Changing The Capital Flow Paradigm For BIPOC Female VC Fund Founders

In the dog-eat-dog world of venture capital, two Black and two Latinx female founders of venture funds are doing things differently. They are collaborating, not competing.

The lack of capital going to female founders is well known. Only 17% of venture capital went to companies with at least one female founder and 2% to all female-founded companies, according to The Q3 2021 PitchBook-NVCA Venture Monitor. Just 3.2% of Black and Latinx founders received venture capital, according Crunchbase data for the first nine months of 2021.

Women venture capitalists are twice as likely to invest in companies with female founders and three times as likely to invest in companies with female CEOs, according to Diana Report Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital by Babson College.

Sadly, of U.S.-based VC partners, only 4.9% are women, according to The Untapped Potential of Women-led Funds by Women in VC. These statistics are even more dismal for women of color—just 0.2% of VC partners are Latina, 0.2% are Black women.

“The United States is missing out on $4.4 to $4.5 trillion in annual GDP by not investing efficiently in women and minority VCs,” said Eugene Cornelius, senior director, Center for Regional Economics at the Milken Institute. “We need to change the narrative.”

Funding women and BIPOC isn’t about doing the right thing; it is an economic issue. The economy can’t prosper if you deny more than half the population the opportunity to innovate.

“Capital raising for BIPOC women is averaging between two and three years compared to male-led funds closing in six to eight months,” sighed Gayle Jennings-O’Byrne, general partner and co-founder of the WOCstar Fund. “That’s more than non-inclusive,” declared Cornelius. “That’s stupid!”

Bringing Grassroots Tools To Venture Capital

When the traditional ways that “good ole boys” first-time fund managers raise capital weren’t working for Jennings-O’Byrne and Tracy Gray, managing partner at The 22 asked, they asked themselves if activating a cross-section of stakeholders the way grassroots community-building methods used in civil rights, women’s suffrage, and LGBTQA+ movements could be applied to venture capital?

The answer is yes!

To ensure a full spectrum of opportunities that map to the sectors where growth opportunities are the greatest for BIPOC founders, the pair formed a cooperative initiative called Ally Capital Collab and added two other venture capital firms:

• 2045 Ventures, led by Carmen Palafox, is a pre-seed and seed fund focused on serving the world’s needs in 2045 when the minority becomes the majority in the U.S.—especially in climate, technology, health, and fintech.
• Supply Chain Capital, led by Noramay Cadena and Shayna Harri, focuses on early-stage companies with diverse founders at the intersection of food, culture, and technology.
• The 22 Fund invests in tech-based, export-oriented manufacturing companies focused on those led by women and BIPOC to create clean jobs of the future in underserved and low- to moderate-income communities.
• WOCstar invests in companies and technology, redefining how we consume content and resources, transact commerce, build wealth, and create a sustainable world.

Setting Standards

These first-time VC fund managers have deep investment and sector expertise, which guide them in setting the principles they follow:

• Share best practices and resources.
• Support each other through the highs and lows of the funding raising process.
• Share which investors not only talk the talk but also walk the walk and connect each other to them.
• Seek allies—venture capital insiders and influencers—to advocate, vouch, and open doors for them.
• Educate potential investors about the arbitrage opportunity that investing in underestimated BIPOC female-led funds represents and offer combined investment opportunities.

These innovators are building out a pilot—Ally Capital Collab—to add $1 trillion in enterprise value to the economy by investing in BIPOC-founded companies and codifying new ways of activating capital for BIPOC-founded funds.

“This is exciting to me,” said Cornelius. “The problem has to be solved from different perspectives.”

Funding the funders

It was utterly unacceptable to Jacki Zehner that women, especially women of color, receive a trickle of funding. She is the founder of ShePlace and co-founder of Women Moving Millions and a former partner at Goldman Sachs. When she reviewed her direct investment portfolio, she only had one investment in a fund managed by women of color. “I have to be more intentional about this,” she emphasized.

“I’m going to put my money where my mouth is,” exclaimed Zehner. Investing in first-time fund managers is very risky. Zehner is working with Rose Maizner on her investment strategy. Maizner did due diligence on 71 funds, 11 fund of funds, and a handful of investing communities and emerging manager accelerators from the Wharton Sage 3.0 database.

Both knew Gray. “She has an absolutely outstanding reputation and a unique [investment] thesis,” said Zehner. “It was a no-brainer to invest in her [The 22 Fund]. “You can’t invest in everyone.” Zehner chose only one other fund to invest in—WOCstar.

Notably, “We’re trying to restructure the way we do due diligence and move away from the reliance on track record and look for other kinds of points of validation,” said Maizner. “It was really compelling for us that Tracy and Gayle are redesigning the process and ecosystem to make it easier for limited partners [investors] to invest.”

Zehner and Maizner are supporting the two VCs by being a reference, sharing what they’ve learned about The 22 Fund and WOCstar and their due diligence with other investors, writing about The 22 Fund and WOCstar using Zehner’s LinkedIn platform, holding group calls with Gray and Jennings-O’Byrne, who educate on the challenges WOC face raising capital for their funds, host calls with Gray and Jennings-O’Byrne, for interested investors, and provide help such as Maizner reviewing their decks and giving additional feedback on other issues.

Sistering Up

Zehner describes the framework for the support she and Maizner provide as “sistering up.” Sistering is a construction term that means to strengthen infrastructure. They connect, amplify, champion, and partner. Bias creeps in unintentionally, such as in the size of funds institutional investors invest in or the fee structure that eats away at profits of first-time funds which are likely to be small. Zehner and Maizner can educate others at closed-door meetings Gray and Jennings-O’Byrne don’t have access to.

Institutional investors need to allocate 5% to 10% of the funds they invest in venture capital to funds managed by women and BIPOC, commented Cornelius. These investors require five years of investment experience and that funds be at least $50 million—if not $100 million—before they invest. They also need to change their underwriting criteria, which unintentionally puts diverse fund managers at a disadvantage.

Confluence Philanthropy and the Hewlett Foundation have become allies, too. Both are committed to making the world a better place through equality.

How will you support diverse founders and funders?