Unlocking a $4.4 Trillion Opportunity

As a general partner of a startup academy focused on underrepresented tech founders,  I have often been asked how much of our returns we expect to sacrifice by investing in overlooked founders such as women and people of color. This question implies that tech companies led by diverse founders are certain to provide inferior returns when, in fact, investing in diversity is one of the biggest economic opportunities of our time. According to Morgan Stanley, overlooked founders could represent a $4.4 trillion opportunity each year in the U.S. alone, not to mention the social benefit that comes with wealth creation among more varied groups and the variety of innovations they will create. So what is next, and how can investors help ensure that the founders that they back will succeed?

Former Teach for America teacher, Amanda DoAmaral, is the perfect archetype of the next wave of startup founders. Fiveable was voted as a top-ten startup in Wisconsin.

Kapor Capital, a leading venture capital firm focusing on investing in diverse founders, recently released a report on the returns of their portfolio. The numbers are jaw-dropping. To date, Kapor Capital has achieved an internal rate of return (IRR) of 29.09% which is substantially above PitchBook’s 75th quartile (25.96% IRR) for other venture capital funds. Additionally, a recent spate of blockbuster successes such as Canva, Rent the Runway, StitchFix and Away have demonstrated more anecdotally that diverse founders are perfectly capable of building global, multi-billion dollar companies. 

Despite a steady chorus of success stories such as those mentioned above, investors have been slow to deploy capital toward high-growth enterprises led by women and founders from diverse backgrounds and geographies. This inertia stems from investors mitigating risk by pattern-matching against past investment success. Unfortunately, with the imbalance of access to capital, historical investment data has created a self-fulfilling cycle around an archetype that is a white, male founder who attended an elite university, studied engineering or business administration and is based in a mature tech hub such as Silicon Valley. 

In 2018, only 12 percent of venture capital went to startups with at least one female founder, one percent went to those led by black founders and one percent went to Latinx founders. This lack of diversity in allocation is dwarfed only by the lack of diversity in the allocators with 40 percent of partners in VC firms coming from just two universities (Harvard and Stanford) and women accounting for only eight percent of investment partners at the top 100 venture firms in 2018.

It’s not just anecdotal stories that point toward the potential of investing in a greater variety of founders and startups. Research has suggested that investing in groups that do not fit the classic Silicon Valley pattern results in superior economic outcomes. A study by Boston Consulting Group and MassChallenge showed that for every dollar invested in female-run companies, $0.78 were returned versus just $0.30 otherwise. Another study by McKinsey, found that companies with diverse leadership are 35 percent more likely to outperform those without such diversity. This is likely because a great majority of founders innovate for what and who they know. As such, overlooked founders are often uncovering markets that have been neglected by others. 

Investing in a greater diversity of founders and startups also includes breaking geographic bounds. According to a Pitchbook/NVCA report, 79 percent of venture capital is allocated to just three states in the U.S. in 2018: California, New York and Massachusetts, with the first of these accounting for over 48 percent. At the same time, Jason Rowley from Crunchbase reported that investments in startups based in regions such as the Midwest and South outperform those based on the coasts, where traditional tech hubs are located. For example, the median multiple on investment for Midwest-based startups is 5.17x compared to the Northeast where the median is only 3.89x.

The movement to deploy capital to a greater variety of innovators might be still inchoate, but the tide is likely to change rapidly as venture capital and private equity investors realize the economic potential that is knocking on their doors. While opportunity abounds, unlocking the economic opportunities from a group of founders that have been underserved is not without unique challenges, which we must recognize to deploy capital and human resources efficiently. Here’s how: 

First, if we invest in tech entrepreneurs that do not fit the old Silicon Valley pattern, we might need to complement these founders’ unique experience and skills with a different set of knowledge and resources. At Beta Boom, we provide our startups with product and marketing coaches that work alongside them daily to improve their product and grow their customer base. We know that product design, marketing and growth hacking skill sets can be developed over time, but grit and outstanding domain expertise–the two qualities we prize in our founders–are irreplaceable.

Second, a startup has a long journey before it provides a return for the founders, employees and investors through an acquisition or initial public offering. It’s very likely that everywhere along the journey underrepresented founders will face biases, including from later-stage investors and strategic partners and acquirers. Investors cannot rest on their laurels and instead, need to work hard to make connections for and champion their portfolio companies. 

Third, beyond implicit (or explicit) biases, there are networking hurdles that underrepresented founders often face. The next generation of superstar tech founders might no run in the same social and professional circles as many investors and are thus less likely to find their way to the investors’ doorstep through warm introductions. Likewise, if we seek to broaden our geographic focus beyond traditional tech hubs such as Silicon Valley, New York and Boston, investors can’t require startup founders to fly for in-person meetings at the drop of a hat or move their entire team.

Venture capital firms such as Village Capital and Indie.VC are trying different investment and operational models to better unlock the opportunity that diverse founders present, and they are not alone. The number of firms, family offices and angel networks innovating and focusing on startups led by diverse founders is growing rapidly. The question is increasingly not whether diverse founders will produce market-rate returns but rather who will catalyze and capitalize on this growing movement and who will be late to the game.

A Look Back at our SOCAP Diversity & Impact Gathering

As we enter the winter season approaching the end of the year, we wanted to reflect on one of the highlights of the previous season. In October, we attended SOCAP19 in San Francisco. As every year, this impact investing conference created an amazing space for connecting to other change-makers, sharing information and hearing from industry leaders. The reason this year was particularly special was that Beta Boom co-hosted a happy hour mixer that brought together diverse founders, impact investors, and supporters for an evening of conversation.

Our motivation to host was clear. First, SOCAP is a huge conference that can feel overwhelming. After a day of inspirational addresses, panels, and networking it’s important to decompress and talk with people who share our interests. Second, since starting Beta Boom, we’ve had the great pleasure to connect with national organizations that are promoting inclusive entrepreneurship across the US (such as the Kauffman and Case Foundations), as well as many local groups supporting female entrepreneurs and people of color. Our work also builds ties to individuals seeking to invest in more diverse founders. While all these groups are working toward a common goal, they aren’t often in the same room together. 

In short, we hear all the time about the need for greater connection and collaboration between founders, investors, and supporters, so we endeavored to bring them together in a relaxed setting to further build these connections.

Co-host Monique Aiken, VP of Programs at Mission Investors Exchange (MIE) came wearing multiple hats including as a member of the steering committee for the SEO impact investing network and as an alumna of the Tiogo Foundation. In the spirit of collaboration, Monique merged MIE’s 4th annual happy hour event with this gathering, inviting all threads of her connections to attend as “a testament to the spirit of the night.” She encouraged the room to “work in coalition and build community to go further, faster together.” 

The founder conversation highlighted the need to focus on the user and chart one’s own path

In a room overlooking the Bay, with food and drinks in hand, conversation flowed and connections were sparked. We wanted to give our guests a window onto the important work founders and supporters do, and highlight how these roles intersect, so we organized two informal Q&As. Our founding partner, Sergio led the first conversation made up of three founders/CEOs: 

  • Meena Palaniappan of Atma Connect, a non-profit tech company working to build resilience in low-income urban communities worldwide; 
  • Amanda DoAmaral of Fiveable, an EdTech livestream platform that prepares high school students for AP tests; and
  • Erica Plybeah of MedHaul, a company providing transportation solutions for medical patients in low-income and rural urban communities.

They started by discussing the most important lessons they’ve learned as founders. Erica confessed she’d been a perfectionist before she became a founder, “and any founders out there know that doesn’t work well. I also had to realize I can’t do everything in one day.” She advised fellow entrepreneurs to take work/life balance seriously, and explained she spends a couple mornings a month volunteering in her son’s classroom. “I don’t bring my phone, I don’t check my email, which is very tough. It’s a very exhilarating experience.”

Meena continued by noting the lessons her users have taught her, explaining that “purely as a result of the ingenuity and resourcefulness of the people [we serve],” Atma has gone from “a way for urban poor people to share water price information,” to a tool for building resilience to future disasters. “I’m just constantly humbled and amazed by that.”

Amanda, who didn’t come from a business background before launching her startup, talked about how she’s learned that “Everyone is making it up as they go.” While finding investors and advisers who can help you get from A to B is key, she’s also learned that there are really no specific markers of success, so founders should “Just keep going.” She also touched on how her platform can address the immediate needs of her users, saying, “We all think that education needs a big overhaul, and that’s true, but the kids right now need it tomorrow. They don’t have time for us to get it together and overhaul it.”

All three women closed by mentioning how partnerships could help take their companies to the next level. Amanda and Fiveable are looking for a way to help students pay for livestreams. Meena explained that entering the disaster space has brought Atma into conversations with insurance companies like SwissRe, (whose tagline is “Making the world more resilient”) and she’s been buoyed by the realization that there are “big institutional sectors that are driven by the same goals that our users have.” Erica and Medhaul have already partnered with Lyft, and she noted, “Solving issues in healthcare is not something that one company can do,” so she’s open to “nontraditional” partnerships with big companies like Google or Walmart. 

Sergio concluded by reminding the crowd that one thing Beta Boom really believes in is helping entrepreneurs in ways beyond investing capital. Supporters “can provide connections to customers, to mentorships, to strategic partnerships, and there’s also a huge value in providing visibility into the work that founders are doing. So when you do meet a founder I would really challenge you to ask yourself, ‘What other ways can we help them be successful and better serve their users, their customers?’ ”

Investors and supporters challenged us to check ourselves, think of unintended consequences and to perhaps not run fast and break things

Kimmy led the second conversation featuring investors and supporters from innovative organizations:

This conversation zoomed out a bit to address the differences these panelists see between predominant models of investing and thinking about tech and the ways they and their respective organizations see and do things. 

Eliza set the tone in her intro about why she’s currently focused on poverty and inequality in the US, saying, “we’re at a critical juncture… and there’s massive urgency around how we think about and start to shift systems here.” She continued by explaining her approach to investment, adding, “I’m somewhat contrarian in the venture investing world in that I don’t want my entrepreneurs to run fast and break things. I want them to be thoughtful and deliberate and energized.” 

After explaining that her org “believes that dignified job creation is the best way to tackle poverty in emerging-market countries,” Nathalie stressed the importance of “hacking” in a very particular sense: “Working with people who have done [similar work] and are willing to share their results.” This approach is currently playing out in an initiative she’s working on that will integrate gender-equity metrics into the enterprises where NESsT invests.

As one of two developers of the first CRM system and co-founder of the People-Centered Internet, Mei Lin took a moment to emphasize that investing and innovating “isn’t just about getting money and doing things” — it’s also paramount to consider the unforeseen consequences of the technology we are working to create.

Building on the notion of thinking beyond the current moment, Dustin stated that the most important thing he’s learned in the impact investing space is the need to “Check yourself. Always. It is my absolute privilege to be able to work with entrepreneurs that are changing the world, and I come to things from my very own perspective, [which] is white, male, and privileged. I’ve had to learn to actually engage with people and understand what their struggles are and, honestly, to always try to provide value to the other person in conversation.”

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