- Acrew is launching a venture fund backed by a diverse network of partners that will invest in companies within a few years of going public.
- Funding sources for start-ups tend to get less and less diverse as companies grow closer to cashing in through IPOs.
- A diverse network of equity partners for pre-IPO companies can result in women and people of color gaining "seats" on tech's historically white, male-dominated capitalization tables.
Silicon Valley efforts to seed more diverse founders are a start in changing who succeeds in the tech startup ecosystem, but funding sources get less and less diverse as companies grow. By the time a company is ready to go public, the network of individuals set to benefit from the exit still reflect the age-old Silicon Valley stereotypes: mostly white and male. Some venture capitalists are planning to confront that before the next era of Facebooks, Googles, Twitters and Slacks is ready to IPO.
Since its inception in 2019, Theresia Gouw's VC firm Acrew has been chipping away at the static funding ecosystem. With an investment team that is 88% female or person of color, and 63% underrepresented minorities, Acrew has generated a portfolio worth $100 billion in market value and returned $2 billion-plus to its investors. But up until now, Acrew has been focused primarily on early-stage investments — among the investments it has made are Chime, The RealReal and HotelTonight (acquired by Airbnb).
Now Acrew is launching a fund, called The Diversify Capital Fund, which aims to bring a diverse network of equity partners to pre-IPO companies, giving women and people of color "seats" on tech's historically white, male-dominated capitalization tables before initial public offerings are completed.
"We don't see any other vehicles out there that are specifically to bring diversity to the shareholder base at those late-stage companies," Gouw, founding partner, told CNBC. The fund is looking at tech companies who've established market leadership and are considering a public exit in the very near term.
Diversity-driven early stage investments like Acrew's, Cleo Capital's, and Precursor Ventures' are key to opening the door for talent that may not look like the rest of Silicon Valley's founder and funder network. But as Gouw pointed out, as the round size grows, the later stage funding sources become less and less diverse. As it stands, 8% of venture capital investors are women, and only 3% identify as Black or Latinx. According to a 2017 study, 1% of private funds are managed by women or people of color.
As a result, the pool of people with access to investment in late-stage, market-leading companies remains predominantly white, predominantly male. In turn, those white, male investors compound their wealth when the companies go public, typically injecting some of that capital back into the homogeneous ecosystem they were a part of before, and the cycle continues. Offering female leaders and leaders of color access to investment in the growth stage could be crucial for wealth creation in those communities, but it may also have an impact on the portfolio companies themselves.
"If you look at the five biggest market cap companies in the U.S., they're all companies that received venture capital backing while they were private. Microsoft, Apple, the list goes on," Gouw told CNBC. "Diversifying who gets to have a shareholder's seat at the table, we think that's going to have massive positive impacts for public companies going forward."
Board diversity made headlines over and over in 2020.
The Nasdaq proposed its Board Diversity Rule for companies listed on its exchange. Goldman Sachs warned that it would not underwrite IPOs for companies without diverse board members. California now requires diverse representation on corporate boards in the state. The regulatory changes are what Gouw calls "accelerants" to the diversification work that Sukhinder Sing Cassidy's theBoardlist and diversity-focused early stage venture funds have been doing for start-ups.
For the already established and public tech giants, the scrutiny and blowback has been stiffer. An analysis of big tech diversity reports shows that these companies now have to work backward to adjust a homogeneous culture rooted in the venture capital ecosystem. Aspiring tech giants may have a chance to disrupt the culture before it continues.
Since Gouw's new fund is investing in companies expected to go public within a one- to three-year period, the individual LPs in the fund's network have a quicker route to liquidity, which means a quicker turnaround for that capital. Acrew has naturally built a network of founders and LPs that reflects the racial and multigenerational composition of Acrew's own team, and in the same way, the new fund's founding partners expect female and underrepresented minorities with a seat at the shareholder table to organically reinvest their returns in founders that look like them.
"If you want to have more diverse angels and investors for tomorrow's companies, you have to have access to growth stage opportunities," Diversify Capital Fund co-founder and theBoardlist founder Sukhinder Singh Cassidy told CNBC.
The VC community has a long way to go to equitable funding. According to Crunchbase, global female-founded start-ups received just shy of $5 billion in venture funding in 2020, a 27% decrease from the same period in 2019. U.S. venture-backed start-ups raised a record amount of capital in 2020, up 14% from the year before. Despite the record capital raises, funding to female founders fell to a three-year low. For Black and Latinx founders, the numbers were similarly dismal through the summer.
Acrew's funds, whether the existing early-stage funds or the new one, do not have a mandate to invest in start-ups that are diverse in their own management ranks, yet 46% of their portfolio companies have underrepresented founders, and 58% are diverse. "It's been happening organically," founding partner Lauren Kolodny told CNBC. Quotas and mandates only go so far; Kolodny and Gouw are betting that the best way to create a diverse tech ecosystem is to diversify the people that fund it.
"We hope to see something similar [in the new fund] acknowledging that there are fewer diverse teams at the growth stage. But we absolutely want to back as many diverse founders as we can," Gouw said.
The new fund has already invested in five companies, and though it has not disclosed the names, the fund's partners said the founders were drawn to the partnership in part because of DCF's "single check" philosophy, which brings the network of diverse partners together, making it easier for private companies to do the right thing when seeking capital.
"If you make it simple, people [founders] want to do the right thing, they're just busy," Singh Cassidy told CNBC.
Kolodny also emphasized the value of a single fund. "At this stage, these founders don't want to be managing a bunch of angel checks ...They can have many individual investors that represent diversity without managing them on their cap table ... it's a huge benefit."
Nominations are open for the 2021 CNBC Disruptor 50, a list of private start-ups using breakthrough technology to become the next generation of great public companies. Submit by Friday, Feb. 12, at 3 pm EST.