Can investing in startups that close opportunity gaps for communities of color and low-income groups also be good business? Or are the two goals mutually exclusive?
Venture capitalists and social activists Freada Kapor Klein and Mitchell Kapor explored these questions on stage at CHM, along with Liz Carey, executive VP of finance and operations at the Silicon Valley Community Foundation. The discussion was moderated by Troy Cosey, head of platform for Kapor Center Investments.
When did they realize that the equity gap was a problem? For Freada, who believes we're all interconnected, equity has always been a concern. Mitch admitted that as an angel investor he initially worried about missing hot deals when Freada convinced him to invest in line with his values, but he agreed to try it.
Liz said, “There are things that you can’t unsee.” Her personal experience as a queer woman in finance meant she was often in meetings where there was no one else like her. It made her wonder who else was being left out of decision making and the opportunities being lost. In fact, according to Troy, a recent McKinsey study showed that companies in the top quartile of racial or ethnic diversity were 35% more likely to have financial outcomes better than their peers.
The Kapors decided to run an experiment to see what would happen if they only invested in companies they thought would do well economically and that also closed gaps for low-income communities or communities of color.
Freada Kapor Klein describes testing a new investment strategy.
Mitch says the experiment has demonstrated how conventional wisdom is misguided. That so-called wisdom separates “regular investments” from “impact sideshows.” But, he notes, all companies have an impact on the economy, the environment, and quality of life and many increase the gap between the haves and have-nots. He believes you're part of the problem if you’re not asking questions like: “What’s the core purpose of the business? If it succeeds, who is going to be better off and who is not?” The engine of value creation for the business must simultaneously create both economic value and social impact so they can’t be separated. The more business the company does, the more positive impact it has.
Liz believes in the "Hippocratic oath" of investing: Do no harm, and when you can add value. The Silicon Valley Community Foundation is a grantmaking organization with a mission to improve life in Silicon Valley. If they deploy capital to close equity gaps, that makes their work easier.
It's important to think about the whole entrepreneurial ecosystem, not just founders and funders, but also the limited partners—the funders of the funders, says Troy. Mitch has strong feelings about that.
Mitch Kapor explains a problem with (some) institutional investors.
Liz noted that there are gatekeepers and systems of due diligence for institutional investors that prevent them from undertaking equity investing, which cuts off opportunity. Freada is hopeful that a new bill requiring endowment transparency will help people like university alums learn who manages the money they donate to their alma mater and where it's being invested.
Assumptions must be challenged in order to enable women and people of color to get their startups funded.
Mitch says one solution is to counteract the “clubby” networks in Silicon Valley by doing away with the requirement for a “warm intro”—meaning that a founder must get introduced to an investor by someone else in the investor’s circle. At Kapor Capital, anyone can apply for funding through a simple form that asks questions about how a business will close equity gaps. They receive several thousand applicants a year and have funded companies who applied through this channel.
Bias appears in other ways too. If someone has a mountain of debt, working for a startup for little or no pay is not an option. Kapor Capital helps employees pay down education loans. Freada is skeptical of pedigrees because they are proxies for privilege. Instead, she is interested in a founder’s “distance traveled.” She wants to know where someone started in life and where have they landed solely due to their own efforts. To help close equity gaps, Liz helps founders understand why they didn’t get funded.
Liz Carey helps founders succeed.
To ensure that they're accountable for closing equity gaps themselves and helping to move the field, Liz and her team updated their investment policy document. Now 1/3 of the firm is managed by a diverse manager.
Kapor Capital uses a “Founder’s Commitment.” Founders sign a pledge to build diverse teams and inclusive cultures or they don’t get a check. They must ask themselves who their customers are and recruit a team that reflects them. Because they believe that who writes the check affects who gets the check, the firm is also now run by Mitch and Freada’s two younger partners, and their latest fund is currently one of the largest Black-led VC funds. To recruit diverse partners, they recommend that VCs post open positions rather than recruiting from their networks.
Change takes a long time, says Mitch, but hope is a discipline. Look for ways you can make a difference and, in Liz's words, "keep pushing forward."
Equalizing Equity | November 16, 2023
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