Are There Market Inefficiencies in Venture and PE?
Less than 500 Words
Summary: In this post, Lance Mason describes the impetus for collaborating with
on the series “Zebras and Horses” and previews their research methodology for uncovering insights about the efficiency of capital distribution across demographic groups.Since publishing this piece reacting to a panel I attended at Afrotech, I’ve had the pleasure of virtually connecting with Kwame Boler on several occasions.
The more we spoke, the more we realized how compatible our worldviews were. Inevitably, our conversations naturally evolved into a series of articles on the opportunities for improving relationships between investors, VCs, Private Equity fund managers, and entrepreneurs (founders).
One topic we’ve been discussing is the distribution of capital to underrepresented founders from diverse backgrounds (hereafter referred to as underrepresented founders).
Many people and institutions have shared statistics on capital distribution, for example, how 1% of Venture Capital funds are allocated to black founders.1 We decided to explore this phenomenon—not just for black founders but for all demographic groups.
We can all agree that 1% is a minuscule percentage. The percentage of capital allocated to other demographic groups is equally abysmal. In addition to the percentage being shocking, though, the entrepreneurship community’s disgust at the percentage implies that underrepresented founders should be getting more.
However, even though many have voiced frustration with the volume of VC funds allocated to underrepresented founders, no one has described how much more they should be getting. Kwame and I set out to do just that.
We started by giving grace to the Venture community and granting some concessions (e.g., all capital distribution decisions are based on trust, and founders must demonstrate their trustworthiness before receiving capital) and ended with acknowledging that even if there are inefficiencies, the decision to invest in a startup is a personal decision that need not be justified to the world. We are all free to do what we want with our money.
With that being said, while working on the first few articles of this series, we reviewed data about capital distribution across demographic groups and were diligent about allowing insights from the data to emerge naturally. People lie, and so can data. As a result, the introduction of biases into studies like this one can have implications far beyond its significance as a standalone fact.
Unreliable data and narratives are not only difficult to make sense of when studied independently, but they are also hard to cite and leverage in our discussions with one another. So Kwame and I insisted on presenting these findings regardless of what they revealed, and we did our best to be as objective as possible during the research process.
We look forward to sharing these results in the future to facilitate a better flow of conversation about what is happening within the Venture community.
The research question we are solving is:
“Are there capital inefficiencies in allocating venture and private equity funds to certain demographic groups? If so, why?
Ultimately, we discovered some pretty interesting insights about capital distribution, and we're excited to share more through biweekly releases.
Stay tuned for the next installment of this series, where we answer this question. The next installment is scheduled to be published on Tuesday, April 23rd, at noon EST.
For now, be sure to check out this post about the relevance of representation in the capital distribution process and subscribe below so you can be notified when the next post is released.