Earlier today I came across this tweet and accompanying photo from the brilliant @JenniferBrandel / @wearehearken, quoting @HBCompass / @ProjectFacet at the #disummit in Berlin. Jennifer is talking about the work she and colleagues are doing at the leading edge of journalism, but the truths she highlighted for the audience in Berlin also land hard for impact investing.
What does equity mean?
In her talk Jennifer posed a sage question: “What does engagement mean?” and followed it up with an insightful observation and prediction: “At the moment most newsrooms see engagement as a special project — but in the future, it could be a competitive advantage.”
Change “engagement” to “equity” and I think Jennifer’s challenge to the status quo is even more pointed for the investment world.
In the most basic terms, equity in the investment world would look like representative opportunity and access to capital at all levels and stages: for founders, equal access to capital from pre-seed through debt and private equity to M&A and public markets; for investment professionals, equal competition for analyst through partner roles; for fund managers, equal evaluation by LPs.
[Kind reader, if that strikes you as revolutionary, anti-capitalist, hopelessly unworkable, or otherwise distressingly contrary to the established order, I lovingly suggest that now is an opportune moment to interrogate your assumptions.]
Despite a recent proliferation of people, funds, and investment practices claiming to be committed to racial / social / gender equity, so far very little capital has flowed in that direction. This is disappointing, but hardly surprising. WBUR has summarized the state of affairs as follows:
These and other indications of brutal inequity are so deeply sustained by implicit bias that it is hardly even unusual when a veteran investor and self-professed “champion of progressive ideals” declares in private conversation with us that, “no one knows whether minority founders could succeed,” and follows up with, “perhaps they just don’t have the mental or cultural aptitude for business.” Or in the public sphere, the August 2018 announcement by Andreessen Horowitz that they were raising a $15M fund to invest in black-led enterprises garnered nearly universally positive coverage [for example] despite explicitly juxtaposing the new fund to their (100x larger) $1.5B Fund V.
We assert that the finance community in the United States has failed to price risk or opportunity correctly over a period of decades. The VC community in particular has specifically and intentionally channeled ever larger quantities of capital into a perilously narrow “pattern matching” founder demographic — overwhelmingly preferencing straight, white, US-born men from about a dozen universities [see here and here, for example] — while both passively and actively dismissing founder teams with equivalent or better prospects on the basis of gender, race, or other factors unrelated to the business or investment case [see here and here, for example].
This preferential selection behavior has persisted in spite of material contraindications, including: extreme competition for a shrinking opportunity pool, as expressed by venture partners complaining about killing each other for good deals; underperformance by the venture sector overall, corresponding with a sector-wide expectation that a well-managed fund hinges on perhaps one in ten deals ultimately being successful; a large and readily accessible population of diverse founder teams [for example]. All while claiming there was no prejudice at play.
This market dislocation propagates a self-fulfilling prophecy: when marginalized founder teams starved of capital cannot grow high-value enterprises, investors conclude it is because of the inadequacy of the founders, rather than the inadequacy of the capital.
LPs have fueled this cycle of behavior, persisting in buying into sequential funds with larger absolute and relative capital allocations, to their own detriment.
The good news embedded in this bad news is that investors and capital allocators — whether impact-minded or otherwise — who recognize this widespread, durable market dislocation and act to deploy capital to overlooked, undervalued talent can gain significant competitive advantage in access to high-quality deals and outcomes; in so doing, they also counteract one of the main drivers of financial inequity.
For, With, About
As Nathalie Molina-Nino so eloquently framed the problem, so long as structural bias remains encoded in investment sourcing, diligence, and selection, many of those who sincerely aspire to invest for social / racial / gender equity will find their best efforts frustrated by their own internal processes.
This is where we come back to the brilliance of those three prepositions.
About is seeing marginalized founders, investment professionals, and fund managers as other. Less than. Suspect. Recipients of charity, rather than creators of value. Unknown quantities. Higher risk. [Evidence be damned.]
For and with is seeing a bigger picture in which untapped talent is exactly what and who we most need. Visionaries. Innovators. Pioneers, rebels and mutineers. Persistent. Proven quantities. Superior risk.
For and with requires us to rethink our criteria, revise our assumptions and preconceptions, take in new information; perhaps most difficult of all, disagree with respected peers and break with established practice to exercise better processes and standards. It demands that we go beyond waiting for others to come to us, or for someone else to go first, and reach beyond our well-worn orbits to discover for ourselves what else and who else is out there. Then listen to their insights, so different from what we are accustomed to hearing and repeating.
It’s not easy to go against the herd, or against the current. But when we switch from about to for and with, we discover entirely new vistas of opportunity — for financial returns, of course; and also for a more vibrant, just, and stable society. We discover the difference between actually prudent and merely familiar. And in the act of making that shift we gain new allies with whom we can lock arms to move forward for all of our benefit.
We are all about With + For
For our part, Reinventure Capital is working from the impact investing playbook Ed originally pioneered in the 1980s and 1990s, investing in overlooked, undervalued founders to grow profitable, value-creating enterprises.
Specifically, we are focused on deploying equity and debt capital in expansion stage (breakeven or so) companies led by people of color and/or women, across the US. The Reinventure approach is proven effective at creating real, measurable social impact in collaboration with the company founder teams, generating meaningful ripple effects for their stakeholders, and as a result, delivering non-concessionary returns to investors.*
We are proud to be in extraordinary company of many others who are also operating For + With. New allies are always welcome — please join us! How might we help you make the switch? — please tell us!
Are you already deploying capital for and with overlooked / undervalued talent? Please share! Or better yet, take the conversation to your network!
*While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s prior track record provides direct evidence that it is indeed possible to consistently invest for both financial returns and social value creation. If you are an accredited investor and would like to learn more about investments that can advance social, racial, and gender equity by supporting high-value companies led by women and/or people of color, please contact us to start that conversation.
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