classist Misogynists?
It’s important to pause here and accurately assess our powerholder archetype. The average VC decision-maker is someone who selected this asset class and this career over other options, in particular, because of the proximity to “innovation”. Someone attracted by the idea of not only making a lot of money, but also enjoying influence, acclaim and the notion that their work has somehow contributed to significant impact in the world.
If this archetype can do a thing that will see them lauded, make them feel like change-makers and trendsetters, and is at the same time selfishly good for them long term, they should 100% jump aboard that bandwagon once they understand as much — unless there are deep emotional reasons holding back their rational thinking, and acting as blockers to plain good sense.
These are the whispers and shouts often exchanged within the movement for diversity in this industry. If VCs are refusing to do a thing that would actually be good for them too, it could only be because they don’t quite get it yet (cue the data efforts and the panels) or they do and yet their irrational/emotional preference for the status quo (racism, sexism, safeguarding privilege etc) is blocking good sense. I’m not claiming there’s none of that, there are perhaps plenty for whom this is an education gap or a refusal on prejudice grounds. Still, I wager that the main reason we’re looking at negligible change, and may continue to do so is actually that the win-win narrative doesn’t hold true here, and the rational conclusion is that optimising for diversity really isn’t in their self-interest at all.
Eyes on the Prize, Boys!
The win-win case for diversity in this industry, is premised on the idea that VCs are in the businesses of finding the most intrinsically valuable companies: i.e the objectively best-run companies (or poised to be the best-run companies) building and distributing the best solutions to whatever problem they’re tackling (or poised to do so). I think this is a misapprehension that stems from a misunderstanding about what capitalism and its market arena are actually about. So I’m going to start there and work backwards.
In our capitalist system, underscored by financial markets, the value of your endeavour is measured, communicated, judged and recognised through money; the sell value of any and all pieces of the whole affair. All else is secondary or incidental. The physical comfort, the disease alleviation, the emotional uplift or whatever else generated as a direct outcome of the endeavour is collateral value. Which may be correlated or somewhat causative to the sell value of some parts at some points, but definitely doesn’t have to be. Basically, there are a bunch of routes to being the hottest commodity in the market, and it’s far from dependent on the real-world impact of your output. So while you might optimise in the direction of real-world impact, like having the best solution or being the best run organisation to make and distribute that solution, you only do so to the extent it leads to the real prize — a higher sell value relative to others in the market. It’s also a bit of a self-fulfilling prophecy. Being a hot commodity on the investor market also means receiving more investment which gives you the best shot at staying in the game and continuing to be a hot commodity.
Buy for a Dollar, Sell for two
This is the system VC is born of and exists to service, under the same rules. Find new potential market participants who are most likely to succeed in the capitalistic sense, and help them into the marketplace. Or put otherwise, buy pieces of the most saleable commodities in order to sell them on to other buyers for much much more than you paid.
This component is the crux of the confusion within the diversity debate of VC. The question:
‘which potential participants are most likely to succeed in the capitalistic sense?’
Is often taken to mean:
‘which potential participants have the most inherent potential, in terms of intelligence, creativity, resilience, a penchant for hard work etc etc’
‘which potential participants have come up with the best solutions to whatever problem they are trying to solve’?
If those were the questions then the win-win narrative holds; talent and great ideas exist across every category of human, so if you needed to find all the best of the best, better to search far and wide. But VCs don’t need to find the intrinsically best — best is not necessary for being or building the most saleable commodity in the financial market. You need solid fundamentals (which can be constructed from decent potential +capital); and you need great signals.
To illustrate, here are 5 characteristics that based on our game-winners to date, have shown themselves to be way more necessary for success or indicative of potential:
- a founder/team that already has capital
- a founder/team carrying familiar markers and signals of being ‘safe bets’; signals that reassure today’s buyers in part because they will also reassure tomorrow’s buyers.
- a founder/team validated by the respected institutions of the current or previous stage. i.e the late-stage investor looks across to other late-stage investors and backwards to the early stage investor for signal, the early-stage investor looks across to the other early-stage investors and backwards to the angel or preseed investor for signal, the angel or preseed investor looks across to other angels/preseed investors and backwards to the university attended and/or companies already worked for signal, and of course, it’s now fairly uncontroversial to say that the university attended and/or companies already worked for is hugely determined by privilege/disprivilege factors of access like wealth, where you lived, what opportunities you ever came to know about or be prepared for by caregivers and peers.
- a founder/team who already have access to key resources (and you see this directly, or see it in certain behaviours that are only possible as a result of a particular key resource). For instance pre-existing/personal relationships with key potential customers or partners, or apparent high risk-tolerance in e.g. pursuing unprofitable scale over immediate profit, a behaviour made possible by access to a safety net that reduces the real-world impact of total failure.
- a founder/team building a solution that, regardless of the measure of its real-world impact, is well suited to exploit market mechanics that will drive extremely large monetary outcomes — and of course a founder/team. that wants that outcome above and beyond anything else, e.g. ‘small’ scale acquisition exit, or just a sustained business doing what it does as well as it can.
There are others, but these, in particular, are key and they stand in direct ‘rational’ opposition to the win-win argument for furthering diversity. Because focusing on the current approach of competing over these sorts of founders, makes far more sense than optimising to find outsiders beyond the flow. Especially at the risk of losing out on this default archetype; a very real risk, given the time and resource limitations of your average early-stage investor. It’s neither here nor there how inherently talented or worthy those outsiders are; it’s not about them at all.
Overhauling any system toward a different outcome in any regard is no easy feat. It means, upending routines, expending resources to map out the entire morass of processes and rules built around the status quo, and then rewiring everything in support of the new preferred outcome. It’s slow enough going when powerholders at least believe in the win-win, and accept that while the status quo is comfortable for them, the change being demanded will be just as good if not better for them personally. When you don’t even have that, when truth be told, optimising for diversity might mean losing out on the ‘hot deals’, while wasting time and resources to select outsiders that might perform worse than the chaps with those nice signals? Then the self-interested thing to do is passively take a que sera sera approach. In other words: a lot of talk and cosmetic ‘solutions’ making little tangible difference.
VCs have no real objections to a change-up in the pattern of what the ‘right’ founder looks like, is like etc. If they woke up tomorrow and, without having to extend themselves, it had entirely shuffled and suddenly working-class black female founders were overwhelmingly correlated with outsized returns or were disproportionately likely to be validated by the designated institutions they respect, and warmly referred in by all their trusted sources, they’d be as apathetic as they are over the fact that middle-class white men have been the cash cows to date. This is also why when they do come across the few [insert minority category here] founders that happen to carry all those ‘high-potential’ signals and are in the flow rather than outside, they are perfectly happy to back them. What matters most is what is likely to sell for much more than it costs to buy.
Underrepresented folks within this space and this movement have been out here thinking our exclusion was actually about us when in fact our exclusion is merely collateral damage.
Clarity -> Focus -> Results
Thus each of us within the VC diversity movement needs to make a choice or be aware of the choice we’re implicitly making in our actions. Either we work to make sure a broader range of people can be squeezed into the current game, inherent limitations notwithstanding, or we work toward a radically different, multipath vision of supporting entrepreneurship.
If the former is to be selected, then say it with your chest, and be consistent/coherent in the approach. Because the former option is in essence an effort to take founders who do not currently fit the mould, and work to make sure that they do. To artificially attach the missing validating signals, or replace missing key resources, or encourage the behaviour that you’d normally need those key resources to trigger. If you are going to do that, then you might as well be efficient about it. Call for the outsiders, that are not too outside, so that the ‘fixing’ necessary to see them fit the mould is a doable amount. Tell would-be founders within the group(s) you wish to see more represented, that when deciding what to build, they should select for what has the greatest (most obvious) potential for massive returns above all else.
If you plan to take the game as it is and make sure a rainbow variance of players are represented, then so be it; and I really mean that. There will be some good that comes of that no doubt. Change inevitably begets more change, and some of that might even alter the overall game incidentally. Minorities hire minorities, diverse companies generally have more inclusive workplace cultures, and exits will mean capital flowing into portions of significantly disprivileged communities. Sometimes folks enter the 1%, remember where they came from and use their platform to argue for wild shit like an absence of monopolies and collective responsibility toward each other supported by effective taxation.
Of course, lots of other times, despite superficial changes, a system is broadly unaffected by the apparent variety of the cogs within it. For instance, the presence of black people in US police forces is unsurprisingly no cure for police shootings of Black Americans. It must also be acknowledged that so long as the game is premised on this very narrow, specific capital-based definition of success, there is only so far you can open it up. So accept the cap on its inclusive capacity, and drive toward the change that is possible. Or I guess, find a way to coerce the behaviour you want to see in VCs!
¡Viva la Revolución!
If instead, you think it might be better for us to create more variance not merely in the range of players but indeed in the game itself, to create all the pathways, for every sort of entrepreneur on every sort of journey of creating and distributing solutions that improve the lived experience of human beings, then let’s get to work. True equality of opportunity and full inclusion is impossible otherwise.
I’m not pretending to have the answers here, simply trying to articulate a problem for what it is, because you can’t fix what you can’t admit. in contrast, when you do face things head-on with full intention to crack it, all manner of things suddenly become possible. Indeed, there’s already so much amazing work going on in terms of reimagining the entrepreneurship journey and what incentivising, supporting and ultimately rewarding people for solving human problems could look like. A handful of examples:
- Nathan for Noeme invites us to imagine what cooperative ownership and ‘exit to community’ could look like?
- Zebras Unite have been saying everything I’ve argued above an more for ages now and actually charting these paths already and we should all be involved!
- Indie VC is a good example of risk capital for businesses distinct from the traditional VC model; with the option for companies to return the investment by repurchasing ownership as they grow.
There are so many others, and frankly I’m in part writing this to signal to them that I want to be part of this change, and I want to meet them, talk to them and be inspired by what they’re already doing; such that I find my own way to contribute. Also publicly outting myself this way, means accountability to get off my ass and progress from realisation to impactful activity — and maybe finally, I’m a little bit hoping you’ll decide to join me.