Chris Rock, one of my favorite comedians, said something some years ago that changed my perception of equality in venture capital. I’d recommend watching the whole thing. He’s dropping gems, especially at the end. Its just a 3-4 minute video.
“TRUE EQUALITY IS THE EQUALITY TO SUCK”
While this goes against what most black people, especially in hyper-competitive white-majority spaces, have been taught, black founders seeking venture capital need this form of equality the most.
Let me explain…
Benedict Evans wrote an article in 2016 on failure and the economics of venture capital here. I’ll be cherry-picking some points so you don’t need to go and jump into reading it now. Essentially, Evans was able to get aggregate data from one of their limited partners on over 7000 investments made by the venture funds they deployed capital to from 1985 – 2014. All to say, they had a treasure trove of data to explore VC activity over a 29 year period.
Here are some major takeaways:
- Around half of all investments returned less than the original investment.
- 6% of deals produced at least a 10x return, and those made up 60% of total returns
- A fund gets better returns by having more really big hits, not by having fewer failures
The way venture works, most investments have a high probability of failure, and few companies produce significant returns. Speaking with black founders, there seems like there’s an extraordinary case needed to justify investment in their startup to early-stage investors. Most of the time, they feel like they need to have everything figured out… exceptional team, major traction, product, and massive market. There’s a return the fund hurdle that’s put on each opportunity. Where in other situations, white founders have been given what I like to call “figure it out money”. You may have one exceptional part of the puzzle going for you but go figure it out. This return the fund hurdle isn’t applied equally.
Most companies who get “figure it out money” don’t. Some do. But the opportunity to figure it out or not is at the core of equality. Entrepreneurship is a muscle, the more you flex it, the stronger you get. I agree, black founders need to return the fund, just like every other founder should try to if they accept venture capital but VC funds have to be okay with the reality that black founders will most likely return less than they invested, just like their white counterparts.
“It’s not that I want to be bad, but I want the license to be bad and come back and learn.”
– Chris Rock
A couple of extraneous thoughts I couldn’t fit into the essay
- My main goal was to build on a quote from a conversation on Twitter yesterday. “The key here is that Black people need the same room for failure and repeated failure that our white peers enjoy. And can turn their failure into the narrative, in which they’ve emerged on the other side more enlightened.” (from The Myth of Blackness in Venture ) I wanted to add more color to the mechanics behind why failure is essential.
- I’d often get into arguments in meetings with my white counterparts about the market opportunity, especially around black founded companies. To be honest, I’ve never really trusted market opportunity slides or rationale. If you’re investing early, the math will most likely change.
- That goes to say, its 2020. There’s more than enough data for VCs to learn and understand black focused market opportunities. There’s untapped value to be created if you’re willing to explore.
- I’m torn on the conversation that black founders need to find larger markets than black people. I think its a simplistic and outdated statement. Most people build for who they know and what they know. Most of the time, companies who brand themselves as going specifically after black customers most likely have adjacent markets that could add to scale. What I’m trying to say is I somewhat hear the market opportunity argument but it’s up to the investment team and the founders to really think about the bigger opportunity. Extend the same imagination about how an opportunity can work to black founders too.