If you read the daily VC emails, you will see some breathless reporting about how the lawyer who won the Affirmative Action case at the SCOTUS is now suing the Fearless Fund because of their focus.
In the last five years, many venture capital funds have been launched with a focus on “female”, “people of color”, and “underserved” entrepreneurs. They all talk about it in different ways. Often, the general partners of the funds are from the community they are targeting.
I think that online magazines are reporting on it because news is slow and they want the clicks. They also want to fan the flames of the political divide, and since this is race-based it makes it hotter. For what it’s worth, they are reliably hard-left liberals. Just read the tenor and tone in their columns about Twitter and Elon Musk and you will see.
I don’t think the lawyer has a case. I think the market will speak and take care of the racial/gender/sexual orientation sector-focused funds. Either they will succeed or not.
In a complaint filed this week, the American Alliance for Equal Rights — founded by conservative activist Edward Blum, the man driving the effort to end affirmative action — sued a minority-focused venture capital fund for unlawful racial discrimination.
In the complaint, the organization accuses Fearless Fund (an early-stage venture capital firm based in Atlanta that focuses on funding solely to women founders of color) of racially discriminating against non-Black individuals by having a $20,000 grant program for only Black women who are small-business owners.
The program is the Fearless Strivers Grant Contest, and the fund hosts it four times a year in partnership with Mastercard. The American Alliance for Equal Rights alleges that Fearless Fund is violating Section 1981 of the Civil Rights Act, which states that private contracts must be made and enforced without regard to race.
A few points I want to make.
The lawyer is a little zealous in his pursuit to make things “fair” from his perspective. Taking on affirmative action at universities was the right action. Going after private investing funds is not the right action. I think the lawyer tortured the logic a little too much here. By the way, the precedent of the Colorado cake baker might help the cause of the private funds in a trial, which is an ironic twist.
Virtually every fund that is formed tries to create an edge for itself in some way so it can attract investment. Our fund invested in B2B FinTech. We had a unique edge there and so far, our fund returns have proven it. If racial/gender/sexual orientation is a true edge beyond fundraising, the results will speak for themselves. It is too early to say because most of the startups that have been funded haven’t had the chance to exit yet. If Fearless Fund thinks they have an edge, they are getting a chance to prove it and the market will speak.
Even if a public pension fund is invested in a racial/gender/sexual orientation fund, even though it is public money it is not discriminatory because virtually every venture fund discriminates in some way. The principal in charge of that public pension money has to answer to someone so if they make a lot of what turn out to be poor investments, they will lose their job.
We tend not to have a lot of patience for capitalism these days. We want it now. Capitalism is messy. It takes time. How many times do you hear an investor say the “market is wrong” or “the market doesn’t see it”? Even in the famous 2008 crash, the people who bet on the market crash didn’t see results the day they made their play. It took years and in some cases, the investment banks on the other side of the trade intentionally marked the market against them to cause intense financial pain with the intent to break them.
Free market capitalism is the best way to organize society. We ought to embrace it more but the deeper we get into all this stuff and the deeper the political divide in the US becomes, the further away we get away from it.
Does it bug me that people raise funds on racial/gender/sexual orientation supposition? A little. I don’t think there is outright discrimination when it comes to funding startup businesses. I do think that there is a lack of network access to get a chance to pitch. I also think the venture community has gone a bit overboard in trying to virtue signal around these issues. Some venture accelerators are a total waste of time to even go through now because the companies aren’t being built to solve finite problems, they are virtue signaling.
It does bug me that as an old white guy, if I was pitching my fund against a racial/gender/sexual orientation fund founder, they have an edge purely because of their racial/gender/sexual orientation. It’s the reverse Jim Crow, and frankly, it should bug everyone. No one likes to be judged on their racial/gender/sexual orientation, you’d prefer they look at the thesis for the fund and prior track record if there is one.
It does bug me as an old white guy if a bunch of white guys went to a venture fund to pitch, there would be some initial sentiment against funding them because of the virtue signaling that needs to be accomplished by the fund for the “community”.
It would be nice if instead of giving you a lame excuse for not funding you they just said that they weren’t funding you because of your skin color.
One thing to remember is in the scope of all the dollars allocated to venture investment the amount of money going into racial/gender/sexual orientation is de minimus.
I remember pitching an Illinois public pension fund for money with a Hispanic female co-founder and the person on the opposite side of the table said she “wasn’t Hispanic enough” since she was Cuban and not from some other country. Turned out, the Illinois Senator that oversaw the fund manager was Puerto Rican. She didn’t like Cubans. Even trying to thread needles we couldn’t raise money.
Historically, getting institutional money into a venture fund has been hard. Even the legendary venture capitalist Fred Wilson has written about raising their first USV 1 fund. It took one and a half years and Fred had all the “right” credentials. He was liberal, Ivy League with a great track record. It turns out, most of the people that allocate money to venture funds went to Penn, Stanford, Harvard, Yale, or some other Ivy. You need to be a David Brooks card-carrying person to raise from them or you won’t get a meeting. Add in politics, since that infests everything today, and you better be a reliable liberal. Conservatives need not apply.
The way funds are raised today, most people need to raise from high net worth individuals and family offices for their first three to four funds before they can raise Institutional money. It is awfully challenging to raise a really large venture fund without Institutional money. The thing that rubs a lot of people the wrong way is that the racial/gender/sexual orientation didn’t have to jump through those hoops and they can raise that kind of money in their first fund.
I have been to a fair amount of conferences where institutional investors will advise new fund managers. It’s pretty hilarious to me when I hear them talk about “I will do a first-time fund.” but the truth is they actually write a check to one about once in a lifetime. New fund managers have hope but the reality is they generally have no chance. These institutional investors are all fully allocated to the big traditional venture funds and they don’t want to lose their allocations so investing in a new fund for them takes a lot of time and depending on the size of the endowment/pension fund, the check size needs to match up with fund size.
It goes for pitching too. I have had racial/gender/sexual orientation founders tell me they deserve a check because of their racial/gender/sexual orientation. Bullshit, and I am blunt about it with them. Great investors fund great people that have great ideas. You don’t fund a sector just to be in the sector to look cool.
People that put money in funds because of racial/gender/sexual orientation aren’t funding “diversity”. They are funding paint-by-number diversity. There is a big difference.
The proof will be in market returns for a lot of the trendy things people are writing vanity checks into today. ESG, racial/gender/sexual orientation, and global warming tech all will have their day at the races. Will they win, place, or show or not pay at all? It remains to be seen but my guess is the ones that pay will have nothing to do with the outward characteristics. The winners will be like all winners of the past. For fund managers, they will have funded a great person with a good/great idea who can execute like crazy and build a business that solves a problem people are willing to part with resources to get.
99.9% of VCs or investors out there would not write a blog post like this. They aren’t fearless. They are herd followers. They run scared.
An example (kind of old, but still an example): Wheelock St. Capital, founded by Merrick Kleeman, who had been a senior exec at Starwood Capital. Its first fund was designated an emerging fund, which might have helped it get an allocation from NJ Div of Investment. That was in 2016 or 2017. I think Wheelock is now very well established.
I was once a judge working on a program through NYU's Wagner School that was essentially a "shark tank" of "social entrepreneurship" ideas/concepts. I told my fellow panel members, "If any of the ideas requires corporate donations as the primary means of operating the business/concept, I'm going to reject them outright." I was known as the meanest judge in the program. "Sustainability, begins at home. You have to find the means to financially sustain the concept, otherwise forget about it."