Systemic economic oppression and the continuous wealth gap make it harder for people of color and underrepresented founders to launch their startups. For years, they have lacked equitable resources they need to grow a business and embrace entrepreneurship. Meanwhile, venture capitalists (VC) within the tech industry lack diverse representation among investors and have also demonstrated inequities in tech funding.
According to Tech Funding Equity (TFE), the U.S. Securities and Exchange (SEC) has set barriers to capital formation by segregating investors based on income and net worth. This makes it incredibly difficult for underrepresented founders to raise enough capital from friends and family to achieve the milestones required for VC funding. Furthermore, when underrepresented founders do achieve a venture backable position, “they receive less than three percent of total venture capital, despite data showing that diverse teams have higher returns on positive exits than their all-White counterparts. Female founders are likewise funded far less than their equitable share.”
Here are some additional data points and studies from TFE to back that up :
- Only 6% of VC’s are Black or Latinx
- Only 2% of VCs are Black or Latinx at firms that are ten years or older
- Less than 5% of angel investors are Black or Latinx (<1% of the general population)
- VCs hire other venture capitalists and invest in founders who are similar to themselves (research by Rate My Investor and Diversity VC)
- Investors’ discriminatory financing practices and bias toward companies primarily operated by White males cost the U.S. over 9 million jobs and $300 billion in collective national income (the Center for Global Policy Solutions)
During the pandemic and since Black Lives Matter gained momentum last year, the tech industry has acknowledged the lack of representation and the need for immediate change. Luckily, there is an initiative and Pledge that answers this call for change and promotes fair tech funding.
Introducing the Tech Fund Equity Opportunity Pledge
The Tech Fund Equity project (TFE) is an initiative developed and launched to close the funding gap experienced by underrepresented and overlooked founders.
“With the Opportunity Pledge, the goal is to support institutional investors and venture capitalists in overcoming biases that create unnecessary barriers to entry for underrepresented emerging managers and founders,” says Mariah Lichtenstern, chief of the TFE who also serves as the Emerging Manager and Founding partner of DiverseCity Venture.
The goal of this initiative is “to increase investment to underrepresented venture capitalists and founders by 10X by 2025,” according to The Opportunity Pledge white paper.
The Opportunity Pledge was developed as an output of the AspenTech Policy Hub during a 10-week program for tech professionals to focus on an issue they wanted to solve. Lichtenstern wanted to focus on closing the tech funding gap for underrepresented founders, specifically women and people of color. This Pledge is one of the solutions designed to address biases in the VC industry, including the Limited Parter’s (LP) side. The lack of diversity amongst VCs is partially tied to cognitive dissonance among LPs, who lack sufficient mandates around diversity, equity, and inclusion (DEI), despite data showing that diverse founding and funding teams perform on par or better than the status quo.
“When you see systemic issues like racism or bias, or systemic exclusion, it’s a psychological issue, and this Pledge is designed to address that,” says Lichtenstern.
The framework of the Opportunity pledge was inspired by the work of Matt Friedman, whose work at the UN and USAID led to the founding of The Mekong Club Pledge to end modern-day slavery. It’s not just about taking a pledge and getting a badge as a reward. The framework provides guideposts and goals for the ongoing activity that creates accountability and support. Taking it a step further, TFE uses an assessment to give people a starting point to benchmark their DEI progress and impact to tech funding equity.
The Opportunity Pledge in Action
There are four categories within the Opportunity Pledge framework: Assimilation, Engagement, Execution, and Entrenchment (designed to make sure companies are not going back to the status quo). Within these four categories, there are subcategories with suggested actions and activities. Companies can also suggest activities.
“The Opportunity pledge is not designed to name, blame, or shame,” says Lichtenstern. “But what the assessment does is it walks them through the framework and says ‘here are the different areas, what are you doing in each of these areas? And here are some suggested activities. Are you doing any of these things?”‘
The Pledge illustrates assimilation under the dictionary definition, which involves taking in and fully understanding information and ideas related to diverse perspectives. The assimilation step is more about how the firm has created awareness on diversity, equity, and inclusion. Suggested activities include hosting virtual panels, distributing an internal Code of Conduct, and providing workshops, to name a few.
The framework then goes under an internal review process in each category quarterly to monitor the company’s progress and any KPI’s. Participants are not scored on the actual activities; they’re scored on whether or not they’re participating in each subcategory. They can tap into resources and a community support group to share best practices and what is/isn’t working in a non-judgemental space.
Partnerships and Other Pledges
Emtrain is partnering with the Tech Funding Equity Project to “promote diversity, equity, and inclusion within funding organizations that influence their portfolio companies and introduce DEI tools to startups that they can leverage as they scale,” stated in the Press Release. Participants have access to Emtrain’s resources and tools, such as DEI guides, microlessons, and training decks.
The Tech Equity Fund Project recently launched the Startup DEI Pledge, which is very similar and designed with the same framework for VCs and LPs. The idea is to begin the process early on while culture is forming.
“The data has shown that once you get to 15 team members, it’s much harder to fix a toxic culture, so we want them to grow with DEI in mind. And hopefully, once they scale, they’ll be able to maintain and support that culture with resources that Emtrain provides,” says Lichtenstern.
To learn more about The Opportunity Pledge, check out their website: https://www.techfundingequity.com/opportunity-pledge