Given the work we do here at Reinventure — investing exclusively in US-based companies led and controlled by BIPOC and/or female founders — I am often asked questions about why investors should care about inclusive manager or founder selection, or what to do about the pipeline problem / absence of data / lack of deal flow, or how to go about implementing JEDI principles in an organization or portfolio.
It’s frankly baffling to me, given the incongruity of the questions with observable reality — the questions are grounded in premises which are demonstrably counterfactual, and against a backdrop of numerous excellent exemplars. And yet these same questions persist.
Sometimes the questions are obviously interrogative deflections, expressions of the questioner’s committed lack of interest in taking action. But sometimes the questions are sincere, reflecting the questioner’s earnest curiosity and desire to learn. If you’re in that latter category, I encourage you to acquaint yourself with the mountains of resources available to you, and to embark on your transformational trajectory without further delay. Here’s a very quick set of responses to equip you to commence your climb.
Why should investors care about justice, equity, diversity, and inclusion in their portfolio?
Particularly in light of current market uncertainty and economic stresses, investors are well advised to look to BIPOC and female managers and founders to provide improved financial performance through both the downturn and the recovery. These are not even new discoveries.
Among pre-pandemic, pre-#BLM literature, Brookings Institution found, for example, “Although MWBEs were more likely to shutter during the Great Recession, they helped stabilize the economy during the recovery period. Nationally, MWBEs added 1.8 million jobs from 2007 to 2012, while firms owned by white males lost 800,000 jobs.”
BCG and others reported that contrary to conventional wisdom including founder “pattern recognition” parameters, diverse and women-led teams routinely outperform their homogeneous white male peers on both innovation and performance, thereby representing superior prospects for both risk and return.
Morgan Stanley noted that despite the available evidence, venture and private equity investors have persistently failed to capitalize on the “trillion-dollar case for investing in female and multicultural entrepreneurs.”
The US Dept. of Commerce and Brookings Institution, respectively, reported that while white men’s businesses are declining, “minority” businesses are growing at 38%, and “youthful minorities are the engine of future growth.”
Despite being excluded from programs like PPP, Kauffman Fellows reported that growing businesses led by people of color and women are positioned to continue to outperform, and Forbes projected, “minorities will see growing opportunities while delivering a bigger success rate for investors.”
Stronger performance, decreased risk, and advantageous market potential should constitute compelling reasons for rational investors to act. Examining these and other prominent findings, TechCrunch urged, “You’ve likely missed huge market opportunities by getting stuck in pattern matching — but it’s not too late to turn that around.”
What about the pipeline problem / absence of data / lack of deal flow?
The first and most important thing you can do about this troika of hobbyhorses is to recognize that they are every bit as legitimate as Tigger’s tales about heffalumps and woozles, and that worrying about them will likely leave you in a similar spot to poor old Pooh bear: on a limb trying to save your hunny pots from the flood.
Whether you are looking for skilled hires, funds or direct investments, there is no pipeline problem. Rather, you likely need to expand your network to intentionally seek out and connect with communities you have never engaged before. And although you will likely need to alter your selection criteria to remove (unintended) barriers to diversification, as pointed out by Nathalie Molina Niño and many others, it’s entirely in your self-interest to do so. Again, contrary to conventional wisdom, BIPOC and female “emerging managers” present an excellent investment opportunity well worth the effort: numerous sources have noted that for a variety of reasons these small and first funds are more likely than large, long-established (overwhelmingly homogeneous) funds to deliver the returns LPs seek. Among these, Kauffman Foundation and SVB famously noted, “Small funds under $250M return more than two times invested capital 34 percent of the time; a rate almost six times greater than the rate for large funds.”
There is no dearth of data or evidence. These are just a few of the public data sources readily available to any interested investor. We cite several more on our website, a small sampling of the large and growing body of evidence substantiating the case for investing in diverse managers and founder teams. On the same page we also offer a very small sampling of the rapidly expanding universe of funds and managers led by and focused on BIPOC and female innovators.
How can I begin?
Congratulations! In asking that question you’ve already begun. Now it’s a matter of putting one foot in front of the other.
Step one: make it a requirement. Acknowledge that diversifying your portfolio (and team) is overdue, strategically vital, and urgent — particularly in context of a down market. Then take the actions necessary to upgrade your selection and evaluation processes and criteria to make that diversification mandatory. It won’t happen overnight. But it won’t happen at all until you decide that it’s nonnegotiable.
Step two: select for add, not fit. Recognize that an overwhelmingly homogeneous portfolio is a problem, not a pattern to be replicated. Make an intentional effort to seek out people, strategies, and organizations complementary to — rather than consistent with — your existing team, managers and direct investments. Reframe your perspective to ask what and whom you are missing, and how you can begin to remedy those gaps.
Step three: celebrate progress as you climb! Embrace the fact that change requires effort, that you won’t get everything right, and that as implied by the tired adage, no one ever got fired for buying IBM, breaking away from the status quo can feel frightening. So make a point of marking each accomplishment, rewarding each learning to keep your gaze up and avoid getting sucked back down to mere continuity.
Don’t go it alone
There is a communal benediction in the UCC / Congregational tradition that begins:
The way is long; let us go together.
It’s true, the way is long and sometimes steep. Your climb will not be accomplished instantaneously, linearly, effortlessly, or without discomfort. You will likely encounter internal and external opposition in the form of critics, naysayers, and even mudslingers. However, once you begin your ascent, you will find many companions, peers, allies, and collaborators. As you look around, you may also find that the opportunities and connections you discover are far more interesting than those proffered by the purported “best practices” you have begun to surmount. And the views continue to get better as you begin to appreciate new vistas — prolific and varied investment opportunities and outcomes — that were not visible from your prior vantage point(s).
Here at Reinventure Capital we see more high quality deal flow than we could possibly engage — once again, in the form of US-based companies led and controlled by BIPOC and/or female founders at breakeven and poised to grow profitably — and we are inspired by the kaleidoscopic profusion of creative solutions these founder teams are commercializing, as they grow their enterprises into positively impactful economic engines that generate wealth and opportunity. We’re continuing on the climb, learning from peers and colleagues as we go, cultivating community with our fellow practitioners along the way.
Are you making the climb out of hyperconcentrated, homogeneous practices and seeking traveling companions with whom to share the ascent? Please contact us to discover how we might support and amplify each other. Could we collaborate in investing for equitable, sustainable, and prosperous outcomes? Please contact us to explore how we might join forces. And please share how you are raising your standards as you climb, so we and others can cheer and be cheered by your example!
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Image credit: Darwin Vegher / Unsplash
*While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s prior track record delivering 32% IRR to investors provides direct evidence that it is indeed possible to consistently invest for both financial returns and system change. 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 people of color and/or women, please contact us to start that conversation.
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