“But I’m not a racist”
is a constant refrain in Silicon Valley — a place where 91% of venture capitalists are men, 98% are white or Asian, and almost 90% of their funding goes to white-male led ventures.
It seems like if you buy the pint of vanilla ice cream over the chocolate pint 98 out of 100 times you walk into the grocery store, you might have some ingrained preference for vanilla, no? Maybe you think you have open taste buds, but if vanilla is on the front of the shelf, and it’s a brand you recognize, it’s just the easiest thing to pick up and move on with your day. You’re not looking to see if something else might be available, and equally or more delicious, hiding in plain sight. You’re moving on autopilot, and thus eating a lot of vanilla, whether or not it’s good for you. And that’s what’s most tragic about the status quo – it not only hurts those who aren’t getting chosen, but also the person doing the choosing.
Venture capitalists, and the asset owners and managers who fund them, pride themselves on being open-minded when it comes to allocating capital: “I don’t care if they are black, blue or have purple spots, as long as they are great managers who can make money.” They view themselves as fully available to new flavors, spotting trends before others do in order to capture the best returns in a competitive market.
But they are forgetting about the notion of unconscious bias, the ingrained habits we get from society that are extra difficult to root out. Like breathing while sleeping, they happen so naturally we don’t even acknowledge their existence. We only see the outcome — that we don’t die in our sleep (if we are lucky), and we wind up with portfolios of predominantly white fund managers and entrepreneurs.
This not only means that we as capital allocators perpetuate the vast racial and socioeconomic inequality of our society, but also that we are missing out on massive sources of innovation in a majority-minority country. These two reasons are why at Candide Group, we’ve put such an emphasis on diversity within our portfolio, with over half of funds and companies we support led by women and people of color (and in some cases, but not enough of them, by women of color, and trans and queer founders).
It’s also why we’ve supported Illumen Capital: a new fund of funds that is specifically looking to help fund managers build stronger practices around diversity and root out unconscious bias.
Illumen was founded by Daryn Dodson, an African-American investor and fierce advocate for social equity. While — let’s face it — inequities in capital allocation are largely caused by white people like me, we are lucky that Dodson is lending his time and talent to help remedy the problem and demonstrate the true implicit benefit of diversity in VC.
Illumen recognizes this is a multi-year process, and just like any habit we wish to change, we have to essentially go through the equivalent of a 10 step program — admit we have a problem, that we are not always in control (as our unconscious biases take over), and then find new tools and strategies to change our behaviors moving forward.
The first step toward admitting one has a problem? Data. Illumen has partnered with Stanford University’s “do tank” SPARQ (Social Psychological Answers to Real-World Questions) to do one of the first comprehensive, blind studies to better examine both how unconscious bias shows up, and what its impacts are. I sat down with Dodson, Dr. Ashby Monk (member of the SPARQ team and executive director of the Global Projects Center at Stanford), Dr. Hazel Markus, (co-director of SPARQ), Dr. Sarah Lyons-Padilla (a research scientist at SPARQ and leading author of the study), and Jason Henning (Senior Vice President of Investor Relations) to learn more about this report, and what investors might want to do differently as a result.
So let’s cut to the chase. What did this study show?
Dodson: The study had three key findings:
Asset allocators have trouble gauging the competence of racially diverse teams. Asset allocators’ judgments of the team’s competence were more strongly correlated with predictions about future performance (e.g., money raised) for racially homogenous teams than for racially diverse teams.
Racially diverse teams face bias at the top. At stronger performance levels, asset allocators rated white-led funds more favorably than they did black-led funds when evaluating investment skills, competence, and social fit.
Racially diverse teams get the benefit of the doubt at the bottom, but not more funding. At weaker performance levels, asset allocators actually rated black-led teams more favorably than white-led teams in terms of overall performance, investment skills, and ability to raise money. However, asset allocators expressed little interest in investing in weaker funds, diverse or otherwise.
Dr. Monk: The influence that these beneficial institutional investors — who control nearly $100 trillion in assets — ave on the entire chain of financial intermediation, capitalism and even society cannot be overstated. It is of the highest importance that they invest and operate without bias. This paper and its findings hopefully raise awareness of the types of biases that remain. Racial bias is still alive and well in our country and its system of capitalism, and the investment community needs to do more to counter it in order to live up to their fiduciary obligations.
Dr. Markus: This careful analysis of the judgements of actual asset allocators reveals that the same types of biases that social psychologists have long documented in many arenas of society — education, employment, and everyday social life — are also at work in the powerful financial services industry. Rather than an emphasis on “fixing” individual financial decision-makers, however, the results suggest the value of a systematic approach to implementing practices that counteract these pervasive biases.
The results suggest first that underrepresentation of people of color in the realm of investing is not only a talent pipeline problem, and second, that funds led by people of color might paradoxically face the most barriers to advancement after they have established themselves as strong performers.
Additional research is expected to examine solutions in more depth. However, investing experts advising on the study believe that research, awareness-raising, professional training, and coaching as well as intentional changes to long-time industry practices, can improve the future make-up and impact of the investment community, changing the power dynamic to one that is more equitable and culturally significant.
How was the study structured? How much confidence do you have in the results — were some data points stronger or weaker?
Dodson: In terms of the methodology, we asked 180 asset allocators to rate venture capital funds based on a one-page summary of the fund’s performance history. The funds were fictional but the accompanying one-pagers were realistic, containing short summaries of the team’s track record and investment strategies. We manipulated the race of the managing partner (white or black) and the strength of the one-pager quality (stronger or weaker). Asset allocators saw one of four versions of these one-pagers. We conducted statistical analyses to determine how much managing partner race and one-pager quality affected asset allocators’ ratings of the teams.
Dr. Lyons-Padilla: Identifying the root of racial disparities in investing is challenging because there are so few people of color in this space to begin with. Are investors biased against racially diverse teams, or is there just not enough diversity in the pipeline? We decided our first step should be to design a controlled experiment that could tell us whether, all qualifications equal, racially diverse teams face more scrutiny than their racially homogeneous counterparts.
The research team explored three distinct theories that could explain disparities in investing: 1) there is no investor bias against funds owned by people of color, suggesting that the issue is primarily a talent pipeline problem; 2) bias exists predominantly at weaker levels of performance – below the bar; and 3) bias exists predominantly at stronger levels of performance—above the bar.
The study examined differences in judgment among asset allocators when all details about a fund’s track record and qualifications were kept constant except race. Through an online experiment with actual asset allocators, the research team sought to determine whether there are biases in their evaluations of funds owned by black men in particular, and, if so, how these biases manifest.
As the report highlights, “asset allocators” operate via pension funds, endowments, foundations, and sovereign funds, performing two key functions for society and their sponsors: providing high rates of return for the organizations they represent and acting as the base of the global capitalist system, allocating their funds to countless investment opportunities around the world, often through for-profit financial intermediaries (venture capitalists, hedge funds, private equity funds) managed by professional fund managers who attempt to generate a high investment return. If asset allocators set incorrect or biased incentives, the entire capitalist system will reflect and reinforce these biases.
Furthermore, while there are $69.1 trillion of global financial assets under management across mutual funds, hedge funds, real estate and private equity, fewer than 1.3 percent are managed by women and people of color. A comprehensive data set of every venture capital organization and investor since 1990 shows that the industry has remained “relatively homogeneous” for the past 28 years, particularly white and male. Women represent only 8 percent of investors. Hispanics make-up just 2 percent of venture capitalist investors and fewer than 1 percent are black. And there has been no systematic investigation of the factors that cause those disparities in investment decision-making until now.
Henning: For the main study, participants were 180 asset allocators recruited from the mailing list of an investment professionals magazine (161 men, 9 women, 10 gender not reported). A priori power analysis had determined that a sample of 128 would offer sufficient statistical power. Results from this 180-person sample proved statistically significant. Put another way, it’s more than chance that the respondents rated white-led teams higher than racially diverse teams — and, given the only difference in the fact sheets of equal fund performance was the race of the managing director, we found evidence of racial bias in these investment decisions.
This was a study using fictional funds. Surely you’ve also encountered these sorts of situations as real-life scenarios. What sort of anecdotes have you heard?
Dodson: I’ve observed investors leaving money on the table because they underestimate the value of funds managed by people of color and women. But many of these investors did not seem to harbor conscious prejudices or even notice their biased behavior. This leads me to believe that the problem can be addressed, but we must first clearly define why these issues exist. This is true for professionals in the impact investing space too, who, seeking to improve society and achieve returns can never fully reach their goals without addressing racial bias.
What are steps investors can take if they want to address their unconscious bias? How will it benefit them… and the world?
Dodson: We’ve developed five key recommendations for investors:
Look beyond the pipeline problem. While the talent pipeline question has been rightfully examined and remains a key part of the solution, it alone will not solve the problem. A diverse population of entrepreneurs and fund managers already exists and the industry must create practices to ensure that their pipeline reflects that diversity.
Follow through with intentions to diversify. At weaker levels of performance, black-male-led teams in the study received higher ratings than white-male-led teams, suggesting an opportunity to increase diverse teams’ access to capital. However, allocators in the study were not seriously considering investing in weaker funds. It takes more than reviewing a one-pager or taking the first meeting to diversify a portfolio; investors must set diversity benchmarks at each step of the decision-making process.
Support strong diverse teams. The data suggest that the more qualified diverse teams are, the more bias they face. To get at the root of the challenge, decision-makers must support strong diverse teams who are still struggling to advance.
Amplify the presence of diverse teams. The study results suggest that asset allocators have trouble gauging the difference between strong and weak teams led by people of color. This may be for a lack of experience with diverse teams, but not for the lack of diverse teams. Allocators should become knowledgeable about successful diverse teams and distribute this knowledge throughout their networks.
Establish a transparent selection process. Asset allocators in the study assigned different ratings to teams with identical credentials. To ensure that all teams have a fair shot, investors need to define specific selection criteria, apply these criteria consistently, and make their decision-making process transparent.
Racial bias in Investing? Just look at the data. – RobinHood – Reddit Feed
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