Ten venture capital firms have committed to include a "diversity rider" — a promise to startups that they made their best effort to find underrepresented investors — in their deals.
The project was the brainchild of Alejandro Guerrero, a partner at Los Angeles-based Act One Ventures and the child of Mexican immigrants, who often found he was the only person of color in the room when investment deals north of six figures were being made.
"This is about moving diversity forward and there's two themes of how we address that: Money and access," he said.
Inspired by the George Floyd protests and the push it gave the industry to recognize long standing inequities, Guerrero reached out to several venture capital firms and investors with a proposition: add diverse investors in on the deal.
In the end, Greycroft Partners, First Round Capital, SVB Capital, Harlem Capital Partners, Fifth Wall, Plexo Capital, Precursor Ventures and Equal Ventures signed on.
Each of the firms are committed to adding "boilerplate rider language into their standard term sheets" that encourages the addition of underrepresented investors to cap tables.
Alejandro Guerrero often found he was the only person of color in the room when big investment deals were being negotiated.
Studies have shown diverse investment teams deliver better returns, Guerrero points out.
"The same way you would have to have a conversation about, 'how much money do you want to raise, at what dilution'," he said. " You want to throw in there, 'who has a diverse investor?'"
Historically, the answer has been few.
A 2018 Deloitte study found 80% of investment partners at U.S. venture firms were white; 15% were Asian/Pacific Islander; 3% were Black; and 3% were Latino. Women accounted for 14% of partners.
In Los Angeles, one of the country's most diverse metropolises, the figures were even worse. Just 2% of VC investment partners identify as African American or Latino and less than 10% of VC-funded companies are led by women or people of color, according to PledgeLA.
The chasm is more than numbers to Guerrero.
"Sometimes it is uncomfortable being the only person of color in the room, being the only Latino person in the room," he said. "You know we're talking about a town in Los Angeles that's 50% Hispanic."
The largely exclusive world of venture capital has remained largely white in part because of the way it operates, relying on tight-knit networks that circle back to people of similar backgrounds. Guerrero said he thought a lot about that and the systematic inequalities that the Black community faced as he watched the video of police killing George Floyd.
"If you're a person of color, or an underrepresented individual you can kind of feel how you know you've been overlooked for opportunities," he said. "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."
The effort is an attempt to unlock access to investors of color and underrepresented groups, but it also build their reputation and eventually generate more wealth through increasing who owns a stake in companies.
"Long term, this is a step forward in changing the mindset in venture to ensure more investors are frequently considered for co-investment and follow on opportunities," said Henri Pierre-Jacques, managing partner at Harlem Capital Partners, in a statement.
It comes as others in the industry are trying to address longstanding inequities. Softbank launched a $100 million Opportunity Fund to invest in minority-owned businesses and Andreessen Horowitz announced the Talent x Opportunity Fund.
Guerrero said he's hoping that it will catch on not only with venture firms but will encourage founders to ask for diverse investors.
Firms interested in joining the initiative can sign up here.
Geekwire contributed to this story.
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There's the accelerators and female-founder dinners. Throw in the hyped-up "pledges" rallying public support for inclusion. But, for all the female focused co-working spaces in Los Angeles, the startup scene remains a male-dominated game.
The data tells the story. Female founders received fewer than 10% of venture capital deals in Los Angeles last year, according to an analysis by dot.LA using data provided by PitchBook. When it came to the money, women got even less. Only 2% of the $8 billion in venture capital that poured into Los Angeles companies last year went to female-founded companies. The numbers have moved only a fraction of a percent over the years.
"That is so depressing," said Anna Barber, managing director of the accelerator program Techstars LA, and a coach to founders. Raising capital is "still objectively and relatively more difficult for women and underrepresented founders to raise."
A dot.LA analysis found that the amount of venture capital investment in female-founded companies has stagnated in Los Angeles, San Francisco, and nationwide since 2015. The numbers are stark despite the region's significant efforts to turn the tide.
In Los Angeles, the mayor's office launched PledgeLA in 2018 to incentivize the business community, boosting diversity in the tech and venture capital industries. Backers include the Annenberg Foundation, dozens of LA-based venture capitalists, and tech companies. Another initiative includes All Raise, founded the same year by 34 senior female investors to accelerate the success of female founders. The organization recently opened an L.A. chapter.
"Someone said this to me a couple months ago and it really hit a nerve," Barber said. "For men, making money together has always been part of the culture of male friendship, it's 'I know this guy, he's got this thing, let's do this thing together and it'll be fun.' It's part of how men operate together."
"For women, for female friendship," she said, "making money together has never really been on the agenda. I want to change that, I want to think of the women I know and have relationships together and think 'how can I make money together.'"
Data from PitchBook
That culture seems to be reflected in the data.
The Los Angeles area has always been an overall smaller market for VC deals compared to San Francisco, with the Bay Area hitting $40.6 billion invested in companies compared to $8 billion in Los Angeles, according to PitchBook. But, L.A.'s traditionally more consumer-focused market has led to better chances for female entrepreneurs who want to receive VC funding.
In San Francisco, all-male founders made up 73.2% of the total deals in the metropolitan area. Solely women founded companies made up just 5.4% of that total. In Los Angeles, all-women founded companies did slightly better, making up 9.4% of the total number of deals while all-male founders got 65% of the cash.
Smaller Deals, Better Returns
Women founders in L.A. fared better. But, while they got more deals, the investments were smaller in size. This resulted in less total capital.
Data from PitchBook
Jennifer Acree, the chief executive of JSA Strategies, a strategic communications firm that works with both consumer tech and digital media companies, is not surprised by the data.
"Look at how many VCs there are and most of them are men," Acree said. "Venture capital has traditionally been a male-dominated industry, just like technology...it just takes time to fix it and people need to see examples of women in the industry."
A dot.LA review of the last 14 years of median pre-money valuation broken up by gender showed that companies with all-male founders had valuations that rose somewhat steadily from $13.1 million in 2006 to $25.5 million in 2019. For female founders, that number was $11.5 million in 2006 with a rise to $12 million in 2019.
Michael Silton, managing director of Act One Ventures, said their VC firm has made an effort to identify and fund people of all backgrounds, with 70% of their founding teams including women or minorities. The firm also requires term sheets carry a diversity clause for hiring.
"We're not doing this to change the world, we're doing this to make more money," Silton said. "We believe finding the best founders no matter their background and making diverse teams means we're going to make more money. It's the right thing to do and it also works."
That has been borne out in a series of studies that finds diverse teams outperform those that aren't, and that investment in female-led companies actually provides a better return than investments in male-led companies.
Investing in diverse founders requires outreach to communities that are often overlooked and to founders at early stages more proactively, as well as trying to create a more hospitable and welcoming environment for founders of any background, Silton said.
"One of the things you see is that women often present differently, their degree of confidence in relation to their background tends to present differently, than a man," Silton said. "If you listen, a man sounds more positive and a woman maybe less so, when they are equally capable and maybe the woman is even more capable."
Studies have shown that men are more willing to apply for jobs for which they don't necessarily meet the criteria, while women tend not to apply unless they have all the necessary skills perfected. They've also shown that VCs tend to ask women questions they don't ask male founders.
That puts a burden on VCs to look beyond men they've previously invested in, to be conscious of their biases, to support and coach founders, and to give them equal opportunities, Silton said.
"There are intentional biases, there are unconscious biases, and there's a lack of effort to find different founders," Silton said. "And some believe that to achieve a different outcome you have to start differently."
Barber said that to combat some of this she often tells founders who are women or underrepresented to try to "be the biggest version of yourself" and exude confidence. "Sometimes what gets in the way for people is imposter syndrome," Barber said, "just the idea of keeping yourself small."
It's worth noting that PitchBook doesn't track data on venture investments in companies founded by people of color. The numbers are far smaller when you factor in businesses founded by women of color.
The Case for More Female Investors
"It starts with the capital, and I don't just mean where VC funds are investing, I mean who is investing in VC funds," said Kara Weber, president of Brud and founder of Brilliant Ventures. Weber said the largest shift of private wealth from men to women is occurring globally right now, as people's fathers and husbands pass away. But the challenge is where women put that money. Historically, women have been directed to more philanthropic efforts like the nonprofit sector.
"I've heard women talk about how they will not bat an eyelash at giving $250,000 to the New York City Ballet, but god forbid you suggest investing $25,000 in a startup," Weber said. "I think there were gendered norms around that stuff that we're still shaking off the chains from. The men handle one side and the women handle the other."
Alexa Ray Joel wears Tamara Mellon at Go Red for Women-The Heart Truth Red Dress Collection at Mercedes-Benz Fashion Week at Lincoln Center on February 12, 2015 in New York City.by Debby Wong
She added that driving women's capital into the innovation ecosystem ultimately will still benefit women investors and founders: "There's so much economic evidence showing that when you do well by women, you do well by the world." Brilliant Ventures has invested in 17 companies; 72% of the founders are women. But even though there have been a lot of deals, "our check size was miniscule," Weber said.
Weber remembers telling a prominent female angel investor that she wanted to raise Brilliant's first fund entirely from women, "She laughed and laughed and laughed, and said, 'I wish the world for you, but I don't believe you'll ever do it.'" Spoiler alert: "She was right," said Weber. "We did get a lot of women investing, but the bulk of our capital came from men."
She added, with a sad laugh, "I would say, we had a dream."
In 2016, Weber's new L.A.-based venture capital firm Brilliant Ventures was looking to do its first deal, and had the chance to back Tamara Mellon, a new luxury footwear brand founded by Mellon who had previously founded the highly successful Jimmy Choo.
"This deal had everything going for it, it was very well-backed, had a proven founder, and was a category that women investors can understand," Weber said. "And every single woman I took the deal to asked me to speak to a man on her behalf."
One good friend came back and told Weber: "I'm going to do it! My brother thinks it's a no brainer." Weber was dumbfounded. The woman's brother is an emergency wilderness doctor and less qualified on the subject matter than she was to make such a decision.
"We've been so trained to not have confidence in ourselves," Weber said. "That really struck me. These were women, who have plenty of experience buying luxury footwear, they know who Jimmy Choo is and they all still asked me to talk to men, whether financial advisors, private wealth managers, or husbands on their behalf."
Grid110, a nonprofit and accelerator program, has worked to flip the narrative, working with 126 companies over the past five years. About 70% are led by a female founder or cofounder and 60% of the companies are headed by a person of color. So far, 17 companies have raised $16 million and 95% of that is from teams with at least one female founder.
"That's typically the inverse of what you see," said Miki Reynolds, executive director of Grid110 and also a member of the advisory board for PledgeLA.
More women are starting businesses and so there are more female business owners, Reynolds said. But those businesses aren't necessarily the type that has traditionally received VC funds.
Courtesy of LAMayor.org
VCs "invest in what scales and forms the size returns they're looking for, which is a certain type of business," Reynolds said.
Carmen Palafox, managing partner at MiLA Capital said having more female investors is also critical.
"I think (the stagnant numbers) goes back to the need for systemic change," Palafox said. "You're going to see incremental improvements, there's some programs that will accelerate the pace. But at the end of the day, bottom line, if you don't have more women investors, you're going to just go at a turtle's pace."
Palafox strongly believes there needs to be strong incentives, perhaps government-backed, to push for VC firms to invest in women.
"You need to create incentives for folks to do something differently than what they're currently doing," Palafox said, "because what they're currently doing is working for them."
Barber, of Techstars, said she still feels "a lot of hope" despite the numbers that "we will move the needle."
"Looking at who's writing checks is a big part of it," she said. "Not only thinking about investing in more women but also enabling more women to invest."
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It was a rocky start to the year for Chris Violas, CEO of a growing software startup that services the cannabis industry. Violas got the kind of news that no one really wants to hear: Their payment processor, Stripe, had dumped them.
That meant they couldn't get paid.
"We're not selling weed over here, we're selling software," said Violas, CEO and co-founder of Newport Beach-based BLAZE. "But it's because people keep track of all their weed in our software" that "they wiped their hands."
Stripe did not respond to multiple requests for comment.
As cannabis markets in legalized states continue to mature, troubles with banking and payment processing have impacted growing companies -- even if their workers never even touch the cannabis plant. Companies that exist up and down the supply chain are finding themselves affected, like BLAZE, by the lack of federal decriminalization that makes traditional money-handling institutions wary of finding themselves on the wrong side of federal law.
For Violas, the sudden shift in tone in the fourth quarter, ultimately resulted in BLAZE becoming classified as a "high risk" company by banks and credit card brands. It has to secure a new high-risk merchant account, which means higher fees, to handle payments.
The irony, he told dot.LA, is that BLAZE aims to make compliance easier for those in the cannabis business through its platform that keeps track of their operations. The company, which started in 2016, has 250 clients today and is in use by dispensaries in California, Oregon, Alaska, Michigan, Montana, Colorado, Oklahoma, and Canada, Violas said. BLAZE processes roughly $30 million a month, he said
"You're enforcing all these regulations that continue to get more complex day by day, and we're a tool that's trying to help with this," Violas said. "Our chief compliance officer wrote the regulations for the city of Long Beach. We're trying to help as best as we can, but at the end of the day, we're a venture-backed startup."
The landscape of federal laws and the lack of decriminalization means that companies and professionals in the supply chain of any cannabis-providing entity, can often end up twisting themselves up into pretzel-like forms to try to abide by existing laws.
Tyler Beuerlein, the chief revenue officer of Hypur Inc., which aims to provide technology for financial institutions to enter and scale within highly regulated industries like cannabis, regularly fields calls from attorneys, accountants, companies who lose their banking relationships because their institutions find out they're related to the cannabis industry.
Among those are daily calls from merchants who say "we lost a credit product, a debit product, a reverse ATM, we got shut down," said Beuerlein, who is also the chairman of the Banking & Financial Services Committee for the National Cannabis Industry Assn. But, "the only thing that's going to affect this from a branded card perspective is federal legality."
Beuerlein can cite the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN), guidance by heart, noting that per 2014 guidance, the only remaining guidance that pertains to this industry, "if an entity derives a dollar of income from the industry they're technically a marijuana related industry."
That means that anybody running any form of branded credit card in their cannabis shop is essentially committing fraud by misrepresenting the nature of their business to gain access to that payment processing infrastructure, Beuerlein said.
Beuerlein said Stripe, which uses the branded card rails for their transactions, made the right call on dropping BLAZE because from a regulatory standpoint "if they participate in an industry that's prohibited...they're potentially risking all of their other business lines."
But Brad Rowe, a public policy lecturer at University of California, Los Angeles, who is an expert on cannabis legalization issues and is currently working with municipalities across California on cannabis compliance issues, said it "just doesn't sound right to me."
While noting that he's not an attorney, he wonders why a company providing financial services to another company that provides software for cannabis businesses is a risk. But perhaps the issue is that the money that's being processed is considered "dirty money."
And that's the root of the problem, it seems.
"Any payment solution, including cities and states receiving taxes, are all money laundering," Rowe said. "Eventually the money has to get cleaned so it's useful somewhere. until federal decriminalization. That's the problem with all of this. Everyone's guilty of money laundering."
Rowe reads the legal guidance slightly differently from Beuerlein, using a two-step rule.
"If you are knowingly providing support for a plant-touching business, that is a federal crime, so you are aiding and abetting," Rowe said. "You can be two steps away. So, if you are running a grow and I'm your attorney, your compliance advisor, I'm aiding and abetting in an operation. If someone is providing taxation services to me while I'm working with you that's two-degrees separated and that's OK."
Banks must fill out Suspicious Activity Reports under federal law with FinCEN and cannabis is illegal under federal law.
The issue is "if any money passes through FinCEN, it's got to go through Washington, D.C. If it's got to go through a federally-touching system they're just not supposed to be dealing with that money," Rowe said. "I can buy cannabis with my ATM card, the reason is when I punch my PIN it is withdrawing money from the local bank. It doesn't touch the Treasury. It's all completely ridiculous."
In BLAZE's case, being shut off from one company in particular caused significant cash problems because the cash that came in one day did not come in the next, said Michael Silton, managing director at Act One Ventures, noting that as a lead investor in BLAZE, Violas reached out to him for counsel after he learned about what happened with Stripe.
"From a financial viewpoint, It impacted their cash flow," Silton said. "These customers signed up and were paying for Stripe, all of a sudden, they had to pay for them a different way."
After all, he said, getting paid is critical for a company's ability to grow. Even so, Silton said that despite the temporary setback, he is "optimistic" about the investment and BLAZE because the founding team is so well versed in the industry.
It's made up of a lawyer who has dealt with regulation around cannabis compliance, Violas who built a dispensary and grew a business, and a grower who understands the challenges of growing and producing cannabis.
"Every industry has regulatory risk," Silton said, "and it's a matter of assessing what that risk is, compared to the opportunities and the investment return."
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