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Despite recent progress, diversity gap remains in venture capital

BY Sunday, September 27, 2020 05:22pm

Just 13 of the 80 venture capital professionals working in Michigan in 2019 were racial minorities. An equal number of all VC professionals in the state, or 16 percent, were women.

The representations in Michigan of both women and racial minorities working in the VC industry are below national averages and have changed little in the recent past, although firms are now pushing toward greater diversity in the workforce and the investments they make.

“What I’ve noticed in the last several months is there has been more of an intentional process among the investor community to really want to make a difference when it comes to diversity,” said Ara Topouzian, executive director of the Novi-based Michigan Venture Capital Association. “People are really trying to figure out what they can do and how they need to do it.”

The effort among Michigan firms comes as the entire venture capital industry in the U.S. works to become more diverse amid greater attention across the economy on issues of equity and inclusion.

Among the initiatives the association has been considering for members that want to further diversity has been the formation of formal internship and mentorship programs to grow the potential talent pool, Topouzian said.

Underrepresented in workforce

Across the U.S., the venture capital industry that historically has been dominated by white males and slow to change “has made progress toward increasing diversity and inclusion, especially among firms that have adopted strategies in this area. Yet, much work remains for the industry to take full advantage of all the talent available,” according to a June 2019 report by Deloitte and the National Venture Capital Association on a survey of VC firms nationwide.

The NVCA-Deloitte Human Capital Survey conducted in late 2018 found that women were underrepresented in the VC industry in investment positions and leadership. Black and Hispanic employees at VC firms were underrepresented in all positions and leadership.

The underrepresentation of minorities and women in the industry persists despite some progress nationally in the two years since the NVCA first surveyed VC firms on the issue.

The percentage of investment professionals who are women increased to 21 percent in 2018 from 16 percent in 2016, according to the NVCA-Deloitte study. The number of female investment partners increased three percentage points over two years to 14 percent as of 2018.

A little more than two-thirds of the 203 firms participating in the study reported having no female investment partner, versus 79 percent two years earlier.

Black employees represented just 3 percent of the workforce at participating VC firms, and 3 percent of investment positions and investment partners. Hispanic employees were represented at a slightly higher rate of 5 percent of overall employees, according to the 2018 NVCA-Deloitte survey.

The survey also found that VC firms with an inclusion strategy tended to have more diversity within the workforce.

The NVCA is now conducting a third Human Capital Survey. As of mid-September, about 110 VC firms nationwide agreed to participate and pledged that they are “committed to advancing a more diverse, equitable and inclusive venture capital ecosystem.”

Among the Michigan firms that agreed to participate in the survey was Grand Rapids-based Grand Ventures, which believes the pledge is “reflective of our fund’s philosophy.”

“We believe diversity is extremely important. Diverse teams provide diverse ideas, thinking and skills to perform at a higher level and generate better results and returns,” Grand Ventures Partner Tim Streit told MiBiz. Streit noted that three hires the firm made in 2019 were all non-white.

“We built a very diverse team for these reasons as well as to help us relate better to diverse companies and to better support them when we invest,” Streit said.

Other Michigan VC firms in the NVCA’s 2020 survey are Augment Ventures, Huron River Ventures and Renaissance Venture Capital, all based in Ann Arbor, and Detroit-based Arboretum Ventures.

Lack of investment

The need for greater diversity in venture capital extends well beyond the workforce. Only a small percentage of the venture capital invested in the U.S. annually goes to startups owned or led by a female or racial minority.

As of 2019, just 13 percent of venture capital backed companies in Michigan were led by a CEO who was a racial minority, and 10 percent were led by a woman, according to MVCA’s 2020 research report issued this spring.

Of the more than $2.1 billion in venture capital investments in 71 Michigan startups last year, $146 million went to companies led by a CEO who is a member of an underrepresented group. Of that amount, $29.2 million was invested in startups led by women, and $109.2 million was for companies led by racial minorities. Another $7.6 million went to startups led by a CEO who identifies as LGBTQ.

The annual report from the MVCA this year did note that over the last five years, the amount invested in minority-led startups increased by nearly 30 times to $109.2 million in 2019.

Topouzian points to two recent developments in Michigan signaling a change: The formation in Grand Rapids earlier this year of the New Community Transformation Fund that’s working to raise up to $25 million to invest in startups and businesses owned by racial and ethnic minorities; and the launch this month of Commune Angels in Detroit that was founded by five Black professionals.

Peer network

In an August webinar hosted by the MVCA, Carolyn Cassin, co-founder and general partner of the BELLE Impact Fund that invests in women-owned businesses and is backed by female investors, said the data in the association’s annual report “tells the whole story” about the imbalance in venture capital that “we need to correct.”

That imbalance is why Cassin and her partners formed the women-led BELLE Impact Fund in 2018, which has gone on to invest in 10 companies.

Part of the issue is a need to generate greater exposure for women-led startups “and make sure they get the same kind of opportunity to be an important part of this ecosystem,” said Cassin, who’s also president and CEO of Michigan Women Forward.

Aaron McClendon, an entrepreneur-in-residence at Detroit Venture Partners, partly attributed the lack of capital invested in minority- and women-led startups to investors staying within their established peer and referral networks for deals.

To further improve the flow of capital to women- and minority-led startups, VC professionals could reach out beyond their existing peer networks that for many firms have been a usual source for prospective deals and investment opportunities, McLendon said in the MVCA webinar.

“If you look at the top of the funnel, most of the investors that are making investments don’t look like the people that are not getting funded. That’s one of the areas that’s creating a barrier to more success in this area,” McLendon said. “One of the reasons this is such a challenge is we tend to do business with friends and people that we’re comfortable with and we have kind of a familiarity with. So, if your friends are not necessarily people that don’t look like you, it’s kind of hard to recruit and identify entrepreneurs that fit that mold.”

Women and minority entrepreneurs also need to “be tenacious” in networking with people who can assist them and in time help to secure needed capital, Cassin said.

“It’s all out there. You just have to go ask for it. You just have to connect up with it,” she said during the MVCA webinar. “If you want things to change, be a part of the force that changes it.”

The NVCA-Deloitte report on the 2018 survey said that reaching outward, rather than looking internally or using referrals from peer networks when filling an open position, can also help VC firms create a more diverse workforce.

Slightly more than one-third of the firms surveyed nationally seek external candidates “always or most of the time” when recruiting for open positions, and 43 percent recruited externally for senior finance, operations, and administrative positions. Nearly half sought external candidates for junior investment positions and 52 percent did for junior finance, operations, and administrative positions.

“Since VC firms do not have a sufficient representation of women and minorities, relying on referrals is likely to perpetuate the problem because people tend to recommend people that they have worked with or know within the industry,” according to the NVCA-Deloitte report. 

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