$350 million for WeWork co-founder shows how broken and biased venture capital is

2022/08/29 Leave a comment

Of interest (for the WeWork story, watch the AppleTV series, WeCrashed):

A reported $350 million investment into a new, yet-to-be-launched real estate venture founded by a controversial businessman has drawn criticism from women entrepreneurs.

The investment, which was made and publicly shared by venture capital powerhouse Andreessen Horowitz, is in Flow, the new company of WeWork co-founder Adam Neumann.

Given Neumann’s questionable business dealings and his abrupt exit from WeWork amid a fraught initial public offering in 2019, this new investment typifies the immense gap that exists in comparison with how much money venture-funded companies founded solely by women garner, experts say.

The investment is a prime example of how venture capital (VC) ecosystems “have always been inequitable,” Rebekah Bastian, the CEO and co-founder of OwnTrail, a startup that helps people achieve their next personal and professional milestones, told NPR.

“When 16% of investment partners at VC firms are women, 3% are Black and 4% are Latinx, it’s not shocking that women founders have received 1.9% of venture dollars so far in 2022,” Bastian told NPR over email. “Black-founded startups in the U.S. raised less in Q2 2022 in aggregate ($324 million) than Adam Neumann received in a single check from Andreessen Horowitz.”

Andreessen Horowitz did not respond to requests for comment.

Why the venture funding for Neumann received such a visceral response

To understand why Neumann, Flow and the millions of dollars raised caused a groundswell of condemnation among women, one place to start is Aug. 14, 2019.

That’s the day WeWork first released its paperwork to go public and revealed to the world how Neumann had siphoned hundreds of millions of dollars for himself, restructured the company to provide himself a tax break and rented his own properties to WeWork.

A month later, The Wall Street Journal reported on Neumann’s partying and “unusual exuberance and excess.” One of the more puzzling aspects of Neumann’s tenure was how an entity he controlled “sold the rights to the word ‘We’ to the company for almost $6 million—before public pressure led him to unwind the deal,” the Journal reported.

Neumann stepped down as WeWork’s CEO on Sept. 24, 2019, not long after the company’s valuation, once estimated at $47 billion, dropped precipitously.

To see Neumann raise hundreds of millions of dollars roughly three years after his exit from WeWork is a sign of how “there will be Adam Neumanns but there won’t be Abagail Neumanns,” said Katica Roy, a gender economist and the CEO and founder of Pipeline, an award-winning startup that uses artificial intelligence and cloud computing to close the gender equity gap in the workplace. Roy is also the daughter of a refugee who was brought to the U.S. on Air Force One after being granted passage by President Dwight Eisenhower.

“The Flow funding illustrates perhaps the most high-profile example of ‘prove it again’ bias, or the fact that women have to work harder than men to substantiate their competence,” Roy told NPR over email. “These biases lead to smaller and fewer checks for women entrepreneurs and entrepreneurs of color.”

Neumann and Flow also reveal a double standard that exists around second chances in business, said Amy Nelson, co-CEO of The Riveter, which has built a collective of work and event spaces for working women across the United States.

“I think the outrage is about the fact that a lot of Black and brown founders, a lot of women, don’t even get the chance to fail. You can’t show the world a comeback if you can’t even get into the arena,” Nelson told NPR.

How bias is woven into the world of venture capital

Despite a banner year that brought in a record $330 billion of venture capital funding in the U.S., only 2% of funds in 2021 went to women-founded teams, Roy said.

Part of this disparity stems from how investors question founders who are women in comparison with those who are men.

A 2018 journal article, “We Ask Men to Win and Women Not to Lose: Closing the Gender Gap in Startup Funding,” revealed how women receive more prevention questions from potential investors. Prevention questions focus on safety, responsibility, security and vigilance; for example, “How predictable are your future cash flows?”

Meanwhile, men receive more promotion questions from potential investors, according to the article, published in Academy of Management Journal. Promotion questions focus on hopes, achievements, advancement and ideals; for example, “What major milestones are you targeting this year?”

“These biases also reflect the entrepreneurial ecosystem in the U.S. Fully 65% of VC firms have zero women partners or GPs [general partners], and women represent only 4.9% of all VC partners in the U.S.,” Nelson added. “We call ourselves the land of opportunity. However, as we see time and time again, opportunity is not equitably distributed.”

These issues are among the many that explain why entrepreneurs like Jaclyn Fu did not seek out venture funding when starting their companies.

Fu and her co-founder, also a woman of color, launched a 470% successfully funded Kickstarter campaign that helped get their business, Pepper, a direct-to-consumer bra brand for small-chested women, off the ground.

The venture capital that Neumann raised is just another sign that the industry hasn’t progressed, Fu told NPR.

“I was furious that time and time again, VCs invested in the same pattern that rewards toxic, growth-at-all-cost behavior and ineffective stewardship of capital,” Fu said. “It’s wild that safe bets for VCs look more like Neumann with fanciful ‘vision’ versus founders who can actually prove product-market fit and real customer opportunity.”

Change is slow but coming to the venture capital industry

Andreessen Horowitz and its co-founder Marc Andreessen do not care what the world thinks when it comes to their investments, Nelson said.

“No white man has to care,” Nelson added. “White men account for almost all of venture capital investors and almost all of venture-backed founders, and I’m convinced that their money flows in a circle.”

That circle must be broken, said Lizelle van Vuuren, a U.S.-based South African who is co-founder of Undock and founder of Women Who Startup, a learning community for women entrepreneurs. Van Vuuren is also the chief growth officer at OwnTrail.

Van Vuuren was among the first of many women to respond to Neumann’s VC raise on Twitter. When it comes to the world of venture capital, women not only have “to change the game, the rules and the playing field, we have to do it with a smile,” she tweeted.

“I think more women are going to win. I think more Black and brown, Asian, immigrants and disabled founders are going to continue to win, because we’re not going to shut up,” van Vuuren told NPR. “Every generation has yearning for improvement. That is the beauty of human evolution. We will always, hopefully, be focused on improving the way we found things, especially younger generations. So whether Adam continues to make headlines or whatnot is irrelevant to someone right now, at her desk, trying to build a startup with four team members with about $400,000 in the bank. They’re gonna be out of money in several months. And she has to figure out how to raise money. She’s focused on that.”

Source: $350 million for WeWork co-founder shows how broken and biased venture capital is

Filed under gender, Multiculturalism Tagged with , ,

Venture Capital Firms Abandoning $4.4 Trillion Opportunity to Invest With Black and Women Entrepreneurs

2019/12/13 Leave a comment

Interesting, both for the analysis itself and that it was by Morgan Stanley:

Venture capital firms across America are neglecting a $4.4 trillion opportunity to increase their returns by not investing with companies owned by multicultural and women entrepreneurs, a new survey by investment banking giant Morgan Stanley suggests.

The survey, Beyond the VC Funding Gap, found that almost 200 U.S.-based venture capital (VC) firms and diverse entrepreneurs that have raised venture capital triumphantly are not utilizing known ways to boost their exposure or increasing the probability that they will invest in more diverse founders.

A staggering 83% of VCs surveyed reported they are confident they can prioritize investments in companies led by women and multicultural entrepreneurs and maximize returns. Some 60% of VCs stated their portfolios hold too few of these companies. However, just three out of five VCs reported making investments in women and multicultural entrepreneurs is not a firm-wide priority.

Multicultural and women founders cited “not the right fit for me” and “market-related issues” among the top reasons given by VC firms for not investing in their companies.

What is perhaps most startling is the potential amount of money VCs are leaving behind by not investing in the firms. Based on data from the U.S. Census Bureau’s 2012 Survey of Business Owners and the U.S. Department of Labor’s Bureau of Labor Statistics, Morgan Stanley reported revenues for women and minority businesses were $2.4 trillion. The firm said had the number of women and minority-owned businesses and a portion of revenues matched their percentage in the labor force—56%—then 2012 gross receipts would have risen to $6.8 trillion, suggesting a missed opportunity of up to $4.4 trillion.

TAKING THE RIGHT APPROACH

“Our research indicates that with a few subtle shifts in their approach, VCs can better position themselves to take advantage of these entrepreneurs and generate superior returns. I hope that this report will help to inspire more firms to re-evaluate their investment strategies so they can capitalize on these opportunities that have historically passed them by,” stated Carla Harris, Morgan Stanley Vice Chairman, Global Wealth Management and Multicultural Client Strategy Group Head.

The NVCA did not specifically address some of the issues pertaining to multicultural and women-owned firms raised in the Morgan Stanley report. But the Washington, DC-based trade group for the nation’s venture capital industry said it is taking several steps to ensure its membership works with and engages with those firms.

The group provided BLACK ENTERPRISE this statement from Maryam Hague, NVCA’s senior vice president of industry advancement:  “Through our VentureForward initiative, NVCA is committed to expanding opportunities for people of all backgrounds to thrive in the venture ecosystem and ensuring everyone who works in this ecosystem has a welcoming professional culture and safe work environment. Some of our activities to date include: NVCA-Deloitte Human Capital Survey – this survey is intended to be an educational resource for venture capital firms to understand how to expand the diversity of their teams and portfolio companies; LP Office Hours in Palo Alto, Boston, Washington, D.C. and Los Angeles. LP Office Hours is an in-person, half-day educational program across the country for professionals of diverse backgrounds to receive advice from and connect with LPs and other GPs, with the goal of learning from LPs about the fundraising process; NVCA hosts workshops and leadership dinners in San Francisco, Boston, and cities around the U.S. interacting with VC leaders in emerging ecosystems; and we have released model HR policies and best practices for attracting and retaining diverse talent. NVCA also offers several educational opportunities to democratize access to education on VC and to support the next generation of VC leaders, e.g. VC University and the Venture Capital Symposium.”

The Morgan Stanley report revealed VC firms not acting on the data on diverse entrepreneurs could be causing them to miss out on returns. That perhaps is potentially being fueled by a lack of awareness of multicultural and women firms in-house. Some 45% of VCs surveyed didn’t know how the returns from companies founded by women compared with their overall portfolio returns. And 53% of VCs were unsure about the returns of firms with multicultural founders.

A CLOSER LOOK AT THE MARKETPLACE

Still, Morgan Stanley stated a closer look at the broader marketplace reveals that companies serving diverse customers represent a huge opportunity to capitalize on consumer segments with plenty of room for more growth. For example, the firm reported that women drive 83% of all U.S. consumption, through both buying power and influence. Plus, African Americans spend $1.2 trillion annually in the U.S. And, (Latin) consumers’ buying power is expected to reach $1.7 trillion by 2020.

Concurrently, the Morgan Stanley report revealed VCs have a reputation for taking calculated “expansion risks” to invest in new and emerging markets — frequently with little precedent or data beyond their own due diligence. Of the VCs surveyed, they reported about 20% of the companies in their portfolios that embody expansion risks. Yet, when they bump into companies run by ethnic and women, entrepreneurs, VCs are less likely to educate themselves or take the risk, particularly if they are not familiar with the market or product.

Yet 88% of the VCs surveyed view the experiences of underrepresented entrepreneurs as a competitive advantage when it comes to identifying different problems that need to be solved. Companies typically created by diverse and women entrepreneurs target a market inefficiency or need they’ve identified based on their personal experiences, making them ideal candidates for the specific types of calculated expansion risks VCs should be looking at.

Concurrently, companies started by women and multicultural entrepreneurs have been and continue to be a moneymaking investment opportunity. Morgan Stanley maintains it has been investing directly in startups led by diverse founders for the past three years.

In its survey, Morgan Stanley named some firms that have provided investors hefty returns. Take Sundial Brands, one of the largest black-owned personal care products led by co-founder Richelieu Dennis. It was acquired in 2017 by consumer products giant Unilever. Sundial Brands, a former BLACK ENTERPRISE BE 100s company,  had revenues estimated at $240 million when it was purchased. After the deal, Morgan Stanley valued Sundial Brands at a whopping $1 billion.

In another eye-popping deal, Nigerian native and entrepreneur Chinedu Echeruo sold his HopStop.com pedestrian navigation service to tech powerhouse Apple for an estimated $1 billion in 2013. The transaction was stunning as HopStop had estimated revenues of just $5 million in 2012.

Morgan Stanley’s Harris defines multicultural companies as those with an  African American, Hispanic, Asian or American Indian founder.

She says VCs may have held back historically from investing in such firms because up until now there really wasn’t much evidence they were missing something. However, she says, both the evidence and the number on the size of the opportunity exists currently for them to consider doing so.

“The time is now for people to embrace the conversation if not the debate,” Harris says. “The really big surprise is that even though the multicultural and women firms can provide traditional VCs stellar or equal returns (as their peers) that they’re not investing with them for some reason,” she says.

REPRESENTATION MATTERS

Another factor that perhaps is contributing to the funding gap is a lack of diversity at VC firms.

The lack of diversity among VC firms perhaps is adding to the funding gap. The survey showed among VCs who have hired more diverse fund managers, LPs, partners or board members, 71% say it is a “very effective” way to increase the diversity of companies and founders they invest in. Some two-thirds of multicultural founders reported that they have had more success with diverse VC firms. But, only 11% of entrepreneurs have teamed up with VC firms that are diverse when it comes to gender and race.

“The fact that they (VC firms) don’t have more diversity at the table certainly limits their understanding of some of these industries,” Harris says. “Diversity would make it a lot easier to do so.”

Harris says the encouraging news is that if you look at the private equity industry some of the nation’s largest institutional investors such as CalPERS or the New York State Common Fund are now asking their investment partners about their diversity practices. She says the questions include what does diversity in your firm look like, how many businesses of color did you look at and how many multicultural firms do you have in your pipeline for partnership? Harris is confident the actions may drive VC firms to make the shift of investing with diverse and women firms along with existing partners. “Once you see some of the outside companies start to have some success, I think it’s going to feed on itself,” she says.

Morgan Stanley offered some tips on how VC firms can tap into what the firm calls a multitrillion-dollar market by working with diverse firms. Here is a condensed version of those tips:

REDEFINE HOW YOU THINK ABOUT “FIT” AND EXPANSION RISK FOR YOUR PORTFOLIO

Adjust your definition of “expansion risk” to include companies founded and led by women and multicultural entrepreneurs. This can help expand your networking efforts among diverse entrepreneurs and help you better understand the opportunities they present.

Consider diverse entrepreneurs are more seasoned players with lower risk. When diverse entrepreneurs get to pitch VCs, they’ve already often demonstrated a stronger proof of concept, management expertise, and success metrics when compared with their white, male counterparts.

Women and multicultural entrepreneurs represent an emerging market in America, much like the internet was 20 years ago or cloud-computing a decade ago. Along with pursuing new markets and products, consider investing in the new perspectives that diverse entrepreneurs offer and the markets they serve.

DIVERSIFY

Having more women and multicultural professionals at your fund is one of the most effective strategies for increasing investments in diverse founders.

By looking inward at your hiring and retention practices and prioritizing diversity, you can improve the delivery of results for your limited partners. The traditional sources for entry-level VC talent—top business schools—have large enough pools of women and multicultural graduates to fill the need.

In addition to helping VC firms source more diverse entrepreneurs and see market opportunity more clearly, firm diversity also decreases overall risk: The more diverse perspectives VCs have, the more likely they are to recognize opportunities and identify potential pitfalls.

HOLD YOUR FIRM ACCOUNTABLE AND BE A FIRST MOVER—INSTITUTIONAL INVESTORS CAN HELP

Develop a comprehensive strategy and make it public. Share data about your internal and portfolio diversity. Establishing goals for investing in more women and multicultural entrepreneurs can be an effective strategy for VCs to show their investors their commitment to effecting change; according to our survey, 86% of VCs agree that such goals would benefit themselves and their LPs.

Source: Venture Capital Firms Abandoning $4.4 Trillion Opportunity to Invest With Black and Women Entrepreneurs

Filed under Multiculturalism Tagged with , , ,

Silicon Valley needs to figure out how to promote women and people of color. Andreessen Horowitz is doing that by changing one of its founding rules.

2018/07/19 Leave a comment

Interesting illustration of how criteria developed for valid corporate reasons led to the realization of who they excluded, with the criteria being changed:

The high-profile venture capital firm has elevated Connie Chan to general partner — and scrapped a rule that the firm candidly admits was outdated.

During its first decade of existence, Andreessen Horowitz — one of Silicon Valley’s premier venture capital firms — held fast to a seemingly minor rule about the types of people who comprised its top investors: To become a general partner, you had to have founded or led a company as CEO. No exceptions.

But amid the broader conversation nationally — and in Silicon Valley specifically — about gender diversity, the firm earlier this year quietly scrapped a rule that its critics said, unintentionally or not, made front-of-the-pack partnerships like Andreessen Horowitz’s just a collection of (mostly white) guys.

The firm said today it was elevating Connie Chan, a well-regarded expert on the intersection of Chinese and American tech trends, to general partner. It’s the first time the firm has internally promoted someone to that post, or the level when an investor leads their own deals and splits the firm’s profits.

“When I first started at the firm, I didn’t think this was a path,” Chan said in an interview with Recode.

The rule change amounts to some inside baseball, but it also speaks to how venture capital firms — powerful institutions that control which types of people and ideas get funded and which don’t — are changing. Due to Andreessen Horowitz’s big profile, the rule has been frequently criticized in hushed tones in Silicon Valley by diversity advocates as an example of the types of hurdles that women and minorities face professionally.

The firm isn’t saying the change was a reaction to those concerns, though Chan did say the change was a “testament” to how Andreessen Horowitz managed to move with the times. Last month, the firm announced it had hired Katie Haun — also not a founder or a CEO — as its first female general partner.

Jeff Jordan, a longtime Andreessen Horowitz general partner, described the rule to Recodeas initially useful for the firm — which was only founded in 2009 — as it battled the existing, dominant venture capital players in its early days.

But now? It limits their pool of talent, he said.

“When we were out there looking for [general partner] candidates, I found myself comparing them to Connie,” Jordan said. “Frankly, Connie’s abilities and track record compelled us to do this.”

The firm is being pretty candid and forthcoming about how the rule grew to be outdated. For more, here’s two excerpts from firm co-founder Ben Horowitz’s blog post on Chan’s promotion:

“I felt an immediate conflict with where she was going and the way we had constructed the firm. When we founded the firm, we made a brand promise that if you raised money from us, we would put a Founder or CEO of a significant technology company on your board. That was our General Partner requirement, because we were determined to be the best place for technical founders to learn how to be CEO. To make good on the promise, we built the most powerful platform for giving founders a big time CEO-like network from capital markets to talent to big company customers to the press. On top of that, we committed to putting someone on the board who could help develop the CEO skill set. Finally, we wanted everyone in the firm to culturally understand the struggle of building a company. These were great ideas, but it meant that we did not promote General Partners from within. And in my heart, I knew that one day we would have to promote Connie or miss out. The thought was making me a little insane.”

…

“Fortunately, as things evolved, our culture became stronger than the GP no-promotion rule. Everyone in the firm became all about the entrepreneurial struggle and helping founders grow into CEOs. Founders didn’t just get a person; they got a platform. The old rule started to seem dated and out of place. So, four months ago we dropped the criteria and the promotion rule.”

Source: Silicon Valley needs to figure out how to promote women and people of color. Andreessen Horowitz is doing that by changing one of its founding rules.

Filed under Multiculturalism Tagged with , ,