Startups to investigate investor diversity

Companies are looking for greater mix of employees

Hundreds of startup founders and CEOs, from companies including prominent Bay Area firms 23andMe, Airbnb, Dropbox, Stitch Fix and Lyft, have formed a new group pledging that diversity at VC firms will be an “important consideration” when deciding whether or not to take their money.

The launch of Founders for Change by more than 400 budding and established tech companies is a sign of just how top of mind diversity has become in an industry driven by the #MeToo movement and a series of allegations and admissions of sexual misconduct by workers, managers and venture capitalists.

Five years ago, such a group would never have formed, said Sarah Nahm, co-founder and CEO of Lever of San Francisco, which makes job-recruitment software. Lever is a member of Founders for Change.

When her company raised Series A funding in 2014, “nobody was talking about diversity in Silicon Valley, nobody was acknowledging this as a topic, and certainly nobody believed in change,” Nahm said.

A former product-marketing manager at Google with a bachelor’s degree in mechanical engineering and product design from Stanford University, Nahm said she never felt being female put her at a disadvantage — until she started raising money for her startup.

“Fundraising puts so much pressure on you … matching to this template of success that has stereotypically male attributes: You need to be confident, you need to be aggressive, you need to be sort of this caricature of a successful CEO,” Nahm said. “My identity as a CEO just doesn’t look like that.”

She said Lever has turned down funding from VC firms that “couldn’t demonstrate respect” for her as a female chief executive.

“It was getting talked over often, interrupted, not feeling like I was given the space to speak to our business,” Nahm said. “A lot of the interactions were about cornering me into a moment of admitting I didn’t know some esoteric metric as opposed to coming from a place of learning and partnership.”

Venture capital remains a highly male-dominated field, with VC firm Social Capital reporting in 2016 that 89 percent of investment decision-makers at the top 72 U.S. firms were men.

It’s only been in the past year or so that entrepreneurs seeking funding from Silicon Valley VC company Menlo Ventures have taken to highlighting diversity issues in their own firms and in investment companies, said Shawn Carolan, a partner at Menlo Ventures, whose 11-person team includes one female partner and one female associate.

Building diversity in a VC firm takes “time and patience,” said Carolan. His portfolio includes electric bicycle-sharing startup Jump Bikes, a Founders for Change member. “People have kind of woken up to see the state of the union,” he said.

Within VC firms, “having a diverse partnership that has both the insights and resonance with entrepreneurs and skill sets to cover essentially the entire market is, I think, imperative,” Carolan said.

Nahm declined to draw a firm line on what degree of commitment to diversity her firm would require of investors, saying Lever aimed to work with VCs that were aligned with its values.

Members of Founders for Change have pledged to select funders according

to their diversity commitment when founders and CEOs “have a choice of investment partners,” according to the group.

But sticking too tightly to the group’s principled approach could impose significant limitations on startups that need to raise money to survive, said prominent San Mateo VC Tim Draper.

“I think it is noble, but unlikely to hold up in the face of a term sheet,” Draper said. “An entrepreneur being hamstrung this way is challenging to say the least.”

Founders for Change will likely help accelerate Silicon Valley’s evolution to “a more just society,” but the movement doesn’t address the root of the problem, said Steve Blank, a retired entrepreneur who teaches at UC Berkeley’s Haas School of Business and at Stanford.

The limited partners who fund VCs — usually pension funds and university endowments — “really don’t care about #MeToo,” Blank said. “It’s a 1970s calculation: How much money did you make for me? There is no other metric that VCs are measured on.”

How tough a line on diversity founders and CEOs are willing to take with investors will vary by the stage and success of an enterprise, Blank said. While a hot machine-learning startup, or heavies among the new group’s membership such as Dropbox and Airbnb would have more clout to set terms, many early-stage companies don’t have that luxury, he said.

“You take whatever check you can cash,” Blank said.

Nahm acknowledged that earlier-stage firms may have less freedom to be picky. Even at Lever, which has raised more than $70 million in multiple funding rounds, Nahm said she still takes her “tall, white, male” co-founder Nate Smith with her to investor pitches as a hedge against “what might be unconscious bias in in- vestors’ minds.”