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XColumn: Diversity Riders Can Make the Investing Network Better in LA. Here's How Entrepreneurs Can Help.

Back in August of last year, L.A.-based Act One Ventures partner Alejandro (Alex) Guerrero launched the Diversity Rider, along with a number of other marquee venture capital firms, including First Round Capital, Maveron and Greycroft.
It's likely not a shock to anyone that barely 7% of VC investment partners nationally identify as African American or Latino, according to the National Venture Capital Association and less than 10% of VC-funded companies are led by women.
In L.A. County, where Black and Latino communities represent almost 60% of the population, the numbers aren't much better. Given the fact that distribution of investment dollars roughly reflects the composition of diversity among investment partners, money invested in Black and Brown founders in L.A. is vastly disproportionate. Put simply, VC partners and check writers in L.A. don't look anything like their customers or employees.
Introducing the rider in a recent dot.LA story, Act One's Alex Guerrero put it like this:
"You haven't gotten those chances, not because you don't work hard or you're not there, but because you don't come from those networks, you don't have that wealth, you don't have that privilege and that's what's hindering you and that's not your fault. Sometimes you just don't hit the birth lottery."
While COVID was raging across the country and America was exposed to the horrific killing of George Floyd, Guerrero was thinking about equitable access to opportunity in a new and creative way. Specifically, he was thinking about the opportunity to drive real wealth creation for communities that historically don't have access to the table. He was also thinking about how the venture capital-financed ecosystem needed another tool to drive diversity, equity and inclusion across the entire stack. In particular, the equity component needed real and material change.
How Diversity Riders Work
Guerrero is asking for VC firms leading a deal to add a provision to their term sheets requiring a certain amount of capital in a given financing round be allocated to diverse check writers.
To understand how that provision — called a Diversity Rider — works, you have to understand how venture capital deals work. (This is a simplification, so, finance experts, please bear with me.)
VCs tend to make investments in a given company as a group, but that group of investors is typically led by a single firm, which gets to set the "terms" of the deal in the form of a contract, called the "term sheet."
It is the term sheet that defines many of the critical requirements and conditions of a company's financing event. These documents include many of the most salient and substantive details of an investment deal, including liquidation preferences, voting rights, pro rata rights, board composition changes, right of first refusal and, most importantly (at least, for some), the valuation tied to the investment round.
Much like any contract, everything is subject to negotiation and a lot of creativity can be introduced. This is where riders come along.
Guerrero's initiative is somewhat revolutionary in its incremental nature in that it didn't call for an explicit percentage of a round to go to DCWs, but rather just that a rider should be included and the lead VC. It's sufficiently flexible to enable all sorts of implementation, meaning the Diversity Rider can over time be added to more and more term sheets until it becomes a norm. Ideally we quickly get to the point that the Diversity Rider is perfunctory to include, and noncontroversial — or even better, it's no longer needed at all as the industry has internalized its mission and it becomeis the norm. What a world!
What Is Founders' Role in Expanding the Diversity Rider?
Alex and his supporters have already partnered with at least 10 venture capital firms that are committed to using the rider in their term sheets.
I asked Alex what obligations or part to play he thought founders had in the Diversity Rider call to action.
"Not only are founders incredibly essential to the growth of the rider," he said, "in my opinion they will be the key driver determining how fast the entire industry moves towards normalizing the topic of having a diverse cap table. When you [the founder] see the rider language in a Term Sheet, you will instantly know by their actions that that [VC] cares about D&I where it matters most: at the equity level."
But there's more that can be done, specifically, by founders who want to see their profits, and the ecosystem, grow.
"No founder should be dependent on any VC firm to be the ones to proactively bring up the topic of having a diverse cap table," he said. "These are your companies, and it is your call as to who gets the ability to participate, whether the existing or new investors like it or not."
It is tantamount to success across many dimensions and across many stakeholders to drive a higher participation of diverse participants in cap tables, with allocation requirements baked into the term sheet.
"Hopefully your VC investors will be understanding and supportive," Guerrero added, "but if in today's world you bring this up and an investor balks at it, you might want to ask yourself if you want to be in business with that person or firm in general since you wouldn't be philosophically aligned on this crucial aspect of building your business. I know that this topic of conversation can be uncomfortable, but if we don't commit to having this conversation everywhere, for every round, all the time, nothing will truly change."
We, as founders and entrepreneurs, have the ability to influence terms and make possible the change we want to see. We have leverage as a class, so let's use it for doing good while doing well.
Fernish will be allocating a target of 10% of all future rounds to diverse check writers as our own implementation of the Rider. (Shout out to Finix for setting a great example here for the rest of us!)
We've also broadened our board of directors and kicked off an exploration of DEI training to raise our understanding of unconscious bias in the workplace. We also recently donated to the Fund for South LA Founders and my time as a mentor to the inaugural cohort of this fund.
Why the Rider Works for L.A. Investors, Founders and Communities
Whether you hold a traditional Milton Friedman view that a company's responsibility is solely to its shareholders or a more modern and thankfully broader interpretation of a company's role in society, it is indisputable that more diverse companies — across investors, board members, leadership teams, all the way down to line staff — will have better returns over time. An extensive McKinsey report proved this from multiple angles.
Additionally, VCs are looking for ways to de-risk any and all investments. The rider will drive predictably higher performance so it's inclusion is another edge on the path to venture success. All around, this means the Diversity Rider is a win-win for diverse investors and the rest of the cap table alike.
Even better, the common class stockholders—i.e. the founders and the rest of the employees—will also get to benefit from this better performance. That makes it a win-win-win!
Also important: diverse venture investors get the opportunity to create multi-fold returns, rather than incremental returns, on their investments. Assuming that the investor is comfortable with the risk of an earlier stage investment, and has the financial wherewithal to spread their capital across a decent mix of companies, a blended "Internal Rate of Return" (IRR) target would be 20-30%. Someone who invested in an S&P 500 index fund WHEN? has seen a "compound annual growth rate" of 7-10%. And assuming the investor "picks a winner", this can be multiple multiples on the initial investment.
Venture and private equity as an asset class — and the wide range of preferential tax treatments for investments in this category — is how generational wealth is created.
This is also how DCWs expand their financial footprint, creating a flywheel effect whereby they can invest further. That wealth can, in turn, be used to forward initiatives of various sorts in their "communities" — however that might be defined — that can lead to more opportunity, more founders, more investment.
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Rivian Stock Roller Coaster Continues as Amazon Van Delivery Faces Delays
David Shultz is a freelance writer who lives in Santa Barbara, California. His writing has appeared in The Atlantic, Outside and Nautilus, among other publications.
Rivian’s stock lost 7% yesterday on the back of news that the company could face delays in fulfilling Amazon’s order for a fleet of electric delivery vans due to legal issues with a supplier. The electric vehicle maker is suing Commercial Vehicle Group (CVG) over a pricing dispute related to the seats that the supplier promised, according to the Wall Street Journal.
The legal issue could mean that Amazon may not receive their electric vans on time. The dispute hinges on whether or not Commercial Vehicle Group is allowed to raise the prices of its seats after Rivian made engineering and design changes to the original version. Rivian says the price hike from CVG violates the supply contract. CVG denies the claim.
Regardless, the dispute could hamper Rivian’s ability to deliver electric vans to Amazon on time. The ecommerce/streaming/cloud computing/AI megacorporation controls an 18% stake in Rivian as one of the company’s largest early investors. Amazon has previously said it hopes to buy 100,000 delivery vehicles from Rivian by 2030.
The stock plunge marked another wild turn for the EV manufacturer. Last week, Rivian shares dropped 21% on Monday after Ford, another early investor, announced its intent to sell 8 million shares. The next few days saw even further declines as virtually the entire market saw massive losses, but then Rivian rallied partially on the back of their earnings report on Wednesday, gaining 28% back by Friday. Then came yesterday’s 7% slide. Today the stock is up another 10%.
Hold on tight, who knows where we’re going next.
David Shultz is a freelance writer who lives in Santa Barbara, California. His writing has appeared in The Atlantic, Outside and Nautilus, among other publications.
Snapchat’s Attempt to Protect Young Users From Third-Party Apps Falls Short
Kristin Snyder is an editorial intern for dot.la. She previously interned with Tiger Oak Media and led the arts section for UCLA's Daily Bruin.
Some Snap Kit platform developers have skirted guidelines meant to make the app safer for children.
A new report from TechCrunch released Tuesday found that some third-party apps that connect to users’ Snap accounts have not been updated according to new guidelines announced in March. The restrictions, which target anonymous messaging and friend-finding apps, are meant to increase child safety. However, the investigation found a number of apps either ignore the new regulations or falsely claim to be integrated with Snapchat.
The Santa Monica-based social media company announced the changes after facing two separate lawsuits related to teen suicide allegedly caused by the app. Over 1,500 developers integrate Snap features like the camera and Bitmojis. Snap originally claimed the update would not affect many apps.
Developers had 30 days to revise their software, but the investigation found that some apps, such as the anonymous Q&A app Sendit, were granted an extension. Others blatantly avoided the changes—the anonymous messaging app HMU, which is now meant for adult users, is still available to users "9+" in the App Store. Certain apps that have been banned from Snap, like Intext, still advertise Snapchat integration.
“First and foremost, we put the privacy and safety of our community first and expect the products built by our developer community to adhere to that standard in addition to bringing fun and positive experiences to people,” Director of Platform Partnerships Alston Cheek told TechCrunch.
The news is a blow to Snap’s recent efforts to cast itself as a responsible social media platform The company recently announced Colleen DeCourcy would take over as the company’s new chief creative officer and CEO Evan Spiegel to recently made a a generous personal donation to graduates of Otis College of Art and Design. The social media company currently faces a lawsuit from a teenager who claims it has not done enough to protect minors from sexual exploitation. In April, 44 attorney generals sent a letter to Snap and TikTok urging the companies to strengthen parental controls.
Lawmakers are considering new policies that would hold social media companies accountable for the content on their platforms. One such bill would require social media companies to share data with independent researchers.
Snapchat recently rolled out augmented reality shopping features and influencer-led original content to grow its younger base of users.
Snap Inc., Snapchat's parent company, is an investor in dot.LA.
Kristin Snyder is an editorial intern for dot.la. She previously interned with Tiger Oak Media and led the arts section for UCLA's Daily Bruin.
When we list the attributes most associated with successful founders, investors, billionaires, and industry leaders, we often think of things like determination, grit, fortitude and even obsessiveness. The winners are the most relentless, the ones who work the hardest, know the most, start the earliest in the morning on four hours of sleep and won’t accept no for an answer.
While discussing the venture capital world, and his upcoming technology conference in Santa Monica, The Montgomery Summit 2022, March Capital co-founder and Managing Partner Jamie Montgomery doesn’t necessarily contradict this formula for success, but adds a new attribute to the mix that’s sometimes left out: curiosity.
Montgomery’s a believer that there’s no one right way to go about things, and no surefire process for success. Sometimes, the best company emerges from not just the best data and team but the most creative approach. “If something isn’t clear, invert,” Montgomery explained. “Then invert again. Soon the subject becomes clear.”
The best investors and leaders have an innate inquisitiveness about the world around them, and seek out opportunities not just based on market trends but genuine observations about problems in desperate need of solutions.
“You sort of have to be a very heuristical thinker,” Montgomery said. “Sometimes I find some people I talk to are very smart and interesting, and I think, “That person’s very thoughtful. They’re going to be a good investor.’ Sometimes you meet people and you think ‘Well, they come across smart, but they’re always preparing what they’re going to say in response to what you have to say, they’re not really listening.’ Being a good investor, you’ve got to be a good listener. You’ve got to figure out, what’s the signal and what’s the noise? Filter out the noise and say ‘What’s real?’”
Thoughtfulness, attentiveness and curiosity are typically the sort of attributes that we think of as innate, as opposed to skills you can improve via on-the-job training. Montgomery noted, “I always ask entrepreneurs why rather than what. You get a more interesting answer.” Reading and research and investigation can help, but innate curiosity remains an essential ingredient in business success.
“I think, to be an investor, not just a VC but an overall investor, one benefits from an incredible amount of reading and knowledge,” Montgomery explained. “You have to have a voracious appetite, so it’s really a high-level curiosity. Some people have it, some don’t.”
March Capital Founder Jamie Montgomery.
Illustration by Dilara Mundy
One subject that’s on Montgomery’s mind these days is quantum computing, and its potential impact on cybersecurity, a major area of focus for March. His process starts by asking core questions about the next 5-10 years and what they’ll look like, before even considering potential solutions.
“If you’re investing, you have to look at something that’s inevitable,” Montgomery explained. “Is it gonna happen or not. If it’s inevitable, then the question is, is it imminent? And is it investible? Start with inevitable. Eventually you’re going to have quantum computing, and that’s gonna create an existential threat to cybersecurity. Is that imminent?... What is the post-quantum cyber world like, with all this information that’s been siphoned out of America by China… what do they have and how do we prepare for a post-quantum cybersecurity? It’s almost existential.”
This holistic question-based approach also drives Montgomery as he plans and organizes the annual Montgomery Summit, the largest such event of the L.A. tech calendar year (Montgomery refers to it as the “Rose Bowl of Conferences.”)
He expects around 1,200 people to attend this year – the event’s big return post-pandemic – for panels and sessions that don’t just cover areas in which March Capital specializes, but a vast and diverse variety of subjects and topics, designed to intrigue and inspire curious minds.
Over 175 speakers in total have signed on for the 19th annual Montgomery Summit, to be held on May 24 and 25, from the worlds of technology, economics, geopolitics, public policy, the sciences and beyond. Montgomery gets animated as he tells me about the voluminous range of topics being covered, from the Federal Reserve’s response to inflation to the war in Ukraine to the stories behind companies like Bill.com and CrowdStrike. One session will feature Chapman University Presidential Fellow Jack Horner, one of the world’s leading paleontologists and a key inspiration for the “Jurassic Park” character Dr. Alan Grant.
“It’s the interaction, the entrepreneurs with the investors and the executives,” Montgomery told me. “It’s fantastic, it’s enjoyable, it’s fun, and it’s candid. There are no big egos. The speakers will actually come and talk to you, they don’t come in the back door and leave through the back door. You actually can go to any one of seven sessions, and it’s going to be interesting, and they’re all short. 25-45 minutes each.”
The shorter 25-45 minute sessions help to stave off boredom and mean that attendees can sample a wider range of subjects and sessions than they might at other conferences. It helps keep things moving and makes them fun, a theme Montgomery returned to a few times in our discussion.
“There’s a lot of conferences that are very professionally run or research-driven or they’re very commercial. People come here and they’re gonna have a blast, right?”
The Montgomery Summit runs May 24th-25th at Santa Monica's Fairmont Miramar Hotel & Bungalows. Find out more information on their website.
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