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Updated September 15, 2023You’re reading an excerpt of The Holloway Guide to Raising Venture Capital, a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.
This section was written by Rachel Jepsen.*
Systemic bias as well as implicit or unconscious bias—which can be coupled with outright discrimination and harassment—keeps underrepresented founders from receiving equitable treatment in the venture capital ecosystem. Prejudice makes it difficult or impossible for some founders to participate in the networks that help others connect with VCs, and secure funding.
Anyone seeking venture funding or considering whether venture capital is right for them needs to be aware of the massive discrepancies in funding, as well as the efforts by some VCs, founders, and organizations to right the balance. The more you know about the biases, discrimination, and harassment that many founders continue to face when trying to raise venture capital, the better equipped you will be to stay safe in your own fundraising journey, and to work with investors who will be your allies and reflect well on your company.
This section focuses on discrimination based on race and gender in Silicon Valley. There is much more research to be done into systemic bias against founders and venture capital investors alike on the bases of age, disability, immigration status, gender identity, sexual orientation, and socioeconomic background. We also hope to include more information on discrimination, diversity, and inclusion in startups and venture capital outside of Silicon Valley; it is elsewhere in the U.S. where much of the work is being done to fight against the bias and discrimination that have run rampant in the industry for decades.
The demographics of founders who receive venture funding correspond closely with the demographics of active venture capitalists—investors overwhelmingly invest in companies run by people who look like them.
In 2018, men accounted for 82% of venture capital employees, while white people made up 70% of firms.* At the time of the linked study, July 2018, the industry employed eight Black women and two Latinas. VC firms employ less than 3% Black and Latinx venture capitalists.* 1% of VC funding goes to Black-owned companies. 0.2% of VC funding goes to companies led by Black women.* In 2017, less than 2% of venture capital dollars invested went to companies founded by all-women teams.* 10% went to companies with a male and female founder. Companies with only men on their founding teams received 79% of venture funding.
TechCrunch’s study on women in venture capital reported in 2016 that women represented 7% of the “top 100” venture firms, and 8% of the top 2,300.* Then in 2018, they released global numbers that show that while investment in companies founded by women rose 6% that year, this was due almost entirely to a single outsize Series C investment of $14B into the Chinese company Ant Financial.* Funding to women-led startups in the U.S. is stagnant; the percentage of women employed by VC firms follows a similar pattern.**
Paradoxically, these numbers of women founders and founders of color receiving venture funding are at once dismally low and record highs.*
important Other important numbers are starting to get more attention from VCs: study after study has shown that companies with diverse founding teams perform better and deliver higher returns to their investors. The most recent study from McKinsey’s oft-cited, ongoing global research on “Delivering through diversity” puts the correlation between diverse teams and profitability in stark relief: “…companies in the top quartile for gender diversity on their executive teams were 15 percent more likely to experience above-average profitability than companies in the fourth quartile.” For companies in the top quartile for “ethnic and cultural diversity,” profitability was 33% higher. When it comes to choosing your investors, companies whose boards of directors excelled at cultural and ethnic diversity were 43% more profitable than those with homogeneous boards.
Other studies have confirmed that companies with at least one woman co-founder deliver better returns to investors. Despite receiving 2% of VC dollars, businesses led by women generate 10% more profit than those led only by men.* The same study revealed that women create $0.78 per $1 of investment; men create $0.31 per $1. First Round Capital’s 10-year review, released in 2015, reported that companies with a woman founder “performed 63% better than our investments with all-male founding teams.”*
contribute Of course, adding women to your founding team won’t automatically increase your profit margin, not any more than VC firms adding women partners to increase their “diversity cred” makes them better investors. We plan to add more on inclusion and retention, and the ways diversity on boards and founding teams fuels innovation. Please comment here if you have anything to contribute along those lines.
Despite the widely available data that diverse founders make better investments, venture capital has been slow to change any of its common investment patterns. In addition to investing in founders who look like them, venture capitalists also favor founders who look like those who have started successful companies in the past—of course this reinforces a homogeneous environment, given who has been the majority recipient of venture funding for decades. If you’ve only invested in companies founded by white men, then those investments that did well will be your only models of what success looks like.
This bias, often called “pattern matching” or “pattern recognition,” results in what Richard Kerby calls a “mirrortocracy.” In a Times article on his storied accelerator Y Combinator, Paul Graham made this quip about choosing who to give his money to: “I can be tricked by anyone who looks like Mark Zuckerberg.* There was a guy once who we funded who was terrible. I said: ’How could he be bad? He looks like Zuckerberg!’“ (Graham has responded to criticism of this quote, saying it was “a joke,”* though the very real phenomenon of pushing minority founders out of investments in favor of pattern matching is no laughing matter.)
Refinery29 interviewed eight Black female founders in their report, “What It’s Like to Raise VC Funding as a Black Woman in 2018.” Introducing the interviews, Shauntel (Poulson) Garvey, co-founder and GP at Reach Capital, describes pattern recognition as a serious impediment to diversifying funding: “You’ve probably seen a lot of white males be successful. So applying that lens, especially when you see an entrepreneur who looks different and comes from a different background, means it’s harder to make the case of ‘Oh, I’ve seen this before, and I know that they can be successful.’”
As Daniel Applewhite put it in 2018, “Pattern recognition has enabled VCs to mitigate risk but has also limited their profit potential and created an inherent funding bias. This bias stems from barriers to early-stage capital, a lack of representation in the investing space and is perpetuated by systems of racism that destroy opportunity within communities of color.”*
Pattern matching affects how VCs measure the potential risks and challenges the founders they meet will have to “overcome.” A 2018 study by Illuminate Ventures found that both male and female VCs perceive founders differently based on their gender presentation, including seeing women founders as facing far more significant barriers to success than men, and seeing men as having more characteristics that will enable success. (We highly suggest reading the documententire study, or the helpful summary from TechCrunch.) When the data proves that companies led by women outperform those led by men, and still women founders are perceived as bigger risks, it’s no wonder only 8% of women feel supported by the venture capital community.*
People with the true innovations that will build a better world very rarely have control of the resources to make those innovations possible.Ross Baird, co-founder, Village Capital*
Because Silicon Valley is extraordinarily expensive and remains the center of the venture capital ecosystem, the barrier to entry is a lot harder for founders who come from challenging socioeconomic backgrounds. Some founders and investors are taking heart that this barrier may be diminished as more companies and venture capital firms move to more livable cities across America—often closer to new communities the companies are aiming to serve.
But the problem is bigger than location alone. A lot of people talk about an “entrepreneurial gene,” some penchant for risk-taking that separates entrepreneurs from the rest of the population. Certainly there are some characteristics that make great founders—risk-taking, passion, tenacity. But the number one predictive factor of entrepreneurs today is having grown up with money. It costs $30K to start a business. 80% of that typically comes from savings, friends, and family. Citing multiple studies, Quartz determined that “the most common shared trait among entrepreneurs is access to financial capital”—they are often people who come from money or have access to a moneyed network.**
This expectation amounts to a biased barrier to access. In an article on the cost of bias and racism in the venture funding ecosystem, Daniel Applewhite writes, “Although entrepreneurs are expected to raise friends and family rounds, this expectation is born of bias. African-Americans have an average net worth of $11K compared to $144K for white Americans.* With this lack of access to early capital and generational wealth, most family members and friends can not invest, regardless of how great the idea is.” Early-stage funding is decreasing at a significant rate, meaning founders have to rely even more on moneyed connections to get their businesses off the ground.* It’s important to understand that being underfunded in an early round makes it harder to raise what you need in later rounds, even if you do eventually meet with investors who understand the impact and needs of your idea.
Applewhite cites the Center for Global Policy Solutions, which reported in 2016 that the racial gap in business ownership is costing the U.S. economy big: “If the number of people-of-color firms were proportional to their distribution in the labor force, people of color would own 1.1 million more businesses with employees. These firms would add about 9 million jobs and about $300 billion in workers’ income to the U.S. economy.” Correcting the funding bias for early-stage founders of color is one important step that can be taken to correct this loss.
Of course, privilege is not absent on the funding side of the table either. A full 40% of active venture capitalists graduated from either Harvard or Stanford, according to data gathered by Richard Kerby.* Reflecting on his finding that over 50% of Black investors went to these schools, Kerby writes:
“The bar to create a more diverse industry is difficult when one looks for folks that most resemble themselves; and while talent is evenly distributed, unfortunately, opportunity is not…When you couple the lack of gender and racial diversity with the lack of educational institution diversity, you not only end up with teams that look similar, but you also end up with teams that think in a similar fashion. Not only is our industry lacking in gender and racial balance, but we also suffer from a lack of cognitive diversity.”
Privilege and access have as much to do with networking culture as they do with money. Money, especially having grown up with money, is more often than not the single determining factor in whether a founder can make the connections they need to successfully finance a company. Some investors no longer think a warm introduction to founders is necessary (see more in Getting the Meeting), but the majority of investment deals come out of investors’ networks. People who have been historically kept out of privileged networks—including people of color, immigrants or first-generation founders, women, the disabled, and anyone from a disadvantaged background—are unlikely to have the same connections to wealthy investors that generational wealth (and degrees from Stanford and Harvard) can build. Pattern matching exists as much in networking as it does in closing a deal; the system favors the familiar, and many founders face difficulty getting accepted into the networks that dominate the startup and VC ecosystem, where men make up 91% of VC firms and where executives and employees are overwhelmingly white.**
Jane VC, a venture firm that invests exclusively in women-led startups, surveyed 500 founders on their experiences in fundraising and tech. The results, which they released in 2019, demonstrate an awareness among founders that access to networks can be a huge barrier to (or determinative of) the success of a company.* Overall, 48% of the women surveyed reported feeling supported by the entrepreneurial community; among the demographics included, Black women felt the least supported, at 39%, while 67% of men felt they had a strongly supportive community. When it came to support from the venture capital community, 19% of men felt supported, while 17% of Asian women, 7% of Latinas, and 3% of Black women felt support among that community.
One criticism of Silicon Valley is that its largely homogeneous, club-like atmosphere contributes to the feeling that it’s a cultural bubble—out of touch with the rest of the world, even as it’s dictating the world’s priorities.* Ross Baird, founder of Village Capital, writes in his 2017 book The Innovation Blind Spot, that it is the immense privilege of the venture capitalist class (generally speaking) that blinds them to the next great idea. Baird details stories of founders whose companies aim to serve low-income communities being turned away by VCs who simply didn’t believe (and didn’t bother checking) that low-income Americans make up a significant market for technology. Baird quotes Jerry Nemorin, who founded one such company, LendStreet, to help this population get out of debt: “[Venture capitalists] want to solve my-world problems, but forget about real-world problems.…I find that people are dismissive of ideas that they don’t empathize with. It’s much harder to make decisions, and take the time, to diligence a problem you’ve never faced.” In 2018, Nemorin secured $117M for their Series A.* (We share further examples of this disconnect, as well as the power of harnessing your unique market knowledge, in our section on the “founder’s secret.”)
Startups aiming to help people from backgrounds rarely represented on either side of the table are increasing in number; indeed, there are viable businesses of this kind operating at venture scale. Organizations that seek to make the world of venture funding safer, more open, and more inclusive are gaining traction in the media and in the startup world. Chicago Blend and NYC Blend are two examples of VCs collaborating in their individual cities to change the numbers and foster and support inclusive environments. Founders for Change is a coalition of founders seeking to push investors to diversify their ranks, with some members refusing funding from firms that are too homogeneous. Founders for Change was started by two VCs, Aileen Lee and Jenny Lefcourt, who had heard so many of the founders they work with wishing that the other side of the table was more representative of the world around them. They offer tips for diversity and inclusion (such as creating a diverse board) and maintain a list of diverse investors.
Another organization seeking to increase diversity in venture capital funding and in founders who receive funding is All Raise. The organization is involved with Founders for Change and was also started by a group of VCs. They focus on increasing visibility, mentorship, and access to networks and funding for women, and maintain a list of partners, resources, and related organizations you can turn to for help.
All Raise has received criticism, however, from women in the field, including impact investor Freada Kapor Klein. This criticism maintains that All Raise lacks an intersectional approach in their focus on numbers of women represented in firms and portfolios, largely ignoring racial and socioeconomic diversity. Klein audiohas said about All Raise that celebrating a firm for adding a woman partner isn’t enough if that firm continues to focus on the problems of the white and well-to-do. A 2019 Vox piece on All Raise quotes CEO Pam Kostka, who called Klein’s criticism of the organization “fair,” and says she has been working to improve that relationship. Klein’s firm, Kapor Capital, is a prominent and leading firm working to support founders who have been historically kept out of privileged networks. To that end, rather than focusing their investments in companies who happen to have a woman founder, they invest exclusively in “gap-closing startups”—companies working to fight for more equitable access to knowledge, technology, and services, and companies that work to fight income inequality.
Harassment based on race or gender is inextricable from pay inequity, funding discrimination, and lack of diversity. According to a 2018 survey conducted by Inc. and Fast Company, 53% of 279 women founders surveyed “experienced harassment or discrimination in their capacity as founder”; 58% reported the “worst harassers” to be bankers and investors.*
2018 saw needed attention paid to women founders and founders of color, due in part to the #MeToo movement calling for increased transparency and action from VC firms.** November’s #GoogleWalkout involved 20K employees taking action worldwide to protest harassment and discrimination at the company against women, minorities, and contracted workers.* (The walkout comes in the wake of controversial lawsuits against Google,* a company that has, at best, fumbled with diversity issues, is infamous for pay inequity, and is often used as a touchstone for trends and failures in the technology industry.)
Sexual and gender-based violence in companies and firms is an “documentemerging investment risk,” according to studies conducted by Cornerstone Capital. Some firms are #movingforward in response.
The problem of harassment in Silicon Valley is structural and historic and it will take sustained action to make headway on any one of these problems. Though change is happening, underrepresented founders continue to face significant hurdles that are built into the structure of raising venture capital, not the least of which is the reliance on networking.* While some thrive in a networked environment, an emphasis on personal relationships and “being in the room” does not serve everyone and can be easily abused. A lot of the networking in the startup community is informal and casual: “Let’s grab a drink and discuss it.” Whether it’s drinks at a bar, a launch party at a founders’ house, or whatever other event, it’s important to recognize that some investors abuse this informality and use it as an opportunity to make unwanted inappropriate romantic, physical, or sexual advances. In Silicon Valley, stories of pitch meetings with women founders that men tried to turn into dates are a staple. Accounts of men abusing their positions of power to mislead, sexually harass, and assault women in the community have led to numerous individuals’ resignations, but far more are likely to have yet to answer for their impropriety or their crimes.* An ecosystem that depends on close relationships and networking can be particularly dangerous to vulnerable and underrepresented people.
A growing number of resources are available for founders to help them avoid investors who have been accused of sexual harassment or misconduct. The internet is your friend here—do as much background research as you possibly can before deciding to meet with someone. We cover this in more detail in Creating a Target List of Investors.
It is crucial that all founders, VCs, and angel investors understand the stakes when it comes to speaking out about harassment, assault, and discrimination. Nonprofit Callisto develops technologies to help victims of sexual assault. In 2018 they partnered with Y Combinator to interview 125 women founders whose companies had gone through YC about their experience with harassment and assault in the fundraising process. Top reasons why those who had experienced these things with VCs or angel investors chose not to disclose the events or report their perpetrators include the following:
“Did not want to endanger my company’s funding prospects.”
“I was afraid of the consequences for my ability to get future funding.”
“VCs would penalize women for coming forward by icing them out of social and professional situations and denying them funding opportunities.”
Fear of being ostracized from investment networks and denied venture funding has kept founders from coming forward and speaking out about harassment. The New York Times reported on this harrowing reality after detailed interviews with several women founders in 2017.
For founders and investors looking for a safe way to help employees report sexual assault, harassment, or any kind of discrimination, reporting tool Spot is a good place to turn. Additionally, in 2016, TechCrunch reporter Megan Rose Dickey opened a Signal channel for founders to report investor sexual harassment and discrimination in order to build a “Silicon Valley blacklist.”
contribute We plan to add more resources for reporting sexual assault, harassment, or any kind of discrimination—if you have any suggested resources please leave a comment here!
Founders cannot and should not be expected to solve all of these problems. But change can begin within your company. Look closely at your behavior and your company policies, and listen closely to those you work with—and to those not yet on your team. Sexism and racism are pervasive social systems that affect beliefs and cultural norms, not just a matter of “a few bad apples.” You’ll need to commit to having open, honest conversations with people at your company in an ongoing manner. In addition to helpful statistics and demographic data, DreamHost’s “The State of Women in Tech” provides guidance for founders and investors who want to make their companies or firms equitable, inclusive, and able to sustain diversity. In 2016, TechCrunch drew up a template sexual harassment policy for investors and founders, which can help you start a conversation with your investors and understand where potential risks lie.
danger Do not call lack of diversity at your startup a “pipeline problem.” This theory, which posits that there simply aren’t enough interested and/or qualified members of underrepresented groups available to hire, is not accurate. More commonly, people from these groups leave tech at a higher rate due to discrimination, harassment, and an unwelcoming environment.
Many community networks are using social media to grow their ranks and support women founders and founders of color in starting their businesses and raising money. Organizations like Latino Startup Alliance, Latinas in STEM, Black Founders, and many more exist to help connect and advance minority founders, and Twitter hashtags like #LatinaGeeks and #BlackTechTwitter can be a great way to connect and learn. The Case Foundation provides an excellent list of organizations promoting diversity in startups to follow on Twitter. You can follow them all with just one click.
Silicon Valley lawyer Bärí A. Williams reminds company leaders that diversity on their teams can help prevent missteps in funding, in which an investor’s priorities do not match up with your company’s mission—“All money ain’t good money,” she wisely writes. Beautycon CEO Moj Mahdara has a similar message, and recommends interviewing other founders before making a deal with investors they worked with, to avoid what we might call “bad capital.” If you are a founder underrepresented in the startup and venture community, you can visit Creating a Target List of Investors for a list of resources to help you find VCs who invest in underrepresented founders and/or those who build for underserved communities. Founders who want to help change the system for the better should raise their expectations as well as money. Founders and investors must work together to innovate the business of venture capital and create a more equitable environment for all.
It is part of the founder’s job to make sure there is “enough cash in the bank.”* Capital is a tool used to accomplish specific company goals. How much you decide to raise needs to be directly tied to assumptions you’ve made regarding what you believe you’ll need to spend in order to accomplish those goals. This section will cover setting those goals and measuring their cost along with the costs of operations, as well as how the amount of money you raise is tied to the ownership you will retain—or lose—of your company over time.
important No matter what, you need to be ready to present investors with a realistic, believable plan for how you will use what is raised in one round to get to the next funding round or milestone.