Tag: Venture Capital

#MentalNote · History · Politics · startups · venture capital

It’s Time To Build Pt. 2

4 years ago Author By cumeadi

Marc Andreessen, one of the co-founders of Andreessen Horowitz, wrote a timely piece during the height of the US COVID-19 crisis. Titled “ It’s Time to Build “. It’s essentially a call to arms for builders to focus on creating a better reality where we’re prepared for tomorrow’s challenges. It was a collective call to create a more conducive environment for builders and sounded like a call to get back to what made the United States great; making and creating. 

Fast track to George Floyd’s death and we’ve seen a significant outpouring of support and collective action around ending racism and destroying racist institutions. Now more than ever, there’s an awakening to the fact that black people are suffering from systems built to disenfranchise and systematically ensure they’re held down. We’re at a pivotal point globally. We’ve all seen the decentralized protests around the world demanding change and justice for George Floyd and others who have died at the hands of those sworn to protect them. People, now more than ever, want to tear down and rebuild these institutions. 

As we think of building and tearing down institutions we should make sure we’re focused on building a more inclusive type of institution. The only way we’ll really achieve the promise of a future where there’s equality for all is to ensure everyone is in the workshop as we’re building. We know this is currently not the reality. Black people lag behind on most indicators that would lead them to be in the rooms to be a part of this building process. In venture capital, for example, where the rubber meets the road when it comes to building, the stats are abysmal. For those who aren’t familiar with the venture capital space, here’s some data to provide some color:

  • 77.1 percent of founders were white—regardless of gender and education.
  • Just one percent of venture-backed founders were black.
  • Women-funded startups received only 9 percent of investments.
  • Latino founders made up 1.8 percent of those receiving funding, while Middle Easterners totaled 2.8 percent.
  • Asians were the second most-backed group, making up 17.7 percent of venture-backed founders.

From Ratemyinvestor.com 

We can’t build this new reality if there’s this much inequality in the venture capital industry. I don’t think individual actors are deliberately enforcing inequality – I believe the “system” of risk capital is flawed and perpetuates actors to not act in an equitable way. Venture capital is just one example. There are disparities in healthcare, education, job creation, urban development, and etc. Everywhere we look, there are systems that disproportionally affect black people, and most of the time, for the worst.

If we aren’t careful, we’ll build on the same bias and power structures and we’ll be back in the same spot 20 years from now wondering how we got to where we are. 

venture capital

The License To Suck

4 years ago Author By cumeadi

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.