Racism in the Valley: Why tech investing has not changed

When Elliott Robinson tried to raise money for a venture capital fund, prospective investors told him he should start small.

But Mr Robinson, now a partner at Bessemer Venture Partners, one of Silicon Valley’s oldest firms, focuses on later-stage start-ups, companies that need large investments to push them towards the public markets or an acquisition.

“I had an [investor] tell me, ‘Well, that’s not really the model for people like you,’” said Mr Robinson, who is black. The investor told Mr Robinson that black venture capitalists typically start with $20m to $30m, or $50m to $60m if they show early progress, he said.

Black venture capitalists have been sharing stories like Mr Robinson’s since the killing of George Floyd in Minneapolis three weeks ago, igniting a fresh wave of criticism about Silicon Valley’s lack of diversity, which has endured despite long-running pressure from women and other under-represented groups.

Often the conversations circle back to the limited partners, or LPs, that invest in venture capital funds — including university endowments, pension funds and wealthy individuals.

While these investors have limited power to influence individual investment decisions, collectively they control the purse strings that allow venture capitalists to fund the next Uber or Airbnb. 

Decisions by LPs influence tens of billions of dollars that flow every year to promising new start-ups, determining the kinds of technologies that enter the public domain and the entrepreneurs who accrue wealth from their adoption.

“Venture funds should be getting phone calls left and right now saying, ‘We want to meet with your partners who are diverse. We want to understand who they are. We want to understand your succession plan’,” said Sarah Kunst, managing director of Cleo Capital, an early-stage venture fund.

But Silicon Valley has been slow to change.

Black venture capitalists said they often hit a “glass ceiling” when attempting to join the industry’s most established firms, rarely advancing past the associate or principal title. 

In 2018, venture capital groups employed 18 black investing partners, representing less than 2 per cent of the industry’s total, according to data compiled by Richard Kerby at Equal Ventures. Even fewer were Latinx, or of Latin American descent.

Sequoia Capital, widely viewed as Silicon Valley’s marquee venture firm, does not count a single black partner among its ranks.

“We must build a more inclusive team at Sequoia and back tech founders who have historically lacked access to capital,” the firm wrote on Twitter this month. “We welcome referrals to help us accelerate our efforts.”

Mr Robinson, who joined Bessemer last year, said he was the only black investing partner at a cluster of prestigious firms with headquarters near Sand Hill Road on the San Francisco peninsula.

Instead, many black venture capitalists have opted to start or join new firms outside the traditional power bases of the industry.

Investors, however, have been wary of backing them, preferring to place their cash with the elite venture firms, such as Sequoia or Greylock, that have a long track record of returns.

Large public investors have parked only a small fraction of their capital at diverse investment firms, despite serving diverse constituencies such as municipal workers. “It’s just like a really weird, reverse Robin Hood,” said Mr Robinson.

Their reluctance also comes in spite of research showing diverse investment managers either match or outperform their peers.

“I don’t understand, quite frankly, why more don’t [invest in diverse managers] . . . You can come up with a myriad of excuses, but not necessarily solid reasons,” said Larry Morse, co-founder of Fairview Capital, a 26-year-old firm that invests in managers from under-represented backgrounds on behalf of groups such as the Ford Foundation.

Reformers have proposed a range of solutions, including the regular reporting of diversity statistics at venture capital firms and public investors. 

Last year, the University of California’s investment office began reporting metrics measuring the diversity of its staff and external managers, following legislation sponsored by Anna Caballero, a Democratic state senator.

In his first report to the state legislature, the university’s chief investment officer Jagdeep Bachher said 35 out of 106 outside investment partners surveyed were “substantially or majority diverse or woman owned”, according to Knight Foundation standards. The report did not provide statistics specifically for venture capital or other investing sectors.

“Our actions are premised on what we know to be true, that diverse teams lead to higher performance and better results,” Mr Bachher and UC regent Richard Sherman wrote in a May 29 memo to the board of regents, following Floyd’s death.

“We intend to increase our access to and inclusion of diverse talent when we invest, when we hire, and when we exercise our rights as a company shareholder. We will not let implicit bias hamstring our investment performance.” Mr Bachher declined an interview request.

Big pension funds in the state have been slower to react. Calpers, the nearly $400bn California public sector workers pension, declined to provide data on the racial or gender composition of its venture capital managers. 

Calpers said: “It is against California law for Calpers (or Calstrs for that matter) to select a manager based on race, so we don’t have that information.” 

It also said it was not making new venture capital investments. But last year, the pension system invested in Technology Crossover Ventures, which is known for backing mature tech start-ups nearing initial public offerings. TCV does not employ any black, Latinx or female investing partners.

TCV said 75 per cent of hires in the past 18 months had been diverse, on the basis of gender or ethnicity.

Calstrs, which manages more than $240bn on behalf of California teachers, also declined to share data on diversity among its venture capital managers.

As of the end of 2018, the pension system reported that so-called emerging managers controlled $1.8bn of its $20.3bn in private equity investments, including in venture capital. The “emerging manager” designation includes not only diverse managers, but also groups investing from their first, second or third funds, regardless of gender or race.

That has made emerging manager programmes a target of criticism, with black venture capitalists contending they have largely propped up a crush of white investment managers raising new funds since the 2008 financial crisis.

Instead, they are urging large institutions to apply pressure on established venture firms, citing gains made on gender representation in recent years. For some, that meant threatening to withhold capital if diversity did not improve.

“We did get the attention of limited partners, and they did get the attention of large [venture capital] firms, and they lit that fire,” said Sydney Sykes, co-founder of the advocacy group BLCK VC.

Andrew Golden, president of the Princeton University Investment Company, which manages an $26.1bn endowment, said he would not threaten to exit investment firms that do not meet diversity targets.

“The impediment to diversity is less about motivation and more [about] people trying to figure out how to do it,” Mr Golden said, acknowledging that his stance put him at odds with some critics.

Mr Golden also said he would not publish statistics on the diversity of external managers, adding that “numbers fluctuate for a lot of reasons that not all audiences understand”.

Instead, Mr Golden has prioritised hiring under-represented managers and advocating behind the scenes for greater diversity at existing investment partners.

In the past two fiscal years, three of the five new venture capital firms hired by Princeton were led by black partners, he said. “We can all admit that we don’t have it figured out,” Mr Golden said, “but let’s try and be creative.”