As a Latina investor working at a Latina-led VC fund, I’ve memorized all the diversity statistics and sources; these show that Black and Latinx investors make up only 3% and 1% of the industry, respectively. While a Harvard Business School white paper by Gompers and Wang shows that African Americans and Hispanics dramatically increased their attainment of MBAs over the past two decades, there hasn’t been a similar rise in venture capital entry. Still, a common response to the sheer lack of Black and Latinx representation in venture is that there is a “pipeline problem” with firms, which presumes they need to “lower the bar” in order to hire Black and Latinx talent. At the same time, however, a firm like Harlem Capital has successfully attracted over 6,000 applicants to its internship program over three years, with 90% identifying as non-white and 55% identifying as Black or Latinx. The scarcity mindset—the idea that there is a “lack” of qualified Black and Latinx talent for VC—not only undermines existing Black and Latinx in the market, but it also underestimates the special sauce that underrepresented groups bring to the investing profession: their networks. At Ulu Ventures, one of the criteria by which we evaluate new investment opportunities is what we call special sauce. We use the phrase to refer to specific characteristics of a founding team or company that make it distinctive from the rest of the industry.
A special sauce allows the company to differentiate itself in the short term and build competitive moats in the long term. Similarly, investment firms and investors can also have this feature; for example, at Ulu we believe our special sauce is our combination of using decision analytics to evaluate venture risk, funding diverse founding teams to unlock stronger financial performance, and leveraging our deep-rooted ties to the Stanford ecosystem to identify early-stage opportunities.
Likewise, many diverse investors from underrepresented communities bring a special sauce to investing in how they show up with their network. This advantage is not only apparent in their network’s breadth of diversity, but also in its depth of connections.
Network Breadth
Among all racial and ethnnic groups in the United States, White Americans are still the most segregated from other groups. Consequently, it’s likely that many Black and Latinx investors will have a more diverse network than their White counterparts. According to the Survey Center on American Life’s September 2020 report, 77% of White Americans report that their core social network includes only people who are also White. By comparison, 56%, 39%, and 30% of Black, Asian, and Hispanic Americans, respectively, report having core social networks of their own race and ethnic background.
Moreover, when you consider how underrepresented Black and Latinx individuals are in both technology and financial services, it would be virtually impossible to imagine VC investors from these groups having networks predominantly composed of people who only look like themselves. In fact, when I started my career at Google ten years ago, I knew I had to build a more diverse social network if I wanted to advance my career; I had to build connections that bridged the communities I identified with the most and the predominantly White spaces I navigated daily. As a result, not only did I build a core network with my White colleagues, I also built a core network with other underrepresented minorities at the company. I ended up leading the Latinx employee resource groups at Google and Uber, and today my network includes Latinxs in tech spanning different functions, geographic locations, business units, and companies.
Fundamentally, Black and Latinx community organizations, professional associations, affinity groups, and employee resource groups allow minority professionals to build a network with a much wider reach earlier in their careers as compared to those of their White colleagues.
Network Depth
Many of these community organizations, professional associations, affinity groups, and employee resource groups cultivate a greater sense of belonging for their members. This belonging in turn breeds greater psychological safety and higher network engagement—and higher network engagement can lead to overall stronger connections across a core network. A recent study from the University of Kansas published in the Journal of Social and Personal Relationship showed that “on average, it takes 50 hours of interaction to go from acquaintance to friend … and a total of 200 hours to become a close friend.”
As a fellow of programs such as MLT and Toigo while in business school, it’s no surprise that many of my closest friends were a part of these organizations as well. These organizations, and their programs’ participants, invest significant time and resources into developing a network of diverse leaders—and these connections transcend the confines of any one business school. The connections I built through these programs are what inspired six other MBA alumni and me to start the Latinx MBA Association, a digital-first community of 1,000+ Latinx MBA alumni and current students. I show up with all of these networks in my role as an investor at Ulu today.
So Why Do More Diverse Networks Matter?
Black and Latinx investors’ more diverse and engaged networks have the ability to elevate a VC firm’s investment operations from sourcing opportunities to supporting portfolio companies.
For sourcing companies: Diverse investors are more likely to know diverse founders and diverse co-investors. Gompers, Mukharlyamov, and Xuan (2016) showed that co-investment patterns in venture capital are driven by social similarities, where venture capitalists who are more similar in terms of gender, ethnicity, school background, and work history are more likely to collaborate.
Furthermore, founders of color increasingly seek investors for their cap tables who look like themselves.
Richie Serna, CEO and Co-Founder of Finix, a Series B payments infrastructure company that has now raised over $100 million, has openly stated that people of color were the first to bet on him. Finix also started an SPV specifically for Black and Latinx investors to invest in the company in its latest round.
For evaluating companies: Given diverse investors’ increased exposure to different kinds of people, they may hold a broader perspective and greater awareness of new ideas, as opposed to investors who have had less exposure to communities of color. Ultimately, we see the benefits of this diversity in financial performance: if VC partners all have the same ethnicity, an investment’s comparative success rate is reduced by 26% to 32%.
For supporting companies: As the “Great Resignation” of talent continues in year three of the pandemic, one of the top requests we hear from our Ulupreneurs is that they need help with hiring. In particular, we hear from founders that they seek support in hiring a more diverse workforce.
Diverse VC investors know diverse engineers, diverse product managers, diverse salespeople, and diverse marketers as a result of their rich networks—and diverse investors may also be in a position to recommend diverse suppliers and board members for their portfolio companies.
If You’re a VC Firm Hiring Today … Get Uncomfortable
Branch out of your core network’s comfort zone to proactively find diverse candidates for roles. As part of this effort, consider building relationships with diverse community organizations, including VC-related ones like HBCUvc, BLCK VC, Latinx VC, and VCFamilia (just to name a few), as well as business organizations like the Robert Toigo Foundation and Management Leadership for Tomorrow, or technology groups like Latinas in Tech and Techqueria.
Change the Boxes You’re Checking
Revisit the boxes you’re looking to check off when making a new hire. Rather than defaulting to traditional credentials, consider what you will realistically expect a new hire to do on a daily basis. After reframing your hiring criteria to focus on the candidate’s actual skills and experiences, instead of their credentials, it’s easier to identify top candidates with strong, diverse networks who can be critical talent for your firm.
Consider What You Can and Can’t Teach
In the end, venture capital is an apprenticeship business—thus, firms should determine what it is they ultimately will or won’t be able to teach a new hire. The late Tyson Clark, a General Partner at GV and one of Silicon Valley’s most prominent Black VC investors, said it best:
“You can teach how to invest. You can teach how to interact on a board. But you can’t teach a network. You show up with your network.”
Black and Latinx investors fully show up with their networks, and this special sauce can’t be recreated, even if a White investor has all the ingredients.
