Over the past couple of years, I have seen a lot of virtue signaling when it comes to startups and funding. I received an email the other day and this was the hook to get me to click:
A few fun facts about our co's:
100% of our CEO's identify as an underrepresented class
Several of our founders are 2nd time founders, one with a previous exit to SoFi
One of our founders just one EY's Entrepreneur of the Year award
One of our co's is building Venmo meets Robinhood
Stay safe, stay healthy, and we hope you get to be present in however you choose to spend your weekend.
Frankly, I don’t, never did, and never will care about a person’s color, politics, sexual orientation, or anything like that when it came to investing in them. I only cared about the idea, and if I thought the person could build a great company.
I have never, ever been in a conversation with another investor where any of this came up as a reason to reject a deal. I have never, ever, rejected a deal based on superficial aspects like color, race, sex, or anything like that. Ever.
There are people on both sides of the political aisle that feel the way I do but they won’t say anything. It’s too easy for the chattering class to put them out of business. Since I don’t know what I am going to do next, I don’t care.
If I ever raise money again the only reason I would do it is I see an opportunity to invest money to make a ton of more money. If the person on the other side of the table puts superficial characteristics first, we aren’t a match and I don’t want the money.
Investors are in the game to make money period. They invest in anyone with a great idea that they think can build a company that will generate a massive return. At the same time, companies are so starved for talented people that there are literally no glass ceilings or doors in your way if you want to assume the risk and work for a startup that might not exist in a year, or less.
I always felt like if I specifically funded one group based on superficial characteristics or excluded groups I was limiting my opportunity to make money. In our now closed fund, we only funded B2B FinTech companies at the seed stage. We segmented the market by an objective sector. I never cared who pitched us and listened to hundreds of them from all kinds of people. We funded seven in five years.
When I see color, politics, or sexual orientation as the number one thing in a person’s byline, it actually makes me not want to invest. When those superficial characteristics are more important than building a blowout company, you know how important you will be as a shareholder.
It also shows the true focus of the person. They aren’t interested in dialogue. They are interested in mandates and force.
Venture capital doesn’t exist to fund social justice. It exists and perpetuates itself by taking risks most other forms of investment will never take to fund innovation that makes society better in some way.
I remember when the housing bubble burst in 2007-09 and had knock-on effects all over finance. An old-time VC told me, “A lot of people will start to try and pitch companies now. They aren’t in it to build a company. They just want a steady check. As soon as the economy improves, they will drop the company and take a steady job.”
That stuck with me. It was true then, and true today.
I think there are some people that are seeking to trade on the for lack of a better phrase “social inclusion” movement. They want to be seen as experts, or leaders of a movement. They are looking to make money off of it. It’s not that different from what Bob Woodson says about some people in the Civil Rights movement. I have met Mr. Woodson, supported Mr. Woodson, and know people who know him well. He is the real deal and I appreciate him greatly. You and the rest of America should too.
Of course, there are some very good people like Bob Woodson that are working hard to increase the breadth, depth, and impact of exposing people to entrepreneurship and venture capital. But, because of the pretenders, it is awfully hard to tease them out.
One wonders how many of the pretenders have actual personal capital at risk and skin in the game?
I had a lot of my net worth on the line when I was trading. I also invested in startups when I had negative income, so I know what skin in the game is.
Here are some headlines I have seen recently:
Melinda Gates-backed All Raise launches to boost women in tech
Bringing equity to the tech sector
Rolling Up White Collar Sleeves for Black Lives
That’s just a few. I see them every day in publications far and wide. Virtually every accelerator sends out virtue signaled content about how inclusive they are or what they are doing for only women or only this class of people or that class of people. When it comes to “skin in the game” Melinda Gates will never donate enough money where she is at risk of exploding and imploding her lifestyle.
People that blindly cite statistics like this, “America is 50% women, but venture funding doesn’t go to 50% women” are dumb. It’s just not a realistic or meaningful statistic or correlation. You can substitute any victim class you want and their corresponding census percentage and it still doesn’t make sense.
Guess what, average straight American-born white guys don’t get most of the money either.
Do you know who does? Ivy League people and people who attend elite universities and colleges. Do you know who doles out the money? Ivy League people and people who went to elite schools like Stanford. Do you know who funds the venture funds? Fund of funds, endowments, and pools of capital run by Ivy League people and people who went to elite schools like Stanford.
I see Yale just hired a new manager for their endowment. He is a white male that went to Yale.
I am reminded of Thomas Sowell’s comment that everyone in the sociology department is for diversity until you tell them you are going to remake their department with 50% conservatives. My alma mater Illinois is one of the most liberal universities in the world based on their political donations. Do you think in this hyper-heated political environment you can get an unbiased education there?
Look at the top-tier venture funds and top-tier fund of funds and see where the partners went to school. You don’t see a lot of schools with the words “State” or a geographical direction in them. There aren’t a lot of community college grads there.
As a matter of fact, the more strings you put on venture capital the tighter the circle of people that will end up receiving it or working in it.
Another problem is this. Yes, as an investor you need to be wide open to new ideas, people, networks and critically think about them. But, as an entrepreneur pitching to investors it is incumbent upon you to sell them on you and your idea. If they reject you because the market size is too small, or they don’t understand the problem you are solving it is probably not because you are (fill in the blank). It’s probably because you didn’t do a good enough job taking them to the mountaintop in your pitch so they could see. Maybe they don’t believe you lead and build a blowout company and they are just not saying that part out loud.
Always, always remember this graph as an investor or an entrepreneur.
The other thing to remember, if there are established companies that are already attacking the problem, it will be tougher for you to raise money no matter who you are. Everyone who is in the venture capital business sees a lot of “me too” pitches.
I got a cold email once with an idea for a company. I had no idea who the person was, what their race/gender/politics were. In my initial response, I told the person that I had seen a lot of deals in this space before and it was a tough space. I also told them that I had rejected 100% of the deals in this space for a variety of business reasons. Plus, I had friends in the space that knew a lot more about it than I did and told me it was going to be a hard problem to solve so while the return would be great for anyone who solved the problem, the probability of solving it was low and it was going to be a slog. In the back and forth, I gave the person some advice and some places to look for funding but consistently rejected the deal. At the end of the repartee, I was being accused of being not socially inclusive because I didn’t write a check.
Just because you pitch, doesn’t mean you are going to get the money. This isn’t about entitlement or charitable contribution. It’s about investing in great ideas that can become blowout companies led by great people. Everyone doesn’t get a trophy.
By the way, just raising some money is nothing. It’s a milepost. Building a sustainable and profitable company is brutally hard.
To solve the problem of social inclusion, you have to solve the problem of network. It is often socially risky to build networks. People generally avoid risk. It also means the builder has to get way out of their network and find a way to tap into other networks to extend invitations. By the way, the leaders of the other network might not want you to invite people from their circle to your circle. They might like things just the way they are.
No doubt, there are a lot of challenges around things like diversity and it’s easy to slip into patterns you are used to. But the way I am hearing and seeing diversity today, the people preaching diversity see the world as a fixed pie. Entrepreneurship isn’t a fixed pie.
But, we ought not to be engaging in struggle sessions to “understand”. All you have to do is talk to everyone and listen. Ask a lot of meaningful questions.
The other thing you have to be very mindful of is a person’s personal exposure and appetite for risk. If a person isn’t ever exposed to entrepreneurship or entrepreneurs growing up, that person is less likely to see entrepreneurship as a path to success for themselves.
If that person grew up poor, or was in some tough circumstances, the security of having a steady corporate job might be very nice for them. The opportunity costs of working for a startup might be too great for them.
It really doesn’t matter what sort of business someone tries to build. If they are successful, they will employ people. Those people can take care of their families and build some wealth for themselves. That allows those people to assume more risk in their life and maybe do better. The original person that built the business earns a lot of money, and they invest it in more businesses, people, or charities. That’s good for all of us and it is impossible for a government or non-government non-profit organization to accomplish.
I remember I was in a middle school class and some teacher wrote the word “entrepreneur” on the chalkboard. It was a weird-looking spelling word and it looked French to me so I was interested. We talked about entrepreneurship in that class—no judgments or qualifications like they do today. There was no, “you have to be doing social justice” or “using entrepreneurship to solve social problems” stuff. It was just about building a business and serving your customers.
It turns out, even though around 50% of my high school didn’t go to college many of them went into the trades. There were a lot of contractors around. They aren’t scalable startups but they are entrepreneurs. I was lucky to be exposed to them.
It also turns out that if you build a business, service the heck out of your customers so they are delighted, you tend to build a really nice business and at the same time solve a lot of problems, social and societal problems included.