The Gladiator Paradox: Solving Inequity by Percentages

The term “underrepresented” became popular recently, but still feels uncomfortable, because it lumps together each of the minority groups that make up most of the country together. Women and people of color make up the aggregate majority of people in the US, but even combined, we do not make up the majority of US investors or VC backed founders. I have a theory on why.

Growing up, I was an athlete. Yes, currently 68% of the NFL, 74.2% of the NBA identifies as black, but I just loved running around and having fun. What made a great athlete always started with a competitive spirit. In order to win, you need to defeat one or more people who are actively trying to stop you from succeeding. If only one can be the best, all others are forgotten and fade away. I call this the “Gladiator Paradox”. This paradox applies to sports as well as entertainment, where many black role models have historically received the spotlight. The Gladiator Paradox simply demonstrates that ethnic minorities must compete for limited spots in order to succeed. However, community success will only come with the increased number of participants, rather than finding only the elite names.

Forbes demonstrates the paradox in their article Which Funds Are Funding Black Founders (And How Can You Get Some?) “Black founders that get funded generally come from elite backgrounds. They are PhDs from Cambridge like Dr. Precious Lunga and Dr. Jason Pinto, who also has degrees from Stanford and MIT; or they have studied at Harvard, been nominated for a Grammy and produced artists like Beyoncé, Usher and Kanye West like Ryan Leslie; or they are alumni of McKinsey and Y Combinator like Rich Serunjogi; or they are Members of the British House of Lords, like Lord Victor Adebowale.”

What’s The Issue?

Success in the workforce is not competitive in the same sense that it is in sports or entertainment. You don’t have to be the best by defeating your adversaries and being the last one standing. The market is large enough to have multiple entrants achieve great success without being the highest performing entrant. Examples can be found in many high paying jobs: tens of thousands of doctors, lawyers, investors, and founders are wildly successful, with the vast majority of the population never even hearing their name. Unfortunately, there are not as many of these cases in ethnic minority communities. Spend Me Not quotes that 76% of millionaires identify as white. However, about 60% of the US identifies as white, so that doesn’t illustrate the inequity nearly as well as the percentages of millionaires within the community. What’s interesting is that Statista (below) shows that only 1.9% of the 44.1 million people who identify as black are millionaires, bringing the total to less than 838,000 back in 2016. This datapoint really illustrates one of the issues that contribute to racial inequity.

Many have floated the narrative that the inequity gap has been getting better over time with the increased number of ethnically diverse professionals in the workplace. However, this Washington Post article demonstrates that the issue has not only been stagnant, but we are getting left behind. As the percentage of white families that carry a net worth of $1M or more has increased from 7% in 1992 up to over 15% in 2016, the percent of minority families has remained relatively unchanged in that same time period.

Too Much Talking

I’m sure, by now, many of us have endured a diversity seminar put on by our employers or someone in our circle because of the recent attention drawn to the inefficiencies in fostering a diverse and inclusive environment. Diversity Best Practices reports that a study by the Society of Human Resource Management (SHRM) shows diversity-department budgets at Fortune 1000 companies average around $1.5 million per year. This may be an unpopular opinion, but it costs $0.0 to foster a more diverse and inclusive workplace. The only effort needed requires you to treat all people as you would like to be treated. So, we could argue that companies are so opposed to diversity, that they would rather spend $1.5M annually to discuss the issue than invest that capital into minority communities and talent.

Another frustrating comment I hear fairly frequently is, “It’s difficult because we want to make sure we take the time to invest in minority communities correctly.” Investopedia reports that over 90% of startups fail over the course of their life. This lack of capital to diverse founders and communities is overshadowed by a fear of failure, even though that fear doesn’t apply to the rest of the portfolio. True equality and equity will only be realized when the marginalized parties have the freedom to fail and try again.

Diversity Officer Magazine reports that diversity initiatives have been around in the workplace since the 1990’s, but the workplace has yet to be one of true equity. The logical thing to do would be to turn to those who know their communities best to make decisions to make the community prosper.

There are some absolute rock stars in the world of diverse investors, ranging from powerhouses like Lo Toney of Plexo Capital & Jess Lee of Sequoia Capital, to up and coming leaders, such as Mac Conwell of RareBreed VC & Julia Lipton of Awesome People Ventures. We all need them for inspiration, for guidance, and for examples of how to break barriers. However, the industry will not help solve its inequity by looking to these types of leaders alone. Just like the metrics of millionaires per community, the percentage of investors cannot remain stagnant over the years if we are to close the equity gap.

What Do Statistics Say?

Many people, from LPs to members of the communities themselves, agree that charity is not the way to address inequity. However, West River Group demonstrates the effectiveness of investing in the community, and how those opportunities legitimately trickle down the workforce, in their Whitepaper “THE POWER OF DIVERSITY”

Gender-diverse investing teams with more than one (>1) gender are:

· >3x more likely to invest in a female CEO

· 2.6x more likely to invest in women-led entrepreneur teams

· 2x more likely to invest in gender-diverse founders vs. all-male founders

The Black Founder List (Below) shows the firms with the most investments in black startups. With the exception of Accelerators like Techstars & Y-Combo, most of the lead investors in black funds are black VCs, such as Backstage, MaC, Newark, Precursor & Base. Again, focusing on percentages, the black managed VCs have higher percentages of the portfolio concentrated on the community, while accelerators have higher raw numbers due to the high number of investments. As Overlooked VC’s GP Janine Sickmeyer tweeted, even though accelerators such as YC are backing higher numbers of diverse founders year over year, “88% are men, 96% are not Black, 85% are not Latinx”. I can’t echo enough that percentages matter!

Stats prove that when given a chance, ethnic minorities and women lift each other up. The argument doesn’t stop at self-support, these actions yield results. This demonstrates that capital in minority communities puts their money where their mouth is, making opportunities FUBU (For Us By Us).

So, What’s The Solution?

The solution here becomes more apparent when you dive into the percentages listed above. Racial inequity will be solved when women & ethnic minorities were given the ability to succeed in the workforce at a proportionate percentage, as opposed to being required to compete for the top spot. No more “next one up” when it comes to admitting women & people of color into the circle. Even the corporate classification of “Underrepresented” or “Minorities” demonstrate that there are many groups competing for limited spots. Why do we have to compete for the top spot, when statistics show that higher volumes of opportunities lead to better overall results?

In addition to rushing to support the leaders of diverse investing, we need to increase the percentages of investors in the ecosystem, so that equity can increase exponentially within minority communities. We need to turn to the emerging managers to not only find an earlier access point, but to find unique perspectives on how to close the equity gap.

This is an opportunity for LPs, such as Family Offices, City & State Muni Plans, HNWI, and RIAs, to make a huge splash in the income gap. Allocating capital to more investment firms with diverse leadership has proven to lead to higher returns, as noted in Revere VC’s: “The Case for Diversity in Business, Venture Capital and Innovation Investing.” as well as higher impact in the community.

Although many LPs have pledged assets to diversity, many don’t understand the landscape well enough to invest in direct deals. In addition to that, investing in some of the leaders noted above gets expensive as these funds are popular and some are oversubscribed. Investing in Emerging Managers from diverse backgrounds is the most profitable, cost effective and impactful way to distribute capital to the community. Full Stop.

Emerging fund managers tend to come from unique backgrounds and skill sets. This is because many Corporate Venture Capital firms require previous experience in Private Equity or Investment Banking, something I highlighted in this tweet that also has exclusionary hiring practices. The best option for those overlooked investors is often to bring their unique experience from operations to their community and apply it to a new lens of investing as an Emerging Manager. The unique experiences allow these managers to find new markets that non-diverse teams aren’t able to find, because they don’t understand the markets.

There are 3 reasons why a unique viewpoint in investing is important:

1. As mentioned in the Revere VC Whitepaper, non diverse teams achieve 5.8% lower returns if the team shares an ethnicity and 11.5% lower with a shared school background.

2. The Brookings Institution projects the population of the US is rapidly transitioning to a more diverse landscape (below). If the consumer and business markets change along with the population, it will be beneficial to understand how the world will look in the future from an inside perspective.

3. Venture capital is about investing in the future, rather than looking to ride the coattails of established trends. If diversity is in our country’s future, it is a VC’s fiduciary duty to use diversity as a lens to invest, rather than an asset class.

We have our research, we’ve formed our strategy, now it’s time to stop the endless discussion and put capital to work.