This week, the head of a venture fund dedicated to LGBTQ+ founders told me that Trump’s executive order banning diversity, equity and inclusion considerations from federal contracts prompted him to wind down his debut fund and rethink his career.
Finding it hard to reach the initial target of $10 million for his debut fund, Ben Stokes, founder and managing partner at Chasing Rainbows in San Francisco, told Venture Capital Journal last September that he was extending his fundraising period by six months. I checked in with him this week to see how it was going.
“We had to make the tough decision of what to do now in this time of anti-DEI [sentiment],” Stokes told me. “My focus has been to get as much capital into the fund as we possibly can, close it off as fast as we can and deploy all of that capital as fast as we can so that we cannot be sued based on having capital in our accounts.”
Stokes says he’s taking heed of the precedent set by Fearless Fund’s settlement last summer of a lawsuit filed by a conservative activist after a federal appellate court ruled Fearless Fund was likely to lose the lawsuit. The lawsuit alleged that Fearless Fund’s Strivers’ Grant Fund, which awarded grants to underrepresented founders and was a minor part of its operations, was a “racially discriminatory program.”
Stokes has been pondering whether it’s feasible to raise another DEI-focused investment fund at this time.
In view of recent government directives, “We’re unable to raise a Fund II in the current political environment,” he says. He has realized that “no matter how well-intentioned or how much equity we’ve created or how much opportunity or investments we’ve done, or even all that those [portfolio] companies have been able to produce, it’s not a wise thing to actively set yourself up for potential legal ramifications.”
He is now exploring the possibility of launching a second fund outside the US, where the political environment is more friendly, and considering other ideas for how to contribute to the investment ecosystem.
LPs in a tough spot
Some LPs worry that federal prohibitions will eventually impact state-level programs. That could result in a state-run investment portfolio no longer having the discretion to use beneficiary contributions to commit capital to a manager based in part on whether that manager is from an under-represented community.
Florida and Texas are among the states that have established restrictions on their state pension plans from using environmental, social and governance considerations in their investment decisions. DEI policies fit squarely into the social part of ESG.
While venture funds could potentially be affected if more institutional investors turn away from DEI considerations, private equity statistics show that “endowments and foundations did not have a core portfolio of diverse managers in the first place,” notes Senofer Mendoza, co-founder and GP at Mendoza Ventures in Boston.
Where state pension funds are concerned, New York State’s is one in the lead with a 17 percent diverse manager allocation, which is largely committed to private equity, she says. “So there’s been a lot more noise in the venture space than there has been action on this front because most venture funds are too small [under $100 million] to qualify for that money anyway.”
Mendoza sees the lawsuit that targeted Fearless Fund’s grant program as “a tactical effort, and part of that effort was meant to provoke fear in the emerging manager community that was still very new post-2020. And I think that effort has been very effective.”
Roughly 90 percent of the CEOs of Mendoza Ventures’ portfolio companies come from underrepresented groups. When they launched their fund in 2016, Mendoza and her husband were advised by a veteran VC that they were entering an industry given to volatile personalities and strong opinions.
With that in mind, “The best you can do is create amazing governance around yourself, fix your investment strategy and laser focus on execution,” Mendoza says. The main aim when investing should be on returns. “In that vein, all the data shows that diverse teams outperform. So I would also argue that investing in any homogeneous team is against a fiduciary [interest].”
Making sure you’re not a target
Still, numerous asset management institutions “have paused their [DE&I] programs and are reviewing the language they’ve had in place that created and governs those programs,” says Jacob Walthour Jr, CEO at Blueprint Capital Advisors. “There’s an attempt to make sure that firms are not holding themselves out as a target for any sort of anti-DEI litigation that may be forthcoming.”
The era ushered in by George Floyd’s murder in 2020, which saw an increase in the numbers of venture funds led by women and people of color, as well as an increase in diversity at large VC firms, is coming to an end, Walthour believes.
That said, he is optimistic that the industry will see the benefits of diversity efforts. “You now have capital in the hands of managers who are a lot more open-minded than those who dominated the VC sector historically,” with the amount of capital being managed by funds led by female, LGBTQ+ and BIPOC managers at a record high, he notes. “So, while it’s the end of an era, I think where we are today sets the stage for significant productivity in the VC space at the GP and entrepreneur levels.”
Programs focused specifically on a group of people, such as black or female founders, “have to open up and be more inclusive, just like VC firms have had to open up and be more inclusive with respect to the people they hire and the founders they back with their capital,” Walthour says.
As always, investors favor funds that can deliver performance. “If Big VC is going to ignore entrepreneurs of color or not take meetings with founders because they are women or part of the LGBTQ community, those firms are going to miss out on great alpha-producing opportunities,” he adds.
Rather than setting aside capital for a specific group, Walthour says, “It’s time to be laser focused on performance and to be open minded to collaborating with people you’ve never collaborated with before, who have a network, who have an understanding, who in fact, founders may be more comfortable with as VCs on their cap table. If you think that from an allocator standpoint the best opportunity to perform is by investing in a firm led by a woman or person of color, you should make that investment.”
He also believes there will be some rationalization of investments as a result of non-performing fund managers and strategies, as well as minimal amounts of capital that have been returned to investors.
“The net-net is the bar is going to continue to get higher for everybody in the VC space and the attrition rate will get higher in the VC space,” he says. “If firms don’t pivot quickly and focus on performance, no matter what group they belong to, they’re going to be facing extinction.”
This week, the head of a venture fund dedicated to LGBTQ+ founders told me that Trump’s executive order banning diversity, equity and inclusion considerations from federal contracts prompted him to wind down his debut fund and rethink his career.
Finding it hard to reach the initial target of $10 million for his debut fund, Ben Stokes, founder and managing partner at Chasing Rainbows in San Francisco, told Venture Capital Journal last September that he was extending his fundraising period by six months. I checked in with him this week to see how it was going.
“We had to make the tough decision of what to do now in this time of anti-DEI [sentiment],” Stokes told me. “My focus has been to get as much capital into the fund as we possibly can, close it off as fast as we can and deploy all of that capital as fast as we can so that we cannot be sued based on having capital in our accounts.”
Stokes says he’s taking heed of the precedent set by Fearless Fund’s settlement last summer of a lawsuit filed by a conservative activist after a federal appellate court ruled Fearless Fund was likely to lose the lawsuit. The lawsuit alleged that Fearless Fund’s Strivers’ Grant Fund, which awarded grants to underrepresented founders and was a minor part of its operations, was a “racially discriminatory program.”
Stokes has been pondering whether it’s feasible to raise another DEI-focused investment fund at this time.
In view of recent government directives, “We’re unable to raise a Fund II in the current political environment,” he says. He has realized that “no matter how well-intentioned or how much equity we’ve created or how much opportunity or investments we’ve done, or even all that those [portfolio] companies have been able to produce, it’s not a wise thing to actively set yourself up for potential legal ramifications.”
He is now exploring the possibility of launching a second fund outside the US, where the political environment is more friendly, and considering other ideas for how to contribute to the investment ecosystem.
LPs in a tough spot
Some LPs worry that federal prohibitions will eventually impact state-level programs. That could result in a state-run investment portfolio no longer having the discretion to use beneficiary contributions to commit capital to a manager based in part on whether that manager is from an under-represented community.
Florida and Texas are among the states that have established restrictions on their state pension plans from using environmental, social and governance considerations in their investment decisions. DEI policies fit squarely into the social part of ESG.
While venture funds could potentially be affected if more institutional investors turn away from DEI considerations, private equity statistics show that “endowments and foundations did not have a core portfolio of diverse managers in the first place,” notes Senofer Mendoza, co-founder and GP at Mendoza Ventures in Boston.
Where state pension funds are concerned, New York State’s is one in the lead with a 17 percent diverse manager allocation, which is largely committed to private equity, she says. “So there’s been a lot more noise in the venture space than there has been action on this front because most venture funds are too small [under $100 million] to qualify for that money anyway.”
Mendoza sees the lawsuit that targeted Fearless Fund’s grant program as “a tactical effort, and part of that effort was meant to provoke fear in the emerging manager community that was still very new post-2020. And I think that effort has been very effective.”
Roughly 90 percent of the CEOs of Mendoza Ventures’ portfolio companies come from underrepresented groups. When they launched their fund in 2016, Mendoza and her husband were advised by a veteran VC that they were entering an industry given to volatile personalities and strong opinions.
With that in mind, “The best you can do is create amazing governance around yourself, fix your investment strategy and laser focus on execution,” Mendoza says. The main aim when investing should be on returns. “In that vein, all the data shows that diverse teams outperform. So I would also argue that investing in any homogeneous team is against a fiduciary [interest].”
Making sure you’re not a target
Still, numerous asset management institutions “have paused their [DE&I] programs and are reviewing the language they’ve had in place that created and governs those programs,” says Jacob Walthour Jr, CEO at Blueprint Capital Advisors. “There’s an attempt to make sure that firms are not holding themselves out as a target for any sort of anti-DEI litigation that may be forthcoming.”
The era ushered in by George Floyd’s murder in 2020, which saw an increase in the numbers of venture funds led by women and people of color, as well as an increase in diversity at large VC firms, is coming to an end, Walthour believes.
That said, he is optimistic that the industry will see the benefits of diversity efforts. “You now have capital in the hands of managers who are a lot more open-minded than those who dominated the VC sector historically,” with the amount of capital being managed by funds led by female, LGBTQ+ and BIPOC managers at a record high, he notes. “So, while it’s the end of an era, I think where we are today sets the stage for significant productivity in the VC space at the GP and entrepreneur levels.”
Programs focused specifically on a group of people, such as black or female founders, “have to open up and be more inclusive, just like VC firms have had to open up and be more inclusive with respect to the people they hire and the founders they back with their capital,” Walthour says.
As always, investors favor funds that can deliver performance. “If Big VC is going to ignore entrepreneurs of color or not take meetings with founders because they are women or part of the LGBTQ community, those firms are going to miss out on great alpha-producing opportunities,” he adds.
Rather than setting aside capital for a specific group, Walthour says, “It’s time to be laser focused on performance and to be open minded to collaborating with people you’ve never collaborated with before, who have a network, who have an understanding, who in fact, founders may be more comfortable with as VCs on their cap table. If you think that from an allocator standpoint the best opportunity to perform is by investing in a firm led by a woman or person of color, you should make that investment.”
He also believes there will be some rationalization of investments as a result of non-performing fund managers and strategies, as well as minimal amounts of capital that have been returned to investors.
“The net-net is the bar is going to continue to get higher for everybody in the VC space and the attrition rate will get higher in the VC space,” he says. “If firms don’t pivot quickly and focus on performance, no matter what group they belong to, they’re going to be facing extinction.”
