Why Diversity is Necessary To Make Venture Capital Future-Ready

By Reggie Tucker

Reflecting on all the achievements of Black investors, I am encouraged by our progress. However, I also believe venture capital needs to set the example on how to continue this positive momentum and to evolve the approach toward increasing diversity in investment management.

In the old model, VCs went to the same schools, lived in Silicon Valley, hung out in the same circles and invested in the same opportunities. My peers look to other VCs and LPs who are invested in deals and funds for validation, instead of thinking for themselves. This homogeneity in experience reduces the aperture of the opportunities funded, leading to a particularly negative impact on newer and diverse founders and fund managers.

According to the latest VC Human Capital Survey, only 4 percent of VCs are Black, with only a 1 percent increase from 2018. Just over 1 percent of VC-funded companies have a Black founder, a distribution that does not reflect the make-up of our country. Increasing diversity will require VCs and LPs to think independently and make decisions that challenge the status quo.

Can VC address the root of the problem?

VC is an industry that embraces new and bold innovation. Look at what is happening in crypto with the decentralization, disruption and democratization of many markets.

While the broader VC space offers innovation and a lower barrier to entry for entrepreneurs with compelling new ideas, the projects receiving funding can demonstrate racial bias. To increase representation of Black founders in the space—a necessity to provide investors with the broadest opportunity set and most attractive investments—there must be a call to action for both VCs who fund founders as well as the LPs that invest in the fund managers creating the actionable deal flow.

This call to action will require a commitment from a broad range of LPs, including public pensions, endowments and foundations, corporate VCs, in addition to family offices, high net worth individuals, and angel investors. With focused and increased efforts, LPs can help diversify the VCs in charge of funding—the key to better representation among founders getting funded and shepherding in the future of our industry.

Progress ahead

Having invested across the spectrum of alternative investments, I fully acknowledge that early-stage VC is more nuanced. There is an art to early-stage investing that doesn’t always lend itself well to the standardized analysis some LPs rely upon because it is highly incumbent upon assessing talent, as well as current and long-term market opportunities and risks.

For those funding early-stage companies, take a calculated risk and be different. For those investing in VC fund managers, evolve your investment process so you can make investment decisions that allow you to develop conviction and invest earlier in a new platform’s life cycle. These two things together could help continue to increase diversity in the VC world.

I’ve been a Day One investor in new platforms and an early anchor investor in many others. Throughout those experiences, I developed my own comfort level in how to take and size risk accordingly, which I have brought over to Manhattan West.

We have had great success engaging with newer managers—often structuring terms that align both parties—allowing our platform to act as both a great example of the power of diverse managers and support of new ventures that have delivered fantastic value.

We are not the only example of positive progress. PledgeLA Venture Capital increased investments in Black founders by 71 percent last year, up to 12 percent from 7 percent. Although these numbers are not indicative of rampant change, they are evidence that when the effort is made by the executive team to drive change, it is possible.

Becoming future-ready, as an industry

For minorities who are looking to break into the VC space, there are great programs that can aid you throughout every stage of your career. MLT and Togio Foundation prepare aspiring VCs for early career opportunities. I’ve also participated in programs through NASP SoCal, which annually hosts “A Day in Private Equity” program. While BLVC builds on that and offers hands-on relevant direct training and resources and a direct connection to the venture space.

The Cap Table Coalition helps emerging and angel investors establish a track record, providing funding for diverse founders and broadening opportunities to invest in hard-to-access deals with top-tier managers. Lastly, The Bridge, The Investment Diversity Exchange and NAIC bring like-minded LPs and GPs together to continue discussions about these issues.

These programs not only equip diverse VCs with the tools and education needed to succeed, but perhaps, even more importantly, build community in the field. Networking and community is priceless to young Black and diverse founders.

Moving forward

Opening the aperture to capital to increase and ensure more balanced founder funding and VC fund commitments will enable us to move past the “discussion” and get on with investing and continuing to push innovation forward.

VC is a relationship business, and we all need to get into the practice of broadening and deepening our networks, so that demographics are not determining investment activity and outcomes. Creating awareness around the lack of Black representation in the VC world and continuing to advance efforts toward a more diverse and inclusive industry can help the VC community toward being future ready.

Reggie Tucker is a managing director of venture capital at Manhattan West, a minority-owned strategic investment firm in Los Angeles. Tucker has a long-tenured career of investing in public and private markets. He joined Manhattan West after departing Orange County Employees Retirement System (OCERS) where he served as Managing Director and had oversight of all private markets.

Illustration: Dom Guzman