It was only a few years ago that Black people began making significant inroads as professionals inside the overwhelmingly white male bastion of venture capital.
And while a growing number of them surely have broken through systemic and cultural barriers to operating in the VC ecosystem, they still struggle to attain acceptance and clout in the private markets’ best-performing asset class. Many have formed their own funds out of frustration with work at established venture firms, where people of color sometimes receive empty partner titles but not full-fledged investor status.
“The industry is full of a bunch of bullshit diversity theater,” said Elliott Robinson, a Black partner with Bessemer Venture Partners, speaking Thursday on a panel hosted by the nonprofit BLCK VC. “Very little has changed beyond the titling, and it certainly hasn’t changed in the roles and responsibilities, and the economics.”
During the height of the Black Lives Matter movement in 2020, the financial and corporate worlds were abuzz: Unprecedented dialogue focused on white privilege and its contrast to the dream deferred for Black investors, who aspired to finance diverse entrepreneurship while getting their own shot at VC success.
America’s reckoning on race the past couple of years hinted at a tilt toward a new era of equity and inclusion in a system long rife with inequity and exclusion.
Sure enough, countless corporate and financial leaders rallied for change, including stepping up capital allocations to minority investors or promoting their own diversity programs. And some change has come, such as an uptick since 2019 in representation of diverse owners in private market assets, according to the latest Knight Foundation study on the issue. While the exact reasons for that are unclear, one factor may be the growth of mandates by pensions, foundations and other funders to steer more of their capital to firms led by minorities and women in particular.
But now another reckoning looms. This time it’s driven by a market slowdown rather than a social awakening, and it could upset gains made by Black investors, whom LPs tend to regard as emerging managers, rather than established players with consistent records of delivering payouts to fund backers.
As the past several years of hyper-growth of VC-backed company valuations cools off, some LPs are more likely to reduce their risk profile in alternative assets.
“Typically, if you look at the last two big cycles, those dollars or what’s left of what they allocate, they typically go back to what they knew, and those are funds that have been around a long time, managers that they know, managers that have returned liquidity,” Robinson said. “My fear is what I saw happen in ’08-’09–some folks don’t make it.”
Black-led VC funds already are playing on an unlevel field when it comes to their ability to participate in the upside that most venture investors have enjoyed in recent years. Their funds tend to be smaller than the overall industry average—$30.5 million versus $57 million for first funds—owing to their disproportionate reliance on smaller LPs such as family offices and individuals, according to a report issued this past week by BLCK VC. Limited by smaller fund sizes, Black managers write smaller checks, predominantly for pre-seed and seed rounds, as they are largely shut out of pricier deals at Series A or later stages.
Paradoxically, although there are more Black partners than ever, their rate of increase hasn’t kept pace with overall venture industry growth. “The industry is where it was two years ago on this issue; it’s just a lot larger now,” said Sydney Sykes, an investor and co-founder of BLCK VC.
If their fund sizes and representation persist in lagging behind the industry, then the question of course is how to allocate more capital to underrepresented managers.
That is why managers and their advocates increasingly are looking to LPs for answers, particularly among the larger fund investors like pensions, university endowments and major foundations. They face mounting pressure to make good on diversity pledges by committing more capital and other resources to firms led by people from underserved communities.
There are signs of progress. More endowments of elite universities are directing their investment teams to work with diverse asset managers, a trend that got a big boost in 2020 from the influential Yale endowment chief David Swensen, who died last year. Just last month, Stanford’s $40 billion endowment stepped up its own diverse managers effort with an additional $100 million fund to enable allocations to smaller, emerging funds led by people of color.
Some of the nation’s largest public pensions have also expanded similar initiatives, in some cases mandated by legislation. MassPRIM, the nearly $100 billion fund for Massachusetts public employees, will aim to allocate $1 billion over the next two years in a diverse manager alternative assets portfolio as a result of a state law that came into effect this year.
Efforts to address racial equity in capital markets while making a business case for diversity is laudable but only part of the solution, said Cynthia Muller, head of mission-driven investments for the W.K. Kellogg Foundation.
“We have to also rewire the infrastructure as we deploy this much-needed capital,” she said. “That means continuing to assess and orient our processes in recognition that the system that was built was not built for all.”
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