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Updated February 11, 2023A catastrophic cocktail of the coronavirus pandemic, its resultant recession, and the advent of war in Eastern Europe has sent shockwaves through the global economy in a three-year onslaught that has shaken the world into a state of economic insecurity surpassing that of the Great Depression of the 1920s. The crisis has shone an often uncomfortable yet incandescent light on the systemic inequities embedded in the global economy. Those most affected by these inequities have consistently belonged to the most vulnerable communities: lower-income and ethnic households, and those with lower levels of formal education. Disparities in access to support, inadequate health care provision, and undue strain placed on mothers and caretakers have become too-common penalties for those without access to the wealth, education, and employment required to shield them from the downturn.
Securely sheltered from this economic insecurity are those nestled among the world’s ever-growing list of billionaires. According to the Forbes billionaire list, seven of the world’s top ten billionaires in 2022 are the founders of venture-backed technology companies. Musk, Bezos, Gates, Ellison, Page, Zuckerberg, and Brin are household names. They epitomize the archetypal white male entrepreneur the world has come to associate with world-changing innovation and outstanding venture success. These entrepreneurs create tremendous wealth of their own, which they in turn invest in other venture-backable businesses: the Silicon Valley flywheel. A significant number of the US’s 735 billionaires have amassed their fortunes through entrepreneurship and the creation of venture-backed companies.
Most businesses begin with an entrepreneur who holds a grand vision, invention, or idea. These ideas are shared with co-founders, team members, investors, and eventually the world when the idea materializes into a product or service offered to consumers at a price. It often requires external finance to fuel that growth as a business grows. To realize this capital, businesses create revenues from sales, borrow money from friends and family, and take loans from banks. These more traditional forms of capital are most suited for companies that will grow rapidly yet steadily in a linear fashion. They can break even within one to three years and provide steady profit and growth.
Venture-backed businesses tend to have a few additional components. They tend to be high-growth, high-risk, high-reward, and, more often than not, tech-enabled businesses that can demonstrate potential for massive scalability. Of the millions of companies that are started each year, only a fraction is considered to have the ability to disrupt industries and achieve the exponential growth required to create returns to investors that are equal to or in excess of the entire fund—often more than £100M—from which they were invested. There are a great many books that delve into the detail of how to create a venture-backable company; each provides overarching principles that determine there must be a robust initial team, a problem faced by a large and preferably ever-expanding market, and a “sticky” product that can solve that problem at a price point consumers are willing to pay, also known as product-market fit. With these components in place, many entrepreneurs create startups they deem to have the potential to achieve the billion-dollar valuations that will propel them onto the Forbes billionaire list.
However, ideas are just ideas without the critical component of capital. A sizable investment, often into the seven figures, is required to fuel early growth and is frequently provided through external funding. Given that these companies are high risk, more traditional forms of capital are out of the question. Startup entrepreneurs increasingly rely upon angel investors or venture capital to provide the boost they need onto the trajectory for exponential scale. Funds flow directly into the company as an equity investment rather than an interest-bearing loan. This is central for early-stage companies with limited track records and little income, for whom interest-bearing loans could be unobtainable, onerous, or even crippling.
While venture capital enables company expansion that is far less possible with other methods, there are many vehicles and strategies for funding an early-stage company, not least boot-strapping, which is the art of rapidly creating customer revenues that fuel the growth of the company. As we examine who can access venture capital in the modern era and look at those who are invariably excluded from the wealth that venture-backed businesses can create for entrepreneurs, their families, investors, and the communities these players belong to, we acknowledge just how skewed the industry is towards nurturing and perpetuating its existing flywheels. The consequences of these flywheels are explored in this book, along with the substantial returns available from historically overlooked market segments. Investors are missing opportunities for higher financial returns by undervaluing high-performing companies led by diverse groups or by overvaluing white-male-led firms. Moreover, capital allocators may well be infringing their fiduciary duty to generate the most significant possible returns for their investors by not investing in diverse companies that could produce returns as high or even higher than white-male-led companies they are most familiar with backing.
Venture capital (VC) is invested by general partners in venture capital firms, who use their domain expertise to allocate high-risk capital into entrepreneurial ventures to generate significant returns on behalf of limited partners, who are most commonly pension funds, university endowments, state funds, foundations, and insurance companies, who do not usually act as direct investors in startup companies. Venture capital firms are compensated in two ways: annual management fees (usually 2% of the capital pledged by limited partners) and “carried interest,” which is a percentage of the profits created by an investment fund (typically 20%). VC funds usually have a lifespan of seven to ten years, and the corporations that fund them frequently manage many funds simultaneously. In terms of payoffs, the venture capital model differs from other types of financing. Returns for venture capital investments do not often follow standard distribution curves but are skewed. The majority of the aggregate return is generated by a few exceptional investments, such as Tesla, Microsoft, Meta, Google, or Oracle.
Funding of this nature has proven pivotal for disrupting the way we work, produce, and live, as technology evolves and advances by investing in high-tech companies that promote the development of industries, support innovation, and drive economic growth. The benefits to society over the years have been described as immeasurable, while the casualties created by technological changes that disrupt labor markets and increase inequity are cited as necessary evils that are far outweighed by the essential innovation that leads to competitive advantage, productivity gains, and increased economic growth over the longer term. Yet, what are the long-term effects of capitalism at all costs? The cataclysmic impact on the environment, society, and governance structures over time are leading all too often towards climates in which wages are depressed as businesses compete on the price, over the quality, of goods; where unskilled workers are incentivized with punishments, over promotions; and where bubbles expand and eventually burst, usually to the detriment of those who are already the most vulnerable in society. Time and time again, these results demonstrate that existing models are not fit for purpose as inequality preponderates and poverty expands. Thus, were these premeditated, globalized, and impeccably organized models ever fit for purpose, or is a shift to a more sustainable modus operandi long overdue? Answering such a question effectively relies on accurate knowledge and examining the foundations upon which venture capital was built.
Contrary to popular belief, the earliest forms of venture capital can be found long before the whaling industry took off. Other popular maritime money spinners, more commonly known as the transoceanic spice, tea, and slave trades, were instrumental in the creation of several innovations that shaped both modern venture capital and the systems it is inherently reliant upon, such as insurance, productization, leveraging equity and debt, economies of scale, high-risk, high-reward financing, and many more.
Venture capital has been widely accepted as existing in one form or another since the earliest forms of commercialization. Scholars, such as Harvard historian Tom Nicholas in his VC: An American History, have accredited the first venture capital style investments to whaling, the transatlantic voyage of Christopher Columbus, and Georges Frédéric Doriot, who is seen as being the first venture capitalist to raise money from non-family sources—believing there was a strong business case for investing in entrepreneurs with the vision and acumen to create a future not yet imagined. Among each slightly varying narrative about how venture capital has evolved through the ages, from the financing of whaling ships that were to set sail on perilous waters, carrying precious cargo from one port to another and emblematic of Moby Dick; to the underwriting of risky expeditions leading to the discovery of new territories; and the founding of Doriot’s American Research and Development Corporation (ARD) in 1946, the belief in an entrepreneur to execute the completion of tasks in which there is a high probability of failure and the promise of outsized returns if successful is the golden thread running through a complex and intricate tapestry of events.
Most fascinating is that the invention of venture capital is often ascribed to Americans—despite Doriot being French—with much of the activity being focused on post-World War II exploits. The “VC is an all-American invention” narrative essentially negates the part that the Europeans, mainly the British, played in the formation of venture capital and sweepingly omits the transatlantic slave trade, which was the predecessor of the whaling industry and the foundation for the insurance and banking industries to which venture capital has been intrinsically linked and remains heavily reliant upon today.
Given the legacy of these financial industries, it is no wonder that the ethnic wealth gaps persist to the extent they do across the globe. The inequities that persist in society and the economy today can be redressed through the fairer distribution and allocation of venture capital and the potential for higher returns for the investors who choose to pursue the dividends that diversity offers.
This volume does not focus on the apportion of blame or reparations; that is a matter for a different forum. It seeks the commitment of those currently holding the purse strings, who have invariably profited off the backs of Black and Brown bodies, to make access to venture capital fair and inclusive going forward.
If and when, for instance, Black and Latinx people enter the venture capital market, and they are unable to progress beyond positions in which they have no decision making power or access to carry, are we recreating patterns where these groups work for the system without being able to profit from it? Black and Brown funds across the globe recount stories of being unable to close their funds. At the same time, their white male and, in more and more instances now, female counterparts regale in the successes of well-funded and well-supported ventures that provide returns.
How can we avoid repeating the same behavioral patterns unless we examine how they arose and are perpetuated?
In this collection of interviews, stories, and research, we use the momentum that has been building in recent years to expand the conversation about DEI, venture capital, and the startup ecosystem, and to inspire more concrete action.
In this book you’ll find 43 in-depth conversations with a diverse group of researchers, investors, and entrepreneurs, making it one of the most comprehensive and diverse sets of perspectives on the startup ecosystem ever assembled in one place.
Our intent is that our voices will provide enough guidance and commentary to make sense of what we have heard through these conversations—spanning Europe and the US, and involving more than 85 interview partners.