WHY THIS VC IS BETTING ON WOMEN, PEOPLE OF COLOR, AND LGBTQ FOUNDERS

Why This VC Is Betting on Women, People Of Color, and LGBTQ Founders

 
 
Feb. 7, 2018
 

This article originally ran in Term Sheet, Fortune’s newsletter about deals and dealmakers.

 

Four years ago, Arlan Hamilton was living out of a hotel room that she shared with her mom. At that point, she had given up a career as a live music production coordinator to become a venture capitalist. There were a few problems though: She didn’t have a formal finance background and virtually no connections in Silicon Valley.

 

Her goal? Raise a fund that invests in companies founded by underrepresented entrepreneurs, including women, people of color, LGBTQ company founders, or any combination of the three. She cold-emailed venture investors, explained her strategy, and asked them to back her fund. She eventually managed to raise enough capital to launch Backstage Capital. “[They] saw that I wasn’t just a VC tourist — I was serious,” she says.

 

Hamilton convinced a number of remarkable limited partners to back her fund, including Susan Kimberlin, Marc Andreessen, Chris Sacca, Stewart Butterfield, and Ellen Pao. Since 2015, Backstage has deployed approximately $3 million across more than 60 pre-seed and seed stage startups. The portfolio includes companies such as Thesis Couture, Mars Reel, and Tinsel.

 

Fortune spoke with Hamilton about why she believes a diverse portfolio is good for business.

 

Tell me about your investment thesis. What are some of the key elements you look for in a founder or company before investing?

 

We invest in founders who are women, people of color, and/or LGBT. We felt like a lot of these people and companies were being overlooked, undervalued, and underestimated. With a little bit of leveling the playing field, we believe that these people are equipped to handle an erratic market and the various ups and downs in the startup world.

 

How do you think about dealflow, and what’s your current process of driving it?

 

When I first started, the question I would get from potential LPs over and over again was: Will you have the dealflow for this? How will you find them? We see more than a thousand companies every year. All of them, except for the several that haven’t researched us, are led by underrepresented and underestimated founders.

 

You’ve said previously that you don’t look at investing as “social impact” or a “charity.” Can you elaborate on that?

 

I think that “social impact” and “charity” are two different things. While in the past I’ve said we’re not an impact fund, I’ve actually come around to understand that we are an impact fund, and I’m proud of that. We are an impact fund because of the impact we have, but we are also looking for outsize returns. Those things do not have to be mutually exclusive.

 

Now, I will say that we are not a charity or a non-profit. When you talk to a group of white, affluent male investors and tell them you’re investing in women of color, the first thing that comes out is, “Oh, that’s really nice of you. That’s a great mission.” They immediately correlate us to needing a helping hand. This is not that.

 

What do you think about VC firms forming independent funds to back diverse founders separately from their own firms?

 

Here’s the thing: In an ideal world, they wouldn’t think about it as something separate. But at least, it’s a step forward. I’d rather them do that than completely ignore it. I would be happy to go along to the top 10 funds in the country and help them do that. It’s all about getting the capital access — the politics of it we can talk about another time. You have to start somewhere, so I volunteer to go into any fund and help them start a scout fund that is scouting for diversity. That is not a bad idea, and I applaud the people who are already doing that. They may not have it perfect, but they’re attempting it, and that’s a good start.

 

On average, women founders receive less than 3% of total VC dollars and women of color receive only 0.2%. What needs to happen for these stats to change?

 

A few things: One, more and more angels of color and women angels need to step up and meet founders early in their journey. There’s power in numbers. Two, some of these companies need to have more support at the post-seed level. There’s a lot that has been done at the pre-seed and seed level, but then there’s nowhere for them to go after that. I think larger investors think we’ve taken care of it because there’s a black woman writing a check. That’s not enough. We just can’t do it alone. The larger investors need to step up.

 

You support founders in the early stage, but what do you advise them to do as their company grows and they need further capital?

 

I struggle with that question because I’ve seen so much. I want to tell them that this is a meritocracy and that as long as you keep hitting your KPIs, you’ll be met with a Series A investor and you’ll be part of that percentage that makes it to the next level. But the reality is that the best and brightest and most deserving — even with the numbers, even with the traction — are being shut out. So I don’t know the answer to that until the larger investors really take this seriously and put money behind it.

 

How can the industry get more funding to female founders & more women partners in VC firms?

 

Over the next 18 months, there will be two or three major exits that are just too hard to ignore that will come from women or come from people of color. They will be profound exits that shock the system. Once that happens, a lot of investors will take note, and I believe that will happen by the middle of 2019. I also think that there needs to be a group of LPs who demand that their fund managers are looking at diversity and are actively looking at leveling the playing field.

 

What are some interesting industry trends in tech right now you think Term Sheet readers should be paying attention to?

 

I actually don’t pay much attention to industry trends in tech, to be quite honest. I just spend a lot of time hyperfocused on what we’re doing. I will say that the more I learn about blockchain, the more excited I get about it. It could potentially level the playing field.

 

Do you think cryptocurrency and the blockchain has the power to disrupt venture capital as it stands today?

 

Yes — it has the power to turn it upside down. The people who aren’t figuring out that Silicon Valley doesn’t represent the United States are the same people who laugh and scoff at cryptocurrency. You may laugh at the silliness of the scams but the root of what’s happening is that the world has figured out a different way to communicate and trade with each other. It’s like a new language, and if you aren’t able to read and write in that language over the next couple of years, you’ll be left in the dust.

 

What’s the best business advice you’ve ever received?

 

Go home. Take the day off. Stop working. I’m a big proponent of self-care, and I’ll never stop talking about it. If self-care isn’t part of your daily and business routine, you’re doing it wrong. It’s about recognizing how valuable you are, and you can’t run a company if you’re not able to take care of yourself first.

WHY THE (ENTREPRENEURIAL) FUTURE IS FEMALE

WHY THE (ENTREPRENEURIAL) FUTURE IS FEMALE

Women own only 5 percent of startups. So, when we talk about inequality, how about talking about women entrepreneurs?

 

By: Jeffrey Hayzlett

 

This time of year is normally filled with stories about holiday cheer and yuletide goodwill to all. 'Tis the season after all. No wonder that in years past, I've typically written about Christmas movies, business or some other jolly topic.

 

Related: The Best Places for Women to Work in 2017

 

This year, however,it would an oversight to address the holidays without addressing what's dominated the pre-holiday news cycle: gender inequality and sexual harassment. Everyone is talking about these things, and not just media personalities, Hollywood celebs and other high-profile individuals. (Those are the ones making the headlines!)

 

One reason why so many are talking? While public figures, in a public setting, are the ones we're hearing about most, the reality is that sexual harassment and discrimination occur on a regular basis, even in fields like ours.

 

We can’t eradicate the underlying inequality from every industry by snapping our fingers, but we can do something to combat it in our own industry. Entrepreneurship, after all, is contagious. It’s a state of mind, a way of life: A good idea deserves to be launched, regardless of who is launching it. Yet the reality is so often about who gets that opportunity, and when.

 

Let me show you some numbers:

  • Women own only 5 percent of startups.
  • Only 7 percent of partners at top 100 venture capital firms are women.
  • Women hold only 11 percent of the executive positions in Silicon Valley.
  • Last year, venture capitalists invested just $1.46 billion in women-led companies, while male-led companies earned $58.2 billion in investments, according to M&A and venture capital database Pitchbook.

 

How do we, as entrepreneurs and business owners, help address this national issue? How do we address the gender gap in our own midst, in entrepreneurship? And what does a middle-aged, white man know about this gap to begin with?

 

I’ll start by admitting that I’m not an expert in the topic, but as a student of human nature, I see that the tools to combat this are right in front of us -- if we know where to look. Here are some steps we can take.

 

Set goals.

 

Rome wasn’t built in a day and the issue of gender parity won’t go away in a week, a month or even a year. Set a goal. For example, Oath CEO Tim Armstrong said during a cable TV news interview that his mission was to fill at least half of his company’s leadership positions by 2020 with women.

 

He also said that Oath (a company that was born from the merger between AOL and Yahoo!) is “roughly [at] the 30 percent [level] right now.” He said he wanted to achieve his goal of 50 percent female leadership by promoting from within and creating new positions in areas where women can lead.

 

He said that his initial plan was to launch a new company within the Oath umbrella, where all leadership positions would be filled by women. In fact, the entire company would employ women.

 

His plan seemed flawless until he had a conversation with none other than feminist icon Gloria Steinem.

 

She reminded him that women don’t need a separate workspace -- quite the opposite, actually. She pointed out to Armstrong that business owners at all levels need to take more risks within their own ecosystems, as companies perform better where men and women can work side by side.

 

According to a McKinsey report, companies in the top quartile for gender diversity are 15 percent more likely to outperform above average, financially, within their industry.

 

At my own company, I’ve hired more women than men. I know what they’re capable of and I’ve taken steps to empower them to make decisions. One of those steps involves my response when someone asks me a question.

 

“I will not do the work of my very talented team,” I sometimes reply. That means that I want those team members to make the decision. If their decision ends up being wrong, it’s a learning experience. (More often than not, my team makes the right decision.)

 

Ensure equal access to capital.

 

Despite many advances in gender equality, it’s still an old boys network in terms of financing and investing in startups. A study by Harvard Business School found that investors prefer entrepreneurial ventures pitched by men. The study also took a look at video pitches and found they were twice as likely to get funded when they were narrated by men.

 

This doesn’t even make sense to me. If it’s a good idea, with a good business plan -- fund it!

 

A quarterly report by Fundera found that female entrepreneurs on average ask for roughly $35,000 less in financing their small businesses than men. The report also found that across the board, women entrepreneurs get offered smaller loans (2.5 times less money), than men do.

 

Because it’s so hard to get funding from VCs or angel investors, especially female-led startups, many organizations have taken steps to address these challenges. Companies like Watermark, SheWorx, Merge Lanes and BBG Ventures, to name a few, are making it easier not just to acquire capital, but to access it as well.

 

Despite women-led businesses being the fastest growing segment of entrepreneurship, they still comprise a small percentage of companies funded by VCs. Some blame this on under-representation of women’s businesses, but I think that statement is a cop-out. As I’ve said before, good ideas aren’t a monopoly for one segment of the population to own.

 

In my own company, I encourage anyone with an idea to step forward -- whether it’s the president of the company or the intern. A good idea from a female entrepreneur deserves the same shot at funding as any other good idea from a male colleague.

 

Share the spotlight.

 

Earlier this year, I attended a conference in New York City. Throughout the conference, I noticed that the majority of the panels were all-male, and I thought to myself, “Why isn’t there a woman on that panel?” Our company does a lot of events throughout the year, so I made a mental note to tell my C-suite network team to make sure we have a diverse list of speakers and panelists at every conference and summit we do.

 

In fact, this problem is a prevalent one. The upcoming Consumer Electronics Show (CES), was recently called out by female tech executives for its lack of inclusion and diversity. It might be one of the largest tech events, but its keynote-speaker lineup lacked any women.

 

Twitter CMO Leslie Berland, in particular, took to social media on Dec. 3 to make her feelings known, tweeting, “I’ve got a long list of amazing women to hit your stage. Let’s talk. #changetheratio.” And JP Morgan Chase’s CMO, Kristen Lemkau,  chimed in, naming a long list of women innovators in “less time than it took to drink coffee.”

 

As a result of this backlash, the show organizers made changes to the program. And that was the right thing to do: Giving women exposure as part of a panel, as a keynote speaker or in some other visible role, helps narrow the gender gap -- if only in a small way.

 

Make no mistake about it: The problem we face is a big one. It's a systemic problem that none of us can change alone, but when we all work toward multiple solutions, progress happens.

 

As business owners and entrepreneurs, we need to take a good, hard look at ourselves and tackle this issue head on. We must ask ourselves, "Are we part of the problem?" And, if so, we have to fix it!

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