There are various lessons that people and organizations can learn from great leaders like Martin Luther King Jr. and Jean Augustine - one amongst them is that of being intentional towards the change you want to see. Intentional in your beliefs. Intentional in your thought, and intentional in your actions. It is because these leaders made an intentional commitment; a commitment that was true, had no days off, did not allow for excuses or pardons, they could affect real change.
This intentional commitment toward change is relevant in the world of investing as well.
Data on leaders in the VC space proves that a majority agree that an intentional commitment towards diversity (while maximizing profits) is possible. Despite this VCs side-line the power of diversity, overlook the opportunity of investing in the underserved segment, and miss out on huge potential profits. This article highlights areas of action that can help venture capital firms make an intentional commitment toward diversity; moving the needle towards a more equitable investment ecosystem:
Set up a diverse investment team
Data on gender-diverse investing teams indicate that venture investing teams most likely to fund diverse founders also tend to be diverse. BLCK VC reports that 80% of venture firms don't have a single Black investor on their teams. In this context, it is not surprising that only 1 percent of venture-funded startup founders are Black.
The conclusion here is to become intentional about diversity, funds can rework their programs to prioritize diverse hiring and retention practices. The effectiveness of this reflects in the Morgan Stanley report which found that 71% of VCs surveyed & who had a team of diverse fund managers, LPs, partners, or board members, found it a "very effective" way of enhancing the diversity of companies and founders they invest in. When you hire from the underestimated groups you want to invest in, you bring in insights into a new market, forge relations with an unexplored cohort and unlock deal flow with potential for huge innovation and high ROI.
Invest in smaller funds with diverse owners & portfolios
The demographic composition of people controlling assets under management directly impacts where those funds get invested. According to an analysis by Knight Foundation, only 1.4% of the over $82 trillion managed by the U.S. asset management industry was controlled by diverse-owned firms. For some, this is just a number, for others, genuinely concerned about diversity, this is a once-in-a-lifetime opportunity to build a sustainably diverse portfolio.
There are hundreds of emerging funds with diverse owners and access to deep pockets of talent that go unseen due to insufficient capital to support scale and expansion. These smaller funds have an authentic relationship with underrepresented founders with disruptive ideas. By investing directly in emerging fund managers, larger VCs can get connected to such innovative founders and benefit from making early bets on hidden opportunities and address the inequity in their portfolios as well.
Adjust and widen your lens for what defines the “right fit”
VCs are considered the jet fuel for high-growth companies. They have a reputation for venturing into unchartered territories to generate high returns. They can be credited for taking a huge risk on software and internet companies in the 1990s, backing mobile communication in the early 2000s, and taking big bets on tech companies more recently. However, surveys reveal that when it comes to investing in diverse founders, “not the right fit” is amongst the top reasons given by VCs for not funding them.
VCs with a firm intent for diversity aggressively can educate themselves about opportunities beyond their investment criteria and focus on the business problem the company seeks to address. Adjusting their lens of “right fit” to include “how do I serve the underserved while maximizing financial gains” can help VCs adopt a more diverse approach to funding.
Our own investing experience shows that by pushing the boundary of “fit”, VCs can tap into the lived personal experiences of underserved founders to fulfill unmet needs. Our portfolio company Fyyne for instance is born out of its founders' struggle with finding barbers and hairstylists capable of cutting Black hair. It was when Onyeka Akumah, Co-founder of Treepz had to use three modes of transportation to reach his final destination in Lagos, that he was inspired to revolutionize the public transportation sector in Africa with tech-based solutions. Witness to environmental ramifications of fast fashion, the Peart brothers, Byron & Dexter established Goodee to harness the power of capital for social and environmental good.
Rethink where and how you network
Since our inception we have been flooded with pitch decks from Black tech companies completely negating the perceived pipeline problem with diverse and multi-cultural founders. It is also quite surprising for us to see research that shows that 43% of VCs think that there are not enough multicultural founders. Maybe a rejig in where and how VCs network can help change this perception.
Our partnership with DMZ has played a key role in our endeavour to shift the spotlight to diverse founders. Networking and mentorship events under their Black Innovation Programs support the success of Black entrepreneurs, and are a great opportunity to get introduced to diverse founders.
Additionally, a change in approach to networking too can help VCs increase their diversity quotient. While it is less time-consuming to meet founders through shared connections, this gives founders with the privilege of social and financial capital, an advantage over underestimated founders. By reducing dependence on established networks, VCs can break the myth of pipeline issues and seed decades of deal flow.
Look for proof of performance
Measuring the impact (financial & non-financial) of sectors can work as the data-backed evidence required by VCs to change their core processes, fund underserved founders present there, and achieve systemic, long-term improvements. Fintech is one such space with the combined potential for commercial returns and social change. Entrepreneurs in fintech are creating products with the scope to advance income equality and financial inclusion. Given the accelerated rate of adoption of 82% amongst underbanked communities, supplemented by studies that project a 20% annual ROI on fintech projects, the case for funding underserved founders in fintech becomes stronger. Founded by Jonah Chininga & James Muhato, Miq (formerly known as MICC Financial) is one such fintech app that enables individuals and communities to pool their funds to make credit more accessible and affordable for everyone. We are fortunate to have them in our portfolio.
Wrapping up
Martin Luther King Jr. and Jean Augustine exhibited their intentional commitment to diversity & multiculturalism through their speeches and actions. In business circles, it is well understood and widely accepted that diversity drives excellence, creativity, and innovation. All VCs need to do is to take intentional measures to stop the chronic underfunding of high-growth companies led by underserved founders and reap the resulting exponential benefits.
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