Inclusive Economy | August 7, 2023

Venture volatility is triggering racial bias, challenging diversity, equity and inclusion

David Bank
ImpactAlpha Editor

David Bank

ImpactAlpha, Aug. 7 – The pullback in venture capital and private equity markets has pushed diversity, equity and inclusion efforts into the background, according to Oakland-based Illumen Capital. 

Venture funding for Black-led startups fell by more than half last year compared to 2021. 

“Our team is anticipating continued headwinds in the financial markets, and we know that bias tends to increase during times of uncertainty, volatility and inflation,” Illumen’s Daryn Dodson says in the firm’s annual impact report. Illumen this year raised a $170 million second fund and has deployed $72 million in eight funds. 

In practical terms, that means portfolio company founders are seeking survival help from their investors – increasing revenues, managing headcount and even securing their bank deposits – rather than taking steps to ensure diversity and representation.

This year’s survey of the firm’s portfolio of fund managers found that fund managers are having more difficulty ensuring that founders meet DEI provisions in their term sheets, “because founders are experiencing a lot of stress with regards to market volatility,” Illumen’s Joanna Kuang told ImpactAlpha.

“The triggers of bias are firing more often than in times where the market is steady,” Dodson added in an interview. “People make bigger mistakes, due to biases in times where they’re making quick decisions under lots of stress.”

Bias reduction

Even among fund managers that indicate a personal commitment to racial equity work, many don’t feel they have the autonomy or power to act.

“This shows an increased need for customized training and support to empower effective institutional change,” the firm’s impact report concluded. 

Illumen works with managers in its portfolio to implement bias-reduction strategies as a way to enhance financial performance. For example, the firm last year gathered more than 40 limited partners over two sessions at the Equal Justice Initiative’s Legacy Museum in Montgomery, Ala., commonly known as the lynching museum, to grapple with the challenges of implicit bias. 

A promising finding from this year’s survey: Fund managers cited “It’s good for the bottom line” as one of the top three reasons to increase representation of underrepresented women and people of color, along with “It creates a more equitable future,” and “It’s morally right.”