🤑 Venture Capitalists are not Bigoted Racists
The world of venture capital has long been criticized for its lack of diversity in funding, with statistics revealing a significant disparity in investment allocation for women and BIPOC (Black, Indigenous, and People of Color) founders. However, it is important to consider that this discrepancy may not solely be the result of overt bigotry or racism. Other factors, such as the nature of businesses that attract the majority of venture capital investment, known as network effects businesses, play a role in shaping the funding landscape. In this blog post, we will delve into the nuances of this issue and explore how factors like access, experience, and unique founder characteristics have contributed to the state of venture capital and startups.
The Funding Gap
It is no secret that women and BIPOC founders receive a significantly smaller share of venture capital funding compared to their white male counterparts. A study conducted by RateMyInvestor and DiversityVC between 2013 and 2017 revealed that only 9% of VC-backed startups were founded by women, and a mere 1% were founded by Black entrepreneurs. This stark disparity has fueled accusations of bias and discrimination within the venture capital industry.
Access to Venture Capitalists
However, it is crucial to consider the context surrounding these statistics. Anecdotal evidence suggests that individuals from minority backgrounds may actually find it easier to secure meetings with venture capitalists than their white counterparts. For instance, some black founders have managed to secure an impressive number of meetings with VCs, 150 or 250 meetings, indicating a higher level of access. My personal experience as a non-visible minority who has raised tens of millions of venture capital, is that securing more than 10-15 meetings during a fundraising round can be challenging.
The Power of Network Effects Businesses
So, what explains this phenomenon? The answer may lie in the power-law dynamics of venture capital investments. The majority of value generated by startups stems from network effects businesses, which tend to create a winner-takes-all scenario. Network effects have been responsible for 70% of all the value created in technology since 1994, by companies such as Google, FaceBook, EBay, Uber, Snap, Twitter, etc. Direct to Consumer companies of the 2010’s including Harry's, Casper, Rent The Runway, The Real Real, and Dollar Shave Club, while successful, do not fall under the network effects category.
Several factors contribute to the predominance of white men in the network effects business sphere:
Early access to computers and the internet: White adults are more likely to have had access to a desktop computer and high-speed internet at home, even as recently as 2021. This implies that successful tech founders, with an average age of 45, likely had early exposure to computers before they became mainstream.
Traits associated with autism (e.g., Aspergers): Some successful tech entrepreneurs exhibit traits associated with autism, which can foster intense focus on a specific subject. Autism Spectrum Disorder is five times more common in men. Examples of tech founders on the spectrum include Elon Musk, Mark Zuckerberg, Vitalik Buterin, Adam D'Angelo, and me.
Self-taught in isolation: Many male founders have taught themselves programming or product design, often in isolation. This process can be challenging but is sometimes perceived as a societal expectation for male individuals, who are judged based on their accomplishments.
Learning about Network Effects Businesses
It is important to note that the predominance of white men in network effects businesses does not imply that only they can succeed in this sphere, nor does it suggest that venture capitalists deliberately exclude women and BIPOC founders. However, it highlights the significance of education and exposure to the principles and strategies behind these types of businesses. The NFX Masterclass, for instance, serves as an excellent resource for anyone seeking to learn more about network effects businesses and how to build and scale them effectively.
Conclusion
While there is an undeniable funding disparity between white male founders and women and BIPOC founders, labeling or implying that venture capitalists are inherently bigoted or racist oversimplifies the issue. It is crucial to focus on understanding the nature of network effects businesses and work towards democratizing access to knowledge, resources, and opportunities for all founders, regardless of their background.