Potential down market could temper VCs’ promise of more diversity

There is no progress if there is no movement

Venture hiring by definition is exclusive. Legally, investors have to be able to fork out their own capital, ranging from hundreds of thousands to multi-millions, to join as a partner of a fund, meaning to be a senior partner typically requires some personal wealth. The industry is exceedingly gender imbalanced, with data showing that 84.6% of senior investors are male. The vast majority of VCs, too, come from very similar — and privileged — educational backgrounds from institutions like Harvard or Stanford. And they happen to be white.

There has been progress in recent years, with more women joining venture firms as well as starting their own shops. In February, the advocacy group All Raise released data showing that U.S. firms added 52 female partners or general partners in 2019, compared to 38 roles the year before. People of color have incrementally made progress too, which many say is not enough. Only 2% of VC partners are Black, per Richard Kerby, a partner at Equal Ventures,

The momentum for diversity efforts has been further revitalized lately as firms rally behind Black Lives Matter with donations and commitments to increase diversity in their pipelines. The phrase “make the hire, send a wire” has risen as a mantra for what steps non-Black VCs can enact to be better, like hiring a Black associate or investing in Black founders.

Still, because of the potential economic impacts of the pandemic, the already slow-moving advancement of women, Black people and other underrepresented groups in the venture industry is now being threatened. To not lose the progress of recent years, and to grow it going forward, the entire venture industry needs to intentionally and aggressively approach hiring.

The new new

The newest firms in the industry are beating their more established predecessors when it comes to diversity. In order to join a venture firm you don’t have to be a “lifelong capitalist,” said Monica Desai Weiss, a newer investor at Kleiner Perkins. Instead, you can be an operator, like Desai Weiss, or sometimes even a journalist.

However, faced with an extended recession, the venture world is at risk of losing many of its younger firms. Unlike legacy firms, newer firms don’t have decades of track records to back up their intelligence or gut instinct. Young firms also don’t have deeply embedded relationships with institutional investors, who have deep ties but also remain homogeneous. It means that a more diverse generation of VCs who have popped up over the past decade, some founded to invest in diverse entrepreneurs, are at risk to leave the ecosystem they finally broke into.

“The new boss will be the same as the old boss,” says Chris Lynch, a former partner at Boston-based Accomplice, who fears there will not be a changing of the guard within the VC world if the economy doesn’t recover sooner than later.

Newer VCs, he notes, will be impacted because venture capitalists depend on eight to 10 years to get any kind of liquidity and thus prove that they are good at their jobs. If the market becomes more conservative, LPs are going to return to legacy funds versus betting on new funds with no proven track record.

These investors — who are often managing the assets of pension funds, universities and family offices — and who determine which investors, and firms, ultimately get funded — have already warned that they’re less liable to fund newer fund managers, given the current economic environment. They’re trying to protect their assets by not taking risks on newer players in the space, but sticking with investments such as legacy firms that have proven returns.

For those limited partners, diversity may be a distant concern at the moment. It’s partly for this reason that my colleague, Connie Loizos, recently argued that LPs with public funding require as a legal mandate that the venture managers they fund invest a certain percentage of that capital into diverse startups.

Without any similar mandate, former Accomplice partner Lynch is dubious that LPs will become innovative in a downturn. “With limited partners, it is all old institutional money,” he says. “They have the muscle memory of everyone they have funded before. They don’t like change.”

Jon Holman, a long-time recruiter for tech CEOs and venture capital firms, also fears that up-and-coming venture capitalists will struggle if there is an extended recession similar to 2000, which had socioeconomic impacts for the venture community for at least five years.

In the 2000 collapse, Holman observes, limited partners (institutions, pension funds, universities, life insurance companies) saw that there was no economic opportunity within venture capital because the returns got so bad. So the money was taken out of VC and put into other investments like real estate or gold, he recalls.

“The weaker venture funds that had come into existence and never had a return yet were never able to raise a second fund,” Holman said. “The population of venture capitalists went down pretty dramatically.”

Therefore, if an extended recession, or depression, hits the U.S. economy, venture hiring itself might go on pause. There is no progress if there is no movement.

“Sequoia isn’t going to go out of business, Accel isn’t going out of business, Andreessen Horowitz isn’t going to go out of business,” Holman says.

In a worst-case scenario, it means that the onus will be entirely on these more established players to ensure they invest in Black and underrepresented talent — as well as continue to diversify their own ranks. This is not an excuse for venture capitalists. If only the strong survive, the strong need to show up with commitments.

Tiffani Ashley Bell, a founder and executive director of Human Utility, wrote a Medium post on Friday titled “It’s Time We Dealt With White Supremacy in Tech” outlining a number of ways venture capitalists can support Black investors.

“If you run a VC firm without Black partners, will you commit to adding at least one Black partner before 2022? If not, why not? They will see opportunities in places and spaces you won’t. And let me stop you right there: Not every white or Asian partner at a VC firm now was a spectacular operator or had an exit, so that’s no excuse. If you are a non-Black investor committed to doing better, are you willing to hold your colleagues accountable? Will you call them out for talking more than doing?”

Bell also recommended investors become limited partners in a Black-led VC fund. Plexo Capital, a GV spin-out, approaches this as a hybrid venture capital firm that both invests in firms led by diverse investors and early-stage founders.

Sarah Kunst, the founding partner of Cleo Capital, says that “investing in black talent is not an intractable, insolvable problem. Funds just need the desire to solve it.”

“The way to find, hire and fund black people in tech is the same as finding, hiring and funding any other group,” Kunst says. “You build relationships with people in that group, you seek out thought leaders from the community and learn from there. You tell your hiring and investing teams that there’s a hole in the fund’s expertise stack, and you fill it.”