It seems that there is no shortage of venture capital firms declaring their solidarity with the Black Lives Matter movement. That’s wonderful, so let’s capitalize on this energy with meaningful action. There have been some excellent articles written about ways to increase investment in Black and other underrepresented founders, and I wanted to share a couple of practices, from the perspective of a white male investor, that have helped Beta Boom broaden our deal flow and invest inclusively. Half of our portfolio startups are led by Black founders, and 80% are led by founders from all underrepresented groups.
One of the biggest factors determining the level of investment in underrepresented founders is deal flow, or the leads that investors see. Currently, the investment community primarily relies on warm introductions from their professional network. It does not take much brainpower to realize that investors’ networks tend to mirror themselves. So if you are a white Stanford University alumnus, there is a fair chance that your network is not replete with economic and ethnic diversity. If your own network lacks diversity and you rely on your network for deal flow, how can you expect to see startups led by diverse founders?
The common rebuttal from investors is that if a founder is worth their time, they will find a way to get a warm introduction to them. Not only does this philosophy disrespect the very real perception and bias problems that underrepresented founders face, it also defies basic math. Fundraising is a probability game, and if a founder has more network connections to an investor, his probability of getting a warm introduction is higher. Therefore, the investor is much less likely to get warm introductions to underrepresented founders notwithstanding their merit. Not only that, given that the vast majority of venture capital investors hail from elite institutions like Harvard, Princeton, and Stanford, what is the likelihood that they will be exposed to many economically diverse founders as well?
Stop over-relying on warm introductions
Take an honest survey of your closest 50 professional connections or top deal flow referrers. What proportion of those connections are women, Black, Latinx, immigrants, etc? If your goal is to invest in more Black founders but only five of your closest 50 connections are Black and you primarily rely on warm introductions, it’s unlikely that you will be introduced to a sufficient number of Black founders. Of course, your white friends can also introduce you to Black founders, but the (sad) reality is that humans gravitate to those that are most like them including by race. Consider who their closest networks are and who they have typically referred to get a sense for the diversity of their first-degree and second-degree networks.
Instead of relying primarily on warm introductions for deal flow, you could also make your email available for founders seeking to pitch you or take pitches via Twitter. One challenge that many investors face when opening their inbox is an increase in low-quality deals since your network often serves as a screening mechanism. To counteract this, investors might be well-served to utilize an application form that can screen out deals for factors like traction benchmarks or industry fit.
Work harder to broaden your network
It is probably not viable for some investors to cease taking deal flow via referrals. In that case, it’s obvious that to be exposed to more startups led by diverse founders, investors would be well-served to expand their referral and professional networks. Connecting with excellent diversity-focused incubators and accelerators such as Camelback Ventures in New Orleans, Opportunity Hub in Atlanta, the LatinX Incubator in Chicago and the Hillman Accelerator in Ohio can help. In addition, there are wonderful angel networks investing in female and underrepresented founders. Many of these organizations and investors (including Beta Boom) are looking to broaden their network of co- and down-stream investors that are legitimately focused on investing in a greater diversity of founders and will evaluate their companies fairly.
We’re here to help
We don’t have all the answers, but we have learned some hard-fought lessons to creating an inclusive pipeline of founders at Beta Boom. Both our managing partner Kimmy and I are happy to speak with any investors looking to implement the lessons above or discuss other ways to implement meaningful change including setting up your portfolio startups for success by working actively to bridge access gaps, such as access to skill-building, that underrepresented often face.
Our emails are: kimmy [at] betaboom [dot] com and sergio [at] betaboom [dot] com.