editione1.0.2
Updated February 11, 2023Charles Hudson (Precursor Ventures)
Eghosa Omoigui (EchoVC Partners)
Paula Groves (Impact X Capital)
Charles Hudson, Eghosa Omoigui, and Paula Groves, are venture capital titans. With careers spanning multiple decades, each of them has cut their teeth in traditional venture capital, both managing and amassing multiple millions for their respective funds, before venturing out to create their own. We talked to them about their experiences in the venture ecosystem, the perils of raising funds while Black (despite their qualifications, credentials, and experience), and their desires to see peers invest in the best founders—irrespective of background—alongside them.
Interviewed January 2021
Erika Brodnock (EB): To start with, we would love to hear about your journey to becoming a venture capital investor. Tell us about your pathway and whether there have been any roadblocks or headwinds to overcome.
Paula Groves (PG): I began my career at Stanford University, where I received my undergraduate degree. I then moved to New York City to work for Credit Suisse First Boston on Wall Street. I loved being in New York, by the way, and afterwards went to graduate school to get my MBA at Harvard. One day, I received a call from one of my former bosses at First Boston, who said that he was starting a venture capital firm in Boston and asked if I would like to join. I said, “Sure.” It was a double bottom line fund that we started back in 1992. It was probably one of the first of its kind. Social impact investing and double bottom line investing are more mainstream today. Back then it was quite novel. The State of Connecticut pension fund wanted us to focus on both job creation as well as financial returns, and that was the mission of the fund. We then secured a second mandate from CalPERS [California Public Employees’ Retirement System], and ultimately grew the fund to about $800M of assets under management. I then spun out and launched Axxon Capital, which was focused on women and minority-led businesses, in 2000. What is most interesting is that, in 2000, less than 1% of venture capital dollars went to African Americans and less than 4% went to women-led businesses. Unfortunately, that data has not changed. Even today, those numbers are still the same. The question is, what can we do to make a difference, to raise the bar with regards to getting access to capital for women- and minority-led businesses? That has been the essence of my career.
A partner and I ran Axxon Capital for a number of years. Unfortunately, the dotcom crash happened, and we shut the fund down in 2004. Then I moved out to Oakland, California, and ultimately ran a US Small Business Development Center, set up by the US Small Business Administration. Over time, a team of us secured a contract with the City of Oakland to provide capital to minority-led businesses in the most marginalized part of Oakland society. These were entrepreneurs who had been formerly incarcerated. They were entrepreneurs who had 80% of the median income in Oakland. It was really focused on trying to provide access to capital for those who do not find capital in any other places to launch their business. I did that for a number of years before I received a call from my partner, Eric Collins, who is the CEO of Impact X Capital, who said he was launching a venture capital fund in London to provide capital to underrepresented entrepreneurs. We launched Impact X in December of 2019, and I have been working in the London space since then.
Charles Hudson (CH): I grew up in Michigan and moved to California for college. Like Paula, I went to Stanford, and I studied economics and Spanish and thought I was going to go into international development work and get a PhD in economics. I decided not to do that because in the late 90s, being at Stanford, the internet was all around you. Startups and tech companies were being started on campus all around us. I did not know anything about technology or startups until I took an internship at a company called Excite, which later merged with a cable broadband company called @Home. I worked there for the summer between my senior and junior year and decided that instead of going into development work or public equities, I was going to focus more on tech because I thought it was a really interesting space. I thought that the internet was going to be this huge economic force. It was going to radically change markets, and I decided that was going to be what I focused on.
While I was at Excite, I worked for a woman whose husband, it turned out, was running the CIA’s venture capital fund. When I told her about my interest in going into investing, she said, “Hey, you should really talk to my husband. He has this fledgling venture capital fund, and he could really use some help. In terms of resources, you could do some great work for him.” Instead of taking a more traditional job on Wall Street or consulting, I ended up working for In-Q-Tel, the CIA’s venture capital group, for three and a half years. It was a lot of fun and I invested in a ton of really interesting companies, including companies like Keyhole, which is the team behind Google Earth, Palantir, and a number of other really interesting companies, some of which are still going to this day. That exposed me to venture capital and made me interested in learning more. As a newly minted undergraduate, I did not have all the work experience or business experience I wanted to bring to the table. I went back to business school at Stanford, came out and worked for a number of startups, some on the enterprise side and some of the consumer side. In 2010, I started angel investing on my own and made a couple of investments that worked out well, and quickly realized that after about eight years away from investing, I was ready to get back into the business.
I joined a firm called SoftTech VC, which is now Uncork Capital. At the time, my business partner Jeff had raised $15M for his first institutional fund and was looking to scale up that enterprise. It is pretty crazy that back then, they had $15M under management, and just 10 years later, they have half a billion dollars under management. The firm has really grown—we went from Jeff, to me and Jeff, to now they have three or four partners over there and have completely built out staff and have raised much more funds. While I was there, I noticed that early-stage investing was changing. When I first joined Uncork, we routinely wrote small checks—a couple $100K, to $1M or less—and that got us into companies like Postmates, Eventbrite, Fitbit, and Postmark. As our fund got bigger, it was harder to write those smaller checks. We needed to write bigger checks to make the math work for our fund. The thing that went away as we increased our check size was our appetite for writing small checks to people that were out of our network, or we did not know so well. Those were mostly first-time entrepreneurs. I felt that all of the early seed funds that had been successful were going through the same process of growing up, raising larger funds, and moving away from that early first check investing. That was the work I wanted to do.
Five years ago, I left and started Precursor Ventures and we have raised three funds plus a little sidecar vehicle of about $100M under management. In total, we really focus on finding early-stage entrepreneurs that are oftentimes pre-launch and pre-traction but are also outside of our network, or not coming out of Pinterest, Square, Stripe, some really obvious company where they get the benefit of the doubt. When you have that strategy, you end up backing a lot more women and people of color because many of them as entrepreneurs fall in that bucket.
Eghosa Omoigui (EO): My path to where I am today was a non-traditional one. I went to law school in Nigeria and then worked as a lawyer at a corporate oil and gas and general corporate for two years. I then decided to go to graduate school to pick up exposure to cross-border work. I left Nigeria and went to the University of Pennsylvania, and I was able to craft a degree that was mostly corporate law and quite a bit of corporate finance. This was on the East Coast and I was not steeped in the Stanford startup world. I was lucky, as I had a professor at Wharton [the University of Pennsylvania’s business school], who talked quite a bit about the startup world because his wife was on the West Coast. That exposure got me thinking. It was intriguing, but I did not think I would focus on it. When I finished studying, I had two options to go down the traditional path: work at a New York law firm or Jersey Big Four firm.
There was a small company out in California that wanted a business development corporate lawyer, and I said, “I am going to try that for a year. See if that works.” It made absolutely no sense to my parents in those early days. I went there for about a year and the company ended up being acquired. At that point in time, I said, “This is super interesting. What should I do next?” I was in LA; I was still not in San Francisco or Palo Alto. I was then recruited to join a corporate law department, and they were doing a lot of very interesting transactions and securities. I said, “Let me go beef that up.” I do not think I was designing a career path at that point, not as much as I was just trying to increase my surface area of exposure to different things. It turned out that just because I left the next gig, I was hired by a law firm to do more venture work. I became really interested in venture and decided that I wanted to create my own startup. This was in 1999, 2000. Weirdly, I left the firm around five days before the NASDAQ crash. I am always saying that timing is everything.
I ran the startup until around November, but it was obvious that we could not get anywhere or secure financing. At this point, Intel Capital called and said, “We would love to have you join us on the Intel Capital legal side.” I said, “Great, I would be able to get a salary again.” I started off with Intel in the portfolio management group, which is the group tasked with managing the post-close portfolio. From there, because of the timing, I started realizing that there were other things we could be doing. I started a patent purchase group, where we were essentially buying intellectual property from companies that were failing. I also restarted a bankruptcy and restructuring group for the startups that we managed. I was in the Bay Area at this point in time and realized that it was going to be almost impossible for me to break in, with a non-traditional background, without a strong signal of belonging to the tribe, which would be an MBA. I could not figure out for the life of me how to do an MBA—the opportunity cost was very high, as I had a family. I decided to do a fully employed, full-time MBA. I did that over a two-year period, flying back and forth between the Bay Area and Boston. It was a really hard trade, because it cost me my marriage, even though I still have my kids. I realized that I had to pay those dues to be able to break in. Fortunately, one of my bosses at Intel Capital decided to offer me a job to become Chief of Staff for Intel Treasury Global. I did not have my MBA at that time. I did not have anything. There was a lot of internal resentment that I suddenly fell into, where people were saying, “He does not have a CFA. Does he have an MBA? Why did you pick him?” It was interesting, because he had me on this interview process for three years, that I had no idea was going on. From there, I blossomed.
I hit escape velocity when I wrote a thesis for Intel, “Investing in the Next Generation Internet,” and I was told, “You can do this, go and find some good companies.” Over the course of a four-year period, I was able to bring in many interesting companies, but the big ones were Facebook, LinkedIn, Pandora, and AdMob. Intel did not invest in any of them, so I left in 2010 out of frustration. I made my reputation at Intel for being able to craft the pieces for doing those deals, and it turned out to all be great. I left in 2010 and my thesis was that investing in underserved economies and emerging markets was going to be the next big thing. Africa and Southeast Asia were going to be highly correlated and will be interesting, but no one believed it. I formed EchoVC and went to Africa first in 2014. In 2016, we formed a strategic partnership with TPG Growth. We have been running for six years and it has turned out to be incredibly successful.
Johannes Lenhard (JL): Charles, you began this whole journey at Stanford, and have scaled to all kinds of heights, but how do these early networks play into the ecosystem as it stands, and the reproduction of the status quo? How did you raise your first fund and your own capital? Did you find that the connections that you made at school or in the early years in software help with that? If you had not gone to Stanford or Oxbridge or the Ivy League, how could you do the same thing? How important is networking? How do you get that network together?
CH: Network work is really important. Richard Kerby’s last survey said around 40% of all VCs went to Harvard and or Stanford,* and my guess is 30% went to both. For a long time in venture, there was more of a focus on insularity as a benefit. It meant everybody knew everybody. That was considered a good thing, not a bad thing. It was high trust and comfort. People did not think as much about, who are we keeping out by having these barriers?
When I left Uncork, I thought I would have a reasonably straightforward time raising my first fund. I had been a partner at the firm for five years and I had done some good deals. I knew our LPs. It was the opposite of what I thought it would be. I thought it would take a year or a year and a half to raise. It was not at all what happened. Most of our existing LPs from my old fund were just not first fund LPs. They are the folks who want to see some track record and see some cards get turned over.
The main reason I was able to raise the fund is because I was already part of the network of other VCs. I had other people from other firms who connected me with their limited partners and investors who helped me refine my pitch. They did it because they knew me, I do not think they did because they just generally want to help the world. They helped me because they knew me. When I think about the barriers that keep other Black venture funds from getting started, network is the big one. Without connections to other VCs or limited partners, it is very hard to raise the funds. The other thing I have been fortunate in is that some of my angel investments had worked. I had enough of my own capital to be able to float myself for the two years it took to get our first fund closed, and then to continue to absorb the well-below-market pay that you make as a new fund manager on your first fund.
I tell people it takes about a million bucks to start your own fund, and that those are hard dollars that you will need to part with. If you just look at the wealth creation statistics by race, there are not a lot of Black people that are going to clear that bar. There are just so many structural barriers that get in the way for people starting new funds. People are beginning to recognize that when I got into venture, it was okay to just say I can only go to invest in people I know. That was an accepted wisdom and best practice, and investing in people outside of your network was considered borderline negligent. That is changing, but it is changing slowly. It is changing probably faster for VCs than it is for LPs.
The other thing people said is, “I want to invest in companies that are close enough that I can ride my bicycle to go visit them.” If you think about that, where does venture capital happen? For the most part, it happens in Silicon Valley, one of the most expensive and least racially diverse—in terms of Black people—places in the United States, and New York City, which is more diverse, but also expensive. For a long time, I would say venture capital was geographically isolated from communities of color. I would also say the barriers of getting into the business were financial and just did not allow for much entry.
The third thing is the easiest way to become an independent venture capitalist is to be a venture capitalist at someone else’s firm first. If you look at the statistics of our industry, putting aside partners, there are not that many analyst and associate principal Black investors. All of the places, the mechanics for the pipeline, front doors, all the things that work, none of them really include us right now.
EB: There are not many Black investors that have the credentials and qualifications that you have. If you find it hard, it makes me wonder what hope there is for the people who have not had that educational background or have not had the doors opened by Index, and the various funds that you each worked at before you started out on your own.
EB: Paula, you have previously given me an example of when a state-led intervention positively impacted access to diverse entrepreneurs, and particularly those of Black and mixed heritage. Could you tell us a little bit about the Equal Opportunity loan program and what you think that might look like today, if it was going to be recreated to level some of the playing field?
PG: This goes back to the civil unrest that occurred in the 1960s, just as the civil rights movement was starting in the United States. One of the insights that the federal government had was that the key to solving the problem of civil unrest was providing economic opportunity. They decided to establish what would ultimately become the US Small Business Administration, where they provided loans to underserved communities and underrepresented entrepreneurs. Access to capital creates opportunity, and with opportunity, there is hope. With opportunity, access to capital, and hope, you can spur entrepreneurship, which allows people to provide for themselves and their own communities.
There was a study that I did working with the City of San Francisco back in mid-2015. I wanted to understand why the percentages of African Americans living in San Francisco had declined. It had become fairly expensive to live in San Francisco, and people had to move out to the suburbs to find their own economic opportunity. Most interesting was that there was a high correlation between the repeal of Proposition 209 and the decline in African American population in the city. Proposition 209 said that San Francisco was no longer allowed to consider race when allocating government contracts to businesses. Historically, a lot of government contracts had been allocated to underrepresented entrepreneurs, and when the city was no longer allowed to consider race as a factor in allocating contracts to diversify their supplier base, those contracts went away. Many of these contracts had been awarded to entrepreneurs who had in turn become pillars of their community. They had contracts with the airports, for example. These successful entrepreneurs were then able to employ people that look like them, which is an important factor when you consider diversity and entrepreneurship. Diverse entrepreneurs tend to employ diverse employees. When these contracts went away, these companies declined and were no longer pillars of their community, which had led to the barbershops, restaurants, and the thriving economic environment. Those companies went away, and those communities ultimately went away. There was a high correlation and evidence in the US that says that when you focus on diversity and entrepreneurship, backed by the federal government, that can indeed lead to diverse communities and higher economic growth within those communities.
EB: If we were to recreate that today, how would you feel about overlooked founders being provided with interest-bearing loans, when compared to their counterparts who are being provided with equity financing that is non-interest-bearing and they do not need to pay back straightaway?
PG: Access to capital is access to capital. If we provide interest-bearing loans as a means of helping companies get started, that type of access to capital can be a lever that can be very effective. That is one of the other tenants of the US Small Business Administration in the United States. I used to run one of the business practices for the US Small Business Administration in Oakland, California, where we served over 4,000 entrepreneurs. One of the tools that the US Small Business Administration uses is low-interest loans, specifically for young entrepreneurs and startup entrepreneurs. It is a tool that has been used very effectively in the US. Now, loans versus equity, that is an important consideration, in that equity tends to be risk capital, and we absolutely need risk capital to help underserved communities and underrepresented entrepreneurs. If the choice is low-interest loans versus nothing, then I would take the low-interest loans, but we need both. You need loans as well as risk capital to get the economic engine going and empower our communities, but low interest is better than nothing.
JL: You often hear that 90% of funds are invested in white, all-male teams, and that is true across the board in the European landscape. Eghosa, what steps have you particularly taken at EchoVC to change this? What are you already seeing and having early success with, in your strategy?
EO: There are so many things that get conflated when we talk about the statistics. When we speak to LPs and other participants in the ecosystem, there seems to be confusion as to what to do and how to do it. There is activity now, where more diverse first-time fund managers are emerging. These are very small teams to begin with. A lot of folks say, “Okay, let us invest in these new managers.” Venture is a statistics marketplace, in the sense that nearly 99% of these companies will need further, larger financing. As a new seed manager, if you do not have a network that allows you to push the companies you invest in at the pre-seed stage, downstream to later stage investors, you then do not get the track record that LPs like to use to measure success. Investors are much more interested in things such as, who could invest with me in this deal? Who invested later? The key is, they want to see brands that they like. An LP who does a little bit more work may dig into the portfolio companies themselves and say, “That is an interesting company, let us invest in it.” A lot of them do not do that work and they are looking for very high-level superficial signals. It is all pattern matching, all along the way. The VCs pattern match the founders they bet on. The LPs pattern match the funds they bet on. You see this all the time. If you decide to be non-consensus, you might be out in the cold for a long time, until you have enough of a track record.
I have a friend who started seven years ago. He is not white, and it has been interesting to talk to him about his fundraising dilemma, and how six unicorns into the portfolio, LPs are still telling him that maybe he is just lucky! This kind of feedback is all too common. How do you change this? It is something that I try to figure out, because as a Black fund manager, you carry a lot more weight on your shoulders. In many cases it is invisible, but everyone is looking to you to be solely investing in diverse founders—Black, Brown, women. The truth is, you actually want to be able to have some flexibility in the types of companies you invest in, because of specific interests. If you have an interest or expertise, and you see a company that could really drive impact, how do you balance that out? Are you better off trying to improve that company’s management team from the inside by becoming an investor and bringing diverse talent to the attention of the founder? That is one way to do it. The other way to do it is to figure out how to encourage these founders that are sitting inside other companies that do not have the confidence to come out, because they do not think there is anybody out there who will fund them. Being unapologetically diverse in the approach to investing takes a long track record. You have to not care. You just have to do what you want to do. You have to have enough of a return, or the kind of track record where people say, “I get why he or she does that, and they have shown an ability to do it consistently.” There are interesting interplays here and being able to have more managers in the ecosystem, more emerging managers, that is great, but we need more managers at every tier. We need more managers at seed, at A, and at B. Here is the funny thing, as you start going downstream: it is a smaller and smaller group of GPs that know how to do those deals. I like to ask people: how many Black GPs can do Series B or Series C? It is probably less than 50. It might be less than 30 in the total of the entire US.
JL: The NVCA [National Venture Capital Association] put out a report with Deloitte, called the VC Human Capital Survey, and the first version that they put out in 2019 had zero Black VCs in it. They went away, found some, and put them in there. The second version looks a bit more polished now and has a percent or so. That is how bad the numbers are. You are absolutely right, if you are going downstream, it becomes even thinner.
EO: The answer has been there. When people say, “what should we do?” There are interesting things. One is, for some of the bigger firms that will do the later stages, how do we impanel diverse investors in those funds? The weird thing about those funds is that the few folks who are in these funds, that I mentor, keep running into the same problem, which is: what is the quota of diverse founders you can bring in before people start to wonder whether that is all you came into the fund to do? You run into this, “I do not want to get pigeonholed, because that means that I do not get advanced. I want to bring the deals that I think I can sell to the IC [investment committee].” You then find that they do fewer and fewer of these diverse founder deals because the fund does not invest in them. There was a fund; their actual coverage in their entire portfolio for Black founders is less than 1%, but they are one of the most active on LinkedIn and Twitter about BLM matters. You would not believe that they are less than 1%, if you correlated it to how much noise they make.
For us, it is getting the LPs to say, “How do we get more of these investors to ‘invest’ rather than talking about investing in diverse founders?” The truth is, as Paula says, until you invest in people who look like them, you are never really going to see any traction. We have about 30–40% women in my firm, and we have had interesting pieces of feedback from women founders who say, “The most interesting thing interacting with your firm was seeing women on the other side of the table.” These are soft elements that do not show up in slides, data, or graphs, but matter in terms of how accessible you are and how amenable you are to listen to experiences, and not punish them because they do not match patterns. That is a real issue.
Until LPs essentially make it a mandatory KPI that funds invest in diversity, things will not change. LPs need to build a process or a pipeline where they are looking at the deals and the funds they are investing in. The money needs to start to talk. That is going to be important. A lot of LPs in some of the very best funds are afraid to say anything, because they do not want to get kicked out. The truth is, there will always be big wins that these funds miss. If diverse fund managers are able to pick up the wins, incumbent funds completely missed or discounted, then they begin to trust diverse judgments. In the end, that is what venture is about: trust in judgment, whether it is on the investor side or on the founder side.
Stanford released a study about how difficult it was for diverse fund managers who were on their second and third funds to raise money, and it is absolutely correct. Even when LPs tell you, “Come back in fund two, with your track record.” You go back with fund two and the track record, and then they will have you come back for fund three. The goal posts just keep moving. In reality, they are much more willing to invest in first-time managers because losses can be subsumed under a “special program.” However, once you look for fund two, fund three, then it means that you are now saying, “I really actually want to do something here and I am going to match the record.” It is not some unique giveaway program.
Charles is probably one of the most experienced VCs. He deserves to manage a bigger fund. LPs are giving money to mediocre managers, and I do not understand it. Charles has paid his dues over and over and over again and is an outstanding investor, and he is still struggling to get support. The system is broken. We keep pushing, and we keep talking, but it won’t change until there is some externality that makes one or two or three LPs say, “I am going to deploy money fairly. I am going to give it to folks who are willing and able to invest in diverse founders without apology.” The unapologetic investor.
EB: I 100% believe that, if you are the only person in a room of your hue or of your gender, survival instinct kicks in and will force us to try to conform, so that we fit in and do not lose the food out of our own mouths in order to put it into someone else’s. That is a well-known phenomenon. Does LPs investing in Black GPs en masse and investing it in Black funds actually work? Is the pipeline broken in various different places? Or is it just that if LPs gave more Black GPs money, then the Black GPs would then give it out to more diverse entrepreneurs? What is the broad thesis of your funds and how does this set you apart from other funds in the market?
PG: Yes, absolutely. The more money you give to Black GPs, the more Black entrepreneurs that would be funded. If you look at the Silicon Valley model, GPs tend to invest in people that they know and people that they are comfortable with, rowed crew with, or have attended their son’s wedding with. Getting to know you is one way in which people gain comfort. Venture capital investing is a high-risk business. At the end of the day, despite all the spreadsheets, reference calls, and Google research that you can do, you must still come to that final gut decision to make an investment in an entrepreneur. If you know them and if they are known to you, then making that gut decision adds a level of comfort and makes the decision a bit easier. If you are not in those networks, then it is hard to be known and hard to get through that subjective evaluation process. If you are Black, you tend to have Black networks. I am stating the obvious. It is easier for you to do the reference checking, because if you do not know the entrepreneur directly, you certainly know someone who does know them. If your venture capital investing model is based upon investing in people that you know, then if you are Black, you have the Black network, and therefore, you have access to the Black entrepreneurs who you can gain comfort with to make the investment decision. That makes the subjective decision easier. Intuitively, it just makes sense that if you give more money to Black general partners, then more Black entrepreneurs will have access to capital.
CH: The expectation right now is that Black VCs are going to fix the Black founder funding problem, and it does not look like that is actually going to work because Black VCs are not large, and they are not given nearly enough capital relative to the opportunity. I want to pick up on two things that Eghosa said that are really important to understand. There are not that many Black VCs at the later stage, which means all of the activity ends up happening at the early stage, such as with what I am doing. The problem with that is, it takes five to seven years for an early-stage fund, generally speaking, to start to bear fruit, which means you probably have to be good enough at the job to get two and maybe even a third fund done on very limited realized performance. There are a lot of LPs who will back you on that first fund as Eghosa said, “Oh, we have a mandate, an allocation, a thing to do.” When it comes to that second and third fund, you are swimming in a different pool. My fear is that there are a lot of first-time funds being created that are subscale, that by the time those people go back to raise that second fund, that the people who were enthusiastic about that first fund will have moved on to something else, because they are not really long-term backers in venture. Those funds will not have enough realized performance to make it a no-brainer for new money, and they might just die on the vine.
It is also worth saying that not every Black VC wants to invest in Black people. I do not think they should have to, honestly. There are some Black-led funds that have almost no Black founders in their portfolio, and it is because eventually the market needs to mature to this place where all Black VCs can be diverse within the Black VC tier, and you will have some people that are impact oriented and very focused on funding Black founders, because the strategy they have either yields a lot of those or explicitly focuses on those. You will have Black-led venture funds whose portfolios look, maybe embarrassingly, not diverse. We need to separate having Black venture capitalists and leadership positions at firms from the responsibility of Black VCs to fund black founders, because we cannot give the rest of the venture industry a pass and say, “The funding of Black founders, that is the Black VCs’ problem. We can outsource that to them, they are responsible for it.” That is a cop-out approach. I just bring it up, because I do think when you walk in the room as a Black fund manager, people’s default assumption is you are running a diversity impact fund, no matter what is in the deck. I know this to be the case, because it happens to me all the time. The irony is we do not have an explicit focus on diversity, we have a focus on finding people that are out of network that the market does not know how to underwrite, because in a world of a thousand early-stage venture funds, the only way you can make money is either be first round capital, top skim the best repeat founders, or you have to have confidence in your judgment that you can pick people that other people either do not see or do not value, and to be right. Anything else, it is a hard way to make money in this business. We are at the first inning of this conversation around Black venture capital. Right now, it is a bit of a straitjacket. The LP expectation is that if you are a Black fund manager, you are going to invest disproportionately in Black entrepreneurs, and not everybody that I know has that as an important and core piece of their strategy. Even if just by their lived experience, they are going to end up doing better than our industry, which basically is 0%.
EB: The follow on is that people who do invest in Black founders end up putting those founders back out into a “toxic” market, and some will fail simply because they cannot secure the next round of funding they need to be able to survive, rather than because the VCs made the wrong decision in the first place. What can be done about that? Further, what needs to be done to keep the momentum?
CH: We do not have a vertical Black venture capital ecosystem where I can do the pre-seed, and then I can hand it to Richard Kerby at Equal Ventures, and then he can hand it to someone else. I would argue that on the gender lens, you could probably go full-stack female, female GP, from VC to IPO. That ecosystem is developed enough that it can be totally self-served. Black venture capital is not there yet, which means at some point, these companies are going to have to either get profitable or grow like a Calendly. Or they are going to have to be able to bridge back into mainstream venture capital firms, and that happens with relationships. Yes, company performance matters, but right now everybody is drowning in deals and drowning in things to look at. A lot of people are saying, “I am going to pay attention to stuff that Paula and Egohsa send me, because I know them. The person I do not know who sends me something could be a great company, but I do not have time for it.” Without those bridges back, particularly at the Series A or B, which are really the choke points in the system … And, of course, the question is where do those relationships come from? The circles and relationships come from being in the business and getting to know people. If you cannot get in the business and get to know people, you cannot build those relationships.
My hope is that this new generation of Black managers that we are launching into business, that they are able to build those relationships with people fast enough to help their portfolio companies when they need them. Otherwise, I do think it will be difficult. Unless you have outstanding, out-of-this-world performance, then you can probably still get financed even with the weak network. That is not most companies, most companies do need help. They need help from their investors to grease the skids with these other conversations. You also need an investor who knows what a Series-A-ready company looks like. You only know that by getting Series As done and working with good investors. Everything in this business is this really unfair, brutal information feedback loop, and the real question is, will this new generation of Black investors who are finally getting the opportunity to show that they are good, will they get enough time to run that loop, before investors make a decision about their next fund?
PG: We as Black investors have a real opportunity here to create the ecosystem that Charles has identified as missing. If we can develop it ourselves, build it ourselves, and prove the model, that would go a long way towards validating the marketplace. I resist the notion that the only way for Black entrepreneurs to make it to the IPO is a model that is reliant upon mainstream VCs. I want to do the “For Us, By Us,” the FUBU approach, and work really hard to get there on our own, and to get the exits and generate money for LPs. If our model is reliant upon Silicon Valley for success—Charles is absolutely right—we are never going to get there. I look for the opportunity to do the “For Us, By Us” approach and do it full stack. If we do not know how to do it yet, we are smart enough to figure it out. That is my belief. If we do the full stack from launch to IPO, and do the hard work—so that we are not dependent upon Silicon Valley—that could go a long way towards providing access to capital and attracting more capital to the space of underrepresented entrepreneurs.
Sophia Bendz (Cherry Ventures, formerly Atomico)
Sophia Bendz already became famous as the chief marketing officer at Spotify and one of tech’s first female big-name executives; she started using her power at the latest since joining Atomico as a partner in 2018. It was at Atomico where she rolled out the Angel Programme, which is the focus of the conversation here and also something she is looking at repeating at her new fund, Cherry Ventures, where she joined as GP in 2020.