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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.
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.**