Venture capital: An industry ripe for disruptionby
Eric Collins, founder of venture capital fund Impact X, tells AccountingWEB about his strategy to disrupt the monocultural mindset of traditional investors by backing underrepresented startups.
It is no secret where venture capital (VC) funding goes. Last year, Forbes reported 75% of UK pitches to VCs came from all-male founding teams. Only 4% of all-female founding teams reach investment committees, while 14% are from mixed founding teams. This has been an issue for venture capital since it became an industry in its own right.
The government’s Future Fund’s diversity stats, created to support struggling startups through the coronavirus, suggests that this diversity issue is only getting worse.
Enter Impact X: the underrepresent entrepreneur’s answer to traditional venture capital.
“We focus on black and women-led ventures because there is a market inefficiency which enables us to find gems where others are not already digging,” explained Impact X founder Eric Collins.
Impact X carried out a study in 2018 and targeted three sectors for investment where the research showed encouraging signs of participation by women and black people: digital tech; health, education & lifestyle; and media and entertainment.
Q: What are the primary blockers you experience in your line of business?
Impact X’s primary challenge is distinguishing among potential winners in its pipeline. “For VCs, it’s a numbers game, so you have to identify a mix of the right companies,” Collins told AccountingWEB. The average VC will see around 1,000 companies a year, “so you need a process that allows those right organisations to get to you and allow individual not in your network to be able to access you”.
“With entrepreneurs, there must be an easy way to get to you – which is why we respond to everyone who makes contact, and we work with institutional investors focused on removing excluding criteria. And often, these are the byproducts of systemic racism.
“Most limited partners are very risk-averse, which means they end up investing in the same thing, ie the same investment theses, the same fund managers, etc. Europe hasn't seen black innovator funding VCs before, so that's treated as a risk. Retaining the system is the same thing as conservatism: don’t change it because it works just fine – there’s no way of persuading people who don't want to be persuaded that there is something missing from the current system.”
Q: What are the key issues that exist within the VC industry?
“It’s amazing how many VCs look the same way they did decades before,” explained Collins. “White men in authority, making the decisions and making the money – women and people of colour just don’t exist in these worlds.
“The VC industry seems very comfortable that is doing everything right and doesn’t need to change. When we look at how those organisations are run, they look the same as companies founded hundreds of years ago.
But that is how they want it to be. If they thought there was something that needed to change, they would harness their resources to change it.
“From the way they surround themselves at the table, to how they identify talent and the companies they want to bring into their portfolio – if VCswanted to change, they would.
“I believe we can get a better return if we do things differently if we look to disrupt, like our portfolio companies. Every time I hear an excuse, such as there is a pipeline problem, I wonder to what extent it is the VC's own fault. Many of us happily divorce ourselves from taking personal responsibility for perpetuating and benefitting from inequities.
“I wish we applied some of the same lessons from Covid. Instead of a study group to decide how to deal with the crisis, we just shut down the country – because if we didn't shut everything down, then there could be devastating consequences. This same approach could be taken with underrepresented entrepreneurs. We are in crisis. Black Lives Matter (BLM) helped apply crisis language to systemic racism.
“However, people are not saying that BLM is a crisis. Look at government corporations and venture capitals. Do any of those have an actual stake in what was going on in underrepresented businesses? They say they caste their nets deeply, but if they did then they would do things differently.”
Q: What is preventing black and minority startups from being recognised?
“What you need from most VC firms in order to be considered seriously is a warm introduction,” said Collins. “The warm introduction will only come from a network. If most VCs do not take this seriously and their portfolio is driven by people they’ve already met, and people who just look like them, then it leaves very limited search images and a reduced pool to draw from.
“For Impact X, we are looking at a completely different pool. Others don’t think it's very odd not to see women and black entrepreneurs. They don't think it's odd at all, so they don't treat it as a crisis and figure out ways to solve the problem of network barriers or exclusionary pattern recognition behaviours. They just throw up their hands and continue doing what they're doing.”
Q: How has venture capital been affected by the pandemic?
“With the onset of Covid-19, all of us have been a little more interested in holding onto cash to support the companies in our portfolios,” answered Collins. “If you're in health tech, you’ve probably gained an advantage from the virus; hospitality, the opposite. Insurtech is probably neutral.
“With post-Covid survival a priority, taking on new companies is taking more time than is usual. Investors are considering anything which adds to the risk, so for some reason, they might think being black or a woman adds to the risk – even in the face of Black Lives Matter (BLM).
“BLM has brought new types of risks into question. For example, why does your investment team look the way it does? But it is not enough. And that’s why Impact X is a collaborative venture of people who say ‘We can’t wait anymore for people to move forward, we’ve got to put our money where our mouth is and move on now.’”