Hundreds of Start-Ups Tell Investors: Diversify, or Keep Your Money - The New York Times

The Founders for Change coalition includes, from left, Howie Liu of Airtable, Andre Haddad of Turo, Todd Berman of Loom, Sarah Leary of Nextdoor, Jason Brown of Tally, Sarah Nahm of Lever, Eddie Medina of BetterUp, Amit Sharma of Narvar and Rosanna Myers of Carbon Robotics. Credit Christie Hemm Klok for The New York Times

SAN FRANCISCO — When Trevor McFedries set out last year to raise money for Brud, his robotics and artificial intelligence start-up, he found himself in many meetings with “a ton of white guy” venture capitalists.

So Mr. McFedries, who is black, and his co-founder, Sara DeCou, a Latino woman, added a condition for investors: The pair would accept money only from venture firms that had a woman or a person of color in a position to write them a check.

“It was counterintuitive for us to raise money from a bunch of white guys who want to extract all the value from the world,” said Mr. McFedries, who eventually collected several million dollars from firms that met the condition. “We’re interested in reshaping the way that tech looks.”

Mr. McFedries is one of more than 400 tech entrepreneurs and chief executives who have now banded together, in a loose coalition known as Founders for Change, to pressure the venture capital industry to diversify its ranks. The group includes Dropbox’s chief executive, Drew Houston; Logan Green and John Zimmer of Lyft; Airbnb’s chief executive, Brian Chesky; and founders of public companies such as Katrina Lake of Stitch Fix.

On Tuesday, in a statement underlining the importance of diversity in the tech industry, the tech executives said the racial and gender makeup of a venture capital firm would be “an important consideration” when they were raising money:

I believe in a more diverse and inclusive tech industry. I am dedicated to having a diverse team and board, and when I have a choice of investment partners, the diversity of their firms will be an important consideration.

The entrepreneurs’ public statement is unusual. In Silicon Valley’s start-up ecosystem, founders and investors have generally maintained a delicate power equilibrium. Venture capitalists strive to get into the hottest start-ups, aiming for a big payoff when those companies go public or are sold. Entrepreneurs, in turn, take money and guidance from the investors to help their start-ups grow and flourish.

But a new generation of entrepreneurs is ready to upset that balance. Spurred on by the #MeToo movement and fed up after several Silicon Valley scandals last year revealed how investors had abused their power with female start-up founders, these entrepreneurs have become impatient for change in the industry.

Ms. Nahm, left, Ms. Leary and Mr. Medina. “So much of Silicon Valley is diversifying,” Ms. Nahm said, “but venture capital is the slowest part of the tech industry to bring change.” Credit Christie Hemm Klok for The New York Times

“It’s pretty obvious the venture industry is not where it needs to be” in diversity, said Jack Conte, chief executive of Patreon, a San Francisco start-up that runs a subscription platform for artists, musicians and others. The founders’ statement, which he signed on to, “is a market signal to venture capitalists that their customers care about solving a problem,” he said.

The American venture capital industry, which invested $84 billion in more than 8,000 companies last year, has long faced little to no impetus to alter its demographics. Venture firms are usually small private companies made up of former tech executives or financial types, who are mostly male and white. And because venture firms operate with long-term horizons — their funds generally invest over a 10-year period — the industry’s pace of change is often glacial.

In 2016, 11 percent of venture capital firms’ investment partners were women, according to a survey by the National Venture Capital Association and Deloitte. The survey found no black investment partners at venture firms, while 2 percent of investment partners were Latino.

Venture capital firms have made some attempts to diversify their own ranks, as well as in the companies they invest in. Several high-profile Silicon Valley partnerships have recently hired female investment partners. Others have pledged to take more meetings with female entrepreneurs. To cut down on harassment, more than 40 venture firms also made their codes of conduct public this month.

“Change has picked up and it’s coming, but I do think it’s measured in years, not months,” Greg Sands, a venture capitalist at Costanoa Ventures, said. Costanoa has made its code of conduct public and recently held “Seat at the Table” events to meet more female entrepreneurs.

Part of the pressure to diversify the venture capital industry is coming from within — in particular, from a small group of female venture capitalists. The Founders for Change movement, for example, originated with Aileen Lee of Cowboy Ventures and Jenny Lefcourt of Freestyle Capital.

Over dinner in September, the two women shared stories of different entrepreneurs who were agitating for more diversity in tech. They decided to corral those founders together to publicly seek change.

“Founders tell us: ‘I cannot believe your industry. It’s like ‘Mad Men,’” Ms. Lee said.

She added that it might seem self-serving for female investors to push founders to seek more diversity. But, she said, it is not a case of “us versus them.”

Instead, Ms. Lefcourt said, it is about everyone realizing that diversity can be a competitive advantage.

How much impact these founders might have is unclear. Some said they themselves needed to do better diversifying their own start-ups. And while many have individual diversity initiatives that they plan to share with one another, there has been little discussion of how to follow up on their public statement.

These entrepreneurs also acknowledged that they were in an advantageous position because venture capitalists were competing for their companies and they could choose which investors to work with. Other entrepreneurs may not have that luxury.

Still, Sarah Nahm, chief executive of Lever, a recruiting software start-up, said joining Founders for Change and standing with other entrepreneurs to promote diversity was important.

Since she helped found Lever in 2012, Ms. Nahm has raised $73 million from venture capitalists for her San Francisco company. For much of that time, she said, investors cared little about diversity and inclusion — including sometimes mistaking her for an executive assistant during pitch meetings.

In 2015, Ms. Nahm said, she deliberately chose to take funding from a woman at Scale Venture Partners. “So much of Silicon Valley is diversifying, but venture capital is the slowest part of the tech industry to bring change,” she said.

Now making a statement might enable other founders to have earlier conversations about diversity with investors, Ms. Nahm said.

“Unless investors are hearing it from companies, they are not going to think that changing is critical,” she said. “We want people to realize they can get started today.”

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