Dear VCs: It’s Not a “Pipeline Problem”… You Are Lazy.
Breaking Down The Equity Gap
Most folks are familiar with Venture Capital’s dismal lack of diversity, but the actual numbers bring the industry’s problems into sharp focus.
Only 3% of all VC partners are Black, only 3% of VC partners are Latinx, and nearly three-quarters of U.S VC firms do not have a single female investing partner. On the entrepreneurial side, less than 2% of VC Investment went to Latinx founders, and only 1% of VC backed founders are Black, and a miserly 2.6% went to women.
The Fallacy of The “Pipeline Problem”
Perhaps the weakest and most popular excuse for the venture industry’s exclusion of women and people of color is the “pipeline problem.” If you are unfortunate enough to have stumbled upon an investor who uses the term “pipeline problem,” run away — they are lazy and intellectually dishonest. Essentially, they’re saying, “I haven’t funded POC and women founders because there aren’t any that are creating valuable innovation.” If your gut instinct tells you this sounds inherently racist and sexist, then you’re correct. Not only is the “pipeline problem” ignorant, defensive and deflective — it’s factually incorrect. For example, research shows that Black women create new businesses at rapid rates and represent 42% of new women-owned businesses. Yet, combined with Latina founders, they only received 0.64% of all venture dollars in 2019.
Venture Capital is the engine of the global innovation economy but is currently run as a segregated country club, ignoring and excluding POC and women founders and general partners. Studies show that diverse teams, particularly those with women, outperform monoculture teams. Diversity is not just a social good; it is a fiduciary responsibility. The failure of the venture industry to address these issues is hurting individual entrepreneurs and their families, yielding below market returns, and even worse — stifling societal growth and innovation. With innovation itself at stake, society must no longer allow the exclusion of women and POC from the innovation economy and the wealth it creates.
So How Can VC Do Better?
It is unclear when the traditional venture industry will change its clubby old boy network ways. Here are some ways the market (which hates inefficiency) has begun to distribute capital to innovative companies run by excluded founders:
1.) Funds Focused On Excluded Founders
Funds that focus on providing capital and resources for POC and Women-led companies often play a significant part in filling the equity gap when major VCs miss the mark. These new GPs are now competing with the lazy “pipeline problem” touting investors, and they’re winning. Founders First Capital Partners, Genius Guild, Astia Angels, Portfolia, and of course, The Impact Seat are all examples of women and POC-centered funds that have championed some of the world’s most exciting innovations across all sectors.
2.) Public & Industry Pressure
State pension plans are major investors in Private Equity, including Venture Capital. These large LPs need to start holding funds accountable. If you are California Public Employees’ Retirement System representing the incredibly diverse public employees of California, why would you invest in a fund that doesn’t reflect the diversity of your pension holders and underperforms? You are the company you keep.
In that same vein, syndicate partnerships have begun forming, where investors will band together to write checks for late-stage underrepresented founders. Most notably, The Investors of Color Network is a network of Black, Latinx, and Asian accredited investors working to close the racial funding gap in startup capital. Finding and partnering with like minded, innovation-first and mission-driven investors will always lead you to success.
3.) Hiring Practices
VC firms with women partners are twice as likely to invest in companies with a woman on the management team and three times more likely to invest in companies with women CEOs. When women make 85% of the purchasing decisions in the US and are 50% of the population, perhaps it’s time to re-evaluate the current state of affairs. Both LPs and entrepreneurs should avoid monoculture teams so that more rational and profitable hiring practices become the industry norm.
To solve these glaring equity gaps, the world of venture capital must look inward and do the hard work to fix the inequities that have been allowed to flourish. There is a pipeline problem, but it is not the pipeline of talented women and POC entrepreneurs lacking. It is the pipeline of investors willing to step outside their own biases and social circles to give these excluded entrepreneurs and their ideas an equal chance to shine!
For information on The Impact Seat Foundation visit our website impactseat.org. If you want to join the new economy, email us at firstname.lastname@example.org.