Improving access to capital for diverse founders and managers
September 26, 2022
Improving access to capital for diverse founders and managers is a critically important topic, not only within Newark Venture Partners’ conference room, but throughout the venture capital ecosystem. Too often, the conversations built around this topic are framed as “impact,” which, perhaps, in and of itself highlights an implicit bias around the way we value managers and founders of color. In the last few years, more and more leaders have begun to speak up, answering the question of whether these investments are concessionary or, in fact, profitable.
The current reality is that only 1.4% of the total U.S.-based AUM in their sample of $82.24 Trillion is managed by diverse-owned firms as of September 2021 (Knight Foundation, 2021). Similarly, despite record-shattering venture investment in 2021, Black, Latinx, and female startup entrepreneurs continue to receive only single-digit percentages of available capital. (Crunchbase’s Diversity Spotlight). According to Forbes, 76% of VC partners are white men. And as of 2021, women accounted for just 5% of partners in VC firms, while 1% of partners identified themselves as Black and even fewer as LatinX.
I recently had the privilege of moderating a panel on this topic at SALT New York. I was joined by a truly all-star panel including Omar Eissa, Managing Director in Investment Banking at Bank of America; Jasmine Richards, Head of Diverse Manager Research practice at Cambridge Associates; Jason Wood, Managing Director with the Morgan Stanley Next Level Fund; and Jackson Cummings, Head of Wellington Access Ventures at Wellington Management. These professionals are on the front lines of this conversation every day. Not only are they changing the game within their firms, but they joined us to share best practices and strategies that can help other LPs and investors follow their lead.
I wanted to share some of the key takeaways from that conversation:
Diverse Managers are often emerging managers: One of the top frustrations of investors and funders who want to be more active in this space, but don't know how is “We can’t seem to find qualified diverse managers [or founders].” Here is the truth: You are not looking in the right places for the right things. Our panel discussed the concept of track records at length - and the fact that there have not historically been opportunities in venture and investment, and even within the entrepreneurial ecosystem, for people of color or women. It isharder to find diverse candidates that have all the same boxes checked as a traditional candidate (i.e. Ivy League education, investment banking employment history, multiple exits, etc.) But that doesn't mean that diverse candidates are any less qualified to do the job. Our panel suggested reimagining what you are looking for, and instead of looking for specific institutions on a resume or personal connections in the industry, look for specific skills, personal knowledge, and grit. Jackson, who also serves as a board member for BLCKVC, suggests: get to know your candidates’ stories, and lean in when it comes to training and mentorship of new diverse hires. Jason also talked about how Morgan Stanley sources diverse founders for unexpected places (i.e. secondary cities like Newark), and through their Multicultural Innovation Lab, which often feeds its successful pre-seed founders to the Next Level Fund for follow-up.
Diverse Managers can and should be running funds that have a focus on returns: While Impact funds are great and do meaningful work, the assumption is that they are not focused on returns, and instead they are focused on a societal impact and likely have some sort of charity or giving goal. Some of these are run by diverse managers, but not all diverse managers run impact funds. Jasmine explained that Cambridge has separate and distinct departments for ESG (impact-based) and Diversity goals. She said, “What should not be on the shoulders of women and people of color is changing the world in addition to running an investment fund.” When you force managers to be in that impact bucket, then you are asking questions about your investment strategy and team but also: What is your impact on the world? How are you mitigating climate change? What are you doing to increase health equity? etc. “Women and people of color should be able to run a fund that isn’t necessarily focused on impact. We must not put the burden of impact specifically on that group of GPs.”
Investing in diverse managers and founders is NOT concessionary. Jasmine made a great point that up until recently the investors of the world were investing in a limited universe by focusing so much of their attention on white males. Asking LPs and investors to consider the rest of the population is allowing them to expand the possibilities - as opposed to the common misperception of increased limitation. Diverse founders and managers are an untapped market. Omar and Jason also hit this point home when they spoke about Bank of America’s and Morgan Stanley’s commitment to seed diverse fund managers and diverse founders. To date, Bank of America has backed over 130 early-stage venture firms with diverse managers with LP investments totaling nearly $400 million. This strategy hinges on the goal of those investments making real returns and creating the next generation of businesses, employees, and funds, who will understand that Bank of America believed in their ability to succeed. It’s business, not charity.
Over an hour, our panel touched on quite a bit, but all agreed that there has been much progress in recent year to celebrate and much more to pursue. Most of all, it is clear that we need more institutions and allocators to follow the lead of those who are in this space and proving that diverse managers and founders are excellent investments - for both the ecosystem and their bottom lines.