ImpactAlpha, June 4 – Social justice protests in the streets are exposing misperceptions of risk and opportunity in financial markets.
Systemic racial bias has taken countless lives. It has also left a long tally of misallocated capital, lost talent, overlooked markets, untapped innovation and wasted time.
An eclectic set of venture capital firms and institutional investors are flipping the script. If racism is a systemic risk, they’re seeking systemic opportunities in overcoming its legacy and investing in justice and racial equity.
“It’s a narrative shift,” says Cynthia Muller of the Kellogg Foundation, which two years ago produced “The Business Case for Racial Equity.” “These are all opportunities that are out there.”
The emerging strategies include the intentional shift of larger percentages of capital to entrepreneurs and fund managers of color. The investors are backing ventures that explicitly seek to close racial gaps in wealth and social outcomes. And investors are taking on a systemic problem with systemic solutions, executing strategies that reduce implicit bias in the financial system itself, shift power and shape new narratives.
Kellogg’s latest racial-equity bet is a $1.5 million investment in Blavity, the Los Angeles-based media company founded by Morgan DeBaun that delivers a mix of political, business and social justice news and events to a young Black audience whose voices and experience are too often left out of the conversation. Blavity’s investors include Harlem Capital, GV and Baron Davis Enterprises, the investment company of the former NBA player.
Blavity “is helping to engage an entire generation of educated black professionals who are going to be the folks that help us change the rules,” says Muller.
Kellogg’s media play is part of what Muller calls a systemic racial-equity approach to investing. Among the foundation’s three-dozen “mission investments” are other bets on narrative change including in production company Macro, a financier of the Bryan Stevenson biopic Just Mercy. The portfolio includes Black-owned banks, fund managers of color, inclusive fintech and funds of funds like Illumen Capital, which seeks impact and alpha by helping fund managers and entrepreneurs reduce implicit bias in their organizations.
“These plays collectively hit at disrupting the racial wealth gap,” says Muller. The strategies are also largely still misunderstood by capital markets. “We’re translating these opportunities.”
In the weeks before this week’s protests over the police killing of George Floyd, two other racially charged incidents caught on video highlighted the persistence of racial profiling and bias. Both involved investors. Amy Cooper of Franklin Templeton in New York and Tom Austin of F2 Group in Minneapolis both escalated interactions with Black men to police and building security.
“The guy in this video runs a VC firm,” TechSquare Lab’s Paul Judge tweeted about the Minneapolis case, in which Austin confronted a group of Somali entrepreneurs in a building’s gym. “If he thinks a group of African American males are out of place in the gym, imagine what happens when someone diverse shows up to his firm looking for investment.”
“His ignorance is our entire fund thesis,” followed Brian Brackeen of Lightship Capital, a Cincinnati venture firm that invests in companies led by women, people of color, and other underestimated founders. “Hundreds of millions if not billions of dollars of opportunity are lost to his bias / racism.”
Lightship is among the funds seeking “inclusion alpha” in overlooked founders and markets where they can help unlock value and execute deals that others can’t.
By intentionally backing Black and Brown founders, women and LGBTQ founders and other overlooked entrepreneurs firms like Lightship, Kapor Capital, Backstage Capital, Harlem Capital, Impact America Fund and others are making strategic bets on problems and opportunities other investors don’t even see (Harlem and Impact America are both Kellogg Foundation investments as well).
Last year, Kapor disclosed the performance of its fund to demonstrate the outperformance of its strategy to ‘close gaps’ for communities of color. The portfolio includes justice startups like Pigeonly, the largest independent prison communication services provider, and Promise, an alternative to exploitative and expensive cash bail.
In a post this week, Lightship’s Brackeen called on venture firms to take up the “The Underrepresented Pledge” and nix a common fund management policy: the requirement for a unanimous vote before investment committees approve an investment. The practice effectively stifles investment in founders of color and increases risks for investors, he said.
“Essentially firms that require 100% votes are introducing more risks to LP’s than those that do not,” Brackeen wrote. “This is because if you require unanimous votes then that committee can, by rule, only be as good as the worst person on it.”
This moment “reveals an opportunity that was always there,” says Illumen Capital’s Daryn Dodson, who last year co-authored “Race influences professional investors’ financial judgment” with Stanford SPARQ.
The study found that the better fund managers of color perform, the more bias they face. The implication: asset allocators that undervalue racially diverse high performers may be exposing their portfolios to uncompensated risk and leaving returns on the table. Indeed, investors that don’t address implicit bias in the investment process may be violating their fiduciary duty by underinvesting in high-performing ventures and funds led by people of color.
Dodson’s Oakland-based impact fund of funds tapped Stanford bias researcher Dr. Jennifer Eberhardt, known for her work reducing bias in policing, to root out implicit bias in investing. The fund provides tools to fund managers to help them see the often overlooked value in humanity within investment processes and hiring practices and boards of companies they are owning and controlling.
“The strategy of alpha generation through building a systems shift is a misunderstood part of investment analysis,” says Dodson. By working with fund managers to reduce implicit bias, he says, “We’ve helped them to see returns that are otherwise left on the table.”
Common Future, a network of leaders building a more inclusive economy, allocated $750,000 this week to Black-led organizations committed to investing in Black communities impacted by economic injustice. Instead of a slow-moving application process, the firm worked its nationwide network and trusted existing knowledge to make quick decisions.
“The opportunity to shift capital to shift power is in front of us,” writes Common Future’s Rodney Foxworth. “My request is simple: be an ally and fund people of color. Now.”
Foxworth cited Chicago activist Charlene Carruthers as an inspiration. “It is not a risk to invest in black and brown people fighting for liberation. It’s the surest bet,” says Carruthers. “When we have the resources to lead our own struggles, the world is transformed.”