It’s no secret that the venture capital industry, for as long as it’s existed, has been overwhelmingly white. Last summer, as the murder of George Floyd focused national attention on racial inequalities in the US, firms seemed committed to changing that. “Black Lives Matter,” the firm Benchmark tweeted last May. “Change starts with each of us holding ourselves accountable and taking actions towards a better, more just world,” tweeted Sequoia. A few firms came out with concrete pledges, or funds earmarked for entrepreneurs of color: Andreesen Horowitz put up $2.2 million to start an accelerator program targeting founders who “lack the typical background and resources,” and Softbank set aside $100 million to invest in Black, Latino, and Native American founders. Mostly, though, promises were vague. “We can, and will, do better,” tweeted Kleiner Perkins.
Some in the industry found last summer’s statements hollow, or akin to “diversity theater.” But in the past year, VCs say that the conversations about race have continued, even if visible progress remains slow.
On diversity matters, the industry remains in the “planning phase,” according to Frederik Groce, a partner at Storm Ventures and cofounder of BLCK VC, a nonprofit that supports Black investors. “I do think we’re beginning to see more clear focus on these issues by firms,” he says. “They’re still trying to figure out the structured plan, but people are at least having those conversations in a much more detail-oriented way.”
Venture capital firms have historically been slow to diversify their workforces. According to the latest VC Human Capital Survey, a biannual report compiled by the National Venture Capital Association, Venture Forward, and Deloitte, only 4 percent of VCs are Black, up from just 3 percent in 2018. Latinos represent 4 percent of investment professionals, down from 5 percent in 2018. (Asian and Pacific Islander employees, meanwhile, held 19 percent of investment positions in the survey—a higher percentage compared to the overall US working-age population.) What’s changed, though, is the number of firms with diversity, equity, and inclusion plans: The NVCA found that about 40 percent of firms had such strategies in place in 2020, compared to a third in 2018. More firms also created DEI-focused recruitment programs: 33 percent of firms surveyed by the NVCA had formal programs in 2020, and 74 percent had informal programs.
The lack of diversity in VC firms can also affect the diversity in their portfolios. In 2020, Black and Latino founders received just 2.6 percent of venture funding, according to data from Crunchbase. A number of funds led by Black investors, like Harlem Capital and Backstage Capital, focus specifically on founders from underrepresented backgrounds. But those have barely made a dent in the overall funding landscape. In a survey of venture capitalists by Morgan Stanley last fall, two-thirds of VCs said that the Black Lives Matter Movement had affected their investment strategy, and 43 percent said that investing in founders from multicultural backgrounds had become a “top priority” for their firms. But the survey also found that “traditional VCs are still less likely than women or multicultural VCs to see the value of investing in companies founded by diverse entrepreneurs.”
Alejandro Guerrero, a partner at Act One Ventures, says investors are now more open to talking about inclusion at the cap table. Last summer, he added a new clause to all of Act One’s term sheets, stipulating that before a funding round closes, the investor and founder will work to include underrepresented groups of people at the cap table. One year later, more than 50 venture capital firms have adopted Guerrero’s “diversity rider” in their own deals.
The language isn’t meant to be strictly enforceable, but rather to introduce a conversation that investors usually don’t have. In other words, it’s pretty toothless, something Guerrero acknowledges. “The diversity rider is not a silver bullet,” he says, “but it is a framework.” Talking about how white the industry is can be awkward, which is why Guerrero thinks firms need to standardize a diversity check in each deal. “Sometimes it’s difficult to find a moment for like, when do we bring this up, how do we bring this up?”
Industrywide, however, there’s still a long way to go. “Every time there’s a conversation about how there are people who have been left out, there are other people who just want to move on,” he says.
Brian Dixon, a partner at Kapor Capital, wrote a blog post last summer encouraging firms to look beyond their own networks to hire talent, including partners. “If you do not publicize the jobs that are available at your venture firm, then you are intentionally being exclusionary,” he wrote. The blog struck a chord with the VC firm First Round, which held an open call for its latest partner search. It ended up hiring its first Black investment partner, Meka Asonye, this year.
Groce says he has seen concerted efforts to recruit Black VCs at the junior level. BLCK VC launched a program called the Black Venture Institute in 2020, which has now trained more than 100 operators on how to make venture and angel investments. A separate program, called Breaking Into Venture, is designed to train would-be Black investors on the basics of crafting an investing thesis, sourcing deals, and performing due diligence. Groce says 70 percent of people in that program have secured jobs as analysts or associates at venture funds.
Other initiatives aim to provide support to a diverse set of emerging fund managers. Screendoor, a new $50 million investment vehicle backed by ten general partners at prominent VC firms, will provide capital to a class of underrepresented investors who are raising their first institutional fund. “Waiting for today’s venture capitalists to embrace diversity will take too long,” the partners wrote in a blog post. “Our goal isn’t just to raise funds, but to help build lasting firms.”
Programs like these aim to support and grow a new class of investors. But the industry has a long way to go, especially at the partner level. “The reality is that there are only 34 Black investors that can write a $3 million check,” says Groce, based on BLCK VC’s data. “That’s a seed round.”
Wealth requirements placed on investors are another barrier to entry in the field. Most venture firms require a “GP commit,” meaning that between 1 and 5 percent of the committed capital comes from the fund’s general partners. The requirement is meant to ensure that partners have skin in the game, but also reserves power in venture capital to those with the highest amount of wealth. Similarly, angel investors have long been required by the SEC to meet income and wealth criteria that exclude all but the wealthiest people. And in the US, the wealthiest people tend to be white: The net worth of a typical white family in 2016 was nearly 10 times greater than a Black family, according to research from Brookings. Racial disparities, discrimination, and wealth inequality feed off each other, exacerbating problems in so many facets of American life, including VC.
Some investors have turned to nontraditional platforms to help close the racial funding gap. Clarence Wooten, a longtime entrepreneur and investor, created the venture studio Revitalize last year to “change the complexion of tech” by investing specifically in Black founders at very early stages. The firm leverages equity crowdfunding platforms, like Republic, as a way to diversify the cap table. Those platforms let people invest small checks into startups, which Wooten says can help Black founders engage their communities, as well as help those communities i