In 1965, the Immigration and Naturalization Act was enacted into law, paving the way for a generation of Asian families to immigrate to the United States. This law ended the quota system that gave preference to western European immigrants, allowing a more diverse population to enter. Many of these new immigrants came from impoverished backgrounds, arriving in the US with just a suitcase and $100 to their name. Their parents were often in lower socio-economic classes in their native countries, the pool of money for travel was an aggregate from village neighbors, each able to chip in only a few dollars.
After they arrived, many quickly realized that hard work alone wouldn’t make them successful. Banks were unwilling to provide them loans because they had very little collateral and didn’t ‘look’ like the lenders. Despite this, community members aggregated their personal money and created ‘unofficial investment banks,’ providing small loans to help others succeed.
The discussions around racial and gender equality, especially in the United States, have been gaining momentum for decades. The COVID-19 pandemic has laid bare the inequities that many Americans deal with on a daily basis. Nowhere is that inequality more clear than in the venture capital industry.
The Fundamental Problem
Words like ‘diversity’ and ‘inclusion’ have become popular in corporate communications, aiming to highlight companies' social justice initiatives. Unfortunately, very little has been done to actually address the lack of diversity. According to Crunchbase, “more than 800 female-founded startups globally have received a total of $4.9 billion in venture funding in 2020, through mid-December, representing a 27 percent decrease over the same period last year.” Venture capital firms are flat in structure, meaning there are only a handful of investors and professionals. Each investor plays a significant role, and their decisions have clear consequences.
Paul Gompers, a Harvard economist and National Bureau of Economic Research (NBER) research associate, found that the venture capital industry is “staggeringly homogeneous.” According to Gompers, from 1990-2016, 8% of VC investors were women, 2% were Hispanic, and less than 1% were black. Gompers also noted that homogenous VC firms perform far worse than diverse ones. The success rate of investments, for example, was anywhere between 26.4% to 32.2% lower than diverse firms. The same can be said for schooling; IPOs and acquisitions are 11.5% lower for partners with shared school backgrounds.
The reason for this failure, Gompers explains, is because “thriving in a highly uncertain competitive environment requires creative thinking in those areas, and the diverse collaborators were better equipped to deliver it.”
This hasn’t gone unnoticed.
Challenging the Status Quo
Arlan Hamilton, founder and managing partner of Backstage Capital, has invested roughly $5 million into startups managed by underserved founders. Having no formal education or training on how VCs are created, Hamilton built hers from the ground up. In an interview with the Los Angeles Times, Hamilton stated that 80% of the founders Backstage Capital had been self-funded businesses until they partnered with them. “We know that these founders are going to be the leaders of tomorrow. But right now our circumstances are that we are playing catch-up from decades and centuries of being institutionally locked out.” In Dec. 2019, Mark Cuban gave Hamilton $1 million to invest how she sees fit. They comanage the companies which have an eye on providing value to those living in Dallas.
Neythri Futures Fund, founded by Mythili Sankaran, is ushering in a new wave of startup investing, by accelerating the impact of South Asian female trailblazers. From their website, “South Asian women have been leading for centuries in Science, Mathematics, Politics, and Social Justice. However, we are an underrepresented, invisible minority in venture. The Neythri Futures Fund is a springboard for South Asian women to come together like never before to deploy capital and share their expertise. As one of the most educated and wealthiest demographics in the US, count on this segment of venture to thrive by propelling the underrepresented.
MaC Venture Capital, a majority black VC firm, was founded with the same idea in mind: help companies started by people of color and women. The $103 million firm is different from more traditional firms because it looks for entrepreneurs with diverse backgrounds. In a press release, they stated “We look to partner with those founders who are technically savvy and have an ‘earned secret’ from prior professional and personal experience. Cultural change agents by definition have to be rebel misfit troublemakers. We look for those with little fondness for the status quo.”
Companies like PayPal and Google are trying to address the economic inequality in the United States too. PayPal announced they’re committing $530 million in support of minority and women-owned businesses, especially those most affected by the COVID-19 pandemic. The commitment includes a range of short, medium and long-term investments, including $15 million to strengthen its internal diversity and inclusion programs. PayPal CEO Dan Schulman stated “The holistic set of initiatives we are implementing are designed to help address the immediate crisis and set the foundation for sustained engagement and progress towards economic equality and social justice."
School is Cool
Creating a diverse and inclusive business environment must begin with education, especially for underrepresented individuals. On March 25, Maryland Gov. Larry Hogan resolved a 15-year-old lawsuit regarding underfunded historically black universities and colleges (HBCUs), The legislation will provide Maryland’s four HBCUs $577 million over the next decade. The funds will be used for scholarships, financial aid, and recruiting faculty, along with improving existing educational facilities and programs. Although the payments won’t begin until 2023, each school will receive funding based on the amount of students enrolled in the previous school year. Morgan State University, for example, will receive $24 million.
Support Minority Owned Businesses
Here’s a small list of minority businesses that you can support. Links to Backstage Capital and MaC VC full portfolios can be found by clicking on their respective links.
● Perch Credit: A mobile app that enables users to build their credit score using common, recurring expenses such as rent, Netflix, Hulu and Spotify.
● My Money My Future:A personal financial management platform and community for underserved millennials that guides them through their most important financial decisions.
● Optimal Solar:Solar modules that provide clean, affordable, and reliable electric solutions.
● Paladin: A pro bono platform whose mission is to increase access to justice.
● Athena Security: A camera that uses AI to recognize violent or criminal behavior, then reports it to police.
● Caffeine: A social broadcasting platform for gaming, entertainment, and the creative arts.
● Wild Earth Foods: Pet food made with plant-based, cruelty-free ingredients.
● FireFly Health: A virtual-first primary care alternative for working age Americans that provides 24/7 access to a physician-led care team.
If you like this blog and want to hear more, check out my podcast The Whiskey Hue. You can learn more about my professional experience onmy website. Sava360 Ventures colleague Harry Ortof | LinkedIn contributed to this article.
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