The persistent funding gap for venture firms led by women and people of colour has motivated several women LPs to step up their efforts to not only increase capital commitments to these fund managers but also find ways to expand the pipeline of women entering the asset management industry.
The Knight Foundation, which tracks diversity at asset managers for charitable foundations, notes that it has seen some improvement. Diverse-owned firms managed 18.1 percent of the nearly $79 billion in AUM at US foundation endowments at the end of last year, up from 16.6 percent in 2021 and 16.2 percent in 2020, it said.
But while foundations have boosted investment in diverse managers, the same cannot be said for the overall industry. Just 1.4 percent of the $82 trillion managed by US asset managers was managed by diverse-owned firms as of September 2021, and the figure didn’t change much from two years earlier, the Knight Foundation reports.
There continues to be “a huge imbalance in terms of who’s managing the capital”, Chrissie Chen Pariso, managing director at MPowered Capital, tells affiliate title Venture Capital Journal. MPowered sees the diverse manager landscape as “a hugely inefficient market opportunity”, she says.
MPowered is one of several women-led institutional LPs with an explicit mandate to allocate to women and other under-represented asset managers. It started as the family office of Marcia Page, a co-founder of Värde Partners, who helped it grow into a $13 billion global asset management firm before moving to the executive chair role in 2015.
MPowered Access Fund I, which closed on $110 million in March, focuses on diverse-led VC, growth, buyout, credit and real estate funds. Roughly 25-30 percent of the fund has been allocated to seven VCs led by women or other diverse managers, including Collide Capital of New York, Moderne Ventures of Chicago and Construct Capital of Washington, DC.
“There’s definitely a feel of change that’s happened over this past six to 12 months in terms of the quality and sophistication in understanding the challenges and opportunities diverse managers face,” Pariso says. “But at the end of the day we need allocators to actually allocate their capital to diverse managers.”
MPowered’s new fund is designed to address three pain points in the capital formation process for under-represented fund managers: lack of working capital to launch or scale a firm, lack of an attributable track record and lack of LP fund commitments. The fund also provides strategic guidance around enterprise building for its managers to minimise start-up costs and friction during the firm creation phase.
Some institutional investors have set aside pools of capital reserved for diverse fund managers, including women. When Edison Partners, a New Jersey growth equity firm, was raising Fund X, which closed on $450 million in 2021, some of its LPs expressed appreciation for the firm’s efforts to diversify its leadership team and told the partners about a separate capital reserve for underrepresented managers, says general partner and COO Kelly Ford.
Edison wasn’t looking for allocations earmarked for diverse managers, but LPs “were presenting it to us, saying, ‘We’ll invest out of this pool of capital, but we’re also going to give you some money out of this [other] pool of capital,’” Ford says.
Perception problem
Some women LPs make a point of noting that they don’t apply a gender lens to their allocation decisions. Harisha Koneru Haigh, managing director of Northwestern University’s $14 billion endowment, cites fiduciary duties that compel her endowment to strictly base its capital commitments on fund managers’ return potential. Still, about a dozen of the venture funds that Northwestern has committed to happen to have at least one woman who is a partner, including five that were founded by women.
“The LP panelists have a deep interest in supporting women emerging managers and take the time to provide invaluable feedback and insight to help Pinklight Propel GPs”
Jill Kitazaki
PEWIN
“We don’t feel we’re sacrificing returns by investing in diverse managers” who often have more experience than their fund size would imply, says Haigh. Because it’s an undercapitalised area, she sees it as an opportunity to gain access to different networks extending beyond GPs that are all chasing the same founders.
“A female-founded company may not have raised a lot of capital because they found it harder to fundraise, but they may have more [annual recurring revenue], for instance, than a typical investment,” she says. “So, we’re able to see more progress, perhaps get it for a lower valuation. All of these things accrue to the benefit of investors like us.”
Mauricia Geissler, one of three women co-founders of WovenEarth Ventures, which has raised two-thirds of a projected $150 million fund of funds focused on early-stage climate tech, says she’s excited by efforts “to elevate and make more visible more female investors”. But she warns that LPs that set aside pools of capital to invest in diverse fund managers, including women, may bias their selection and may not necessarily get the best returns. Their selection should not just be based on gender but on all traditional diligence criteria – people, philosophy, process and performance, Geissler says.
If an investor biases their screening for a particular factor like gender and the investor doesn’t perform well, “it can set the industry back”, she adds. “I like to make investments that stand on their merits, and the fact that some are female-run is a happy outcome” but not by design. Three of the 12 fund managers that WovenEarth has backed – Buoyant Ventures, Voyager Capital and Powerhouse Ventures – are women-led.
Wearing two hats
In venture capital, there increasingly is a blurring of identities between GPs and LPs, says Soraya Darabi, co-founder and GP at Trail Mix Ventures, which closed on about $65 million for its Fund II in 2021 and started raising its Fund III in April. All three of the New York firm’s funds are anchored by women LPs at large institutional investment firms, which is rare. Trail Mix also counts a number of ultra-high net worth women with institutional family offices as LPs, as well as a larger pool of capital from family offices owned and operated by men.
“You almost never meet an LP who’s only an LP,” Darabi tells VCJ. “Everybody does fund investing so they can have breadth and depth and so they may learn from the managers whom they back.”
Darabi herself exemplifies this. In addition to backing male and female founders out of Trail Mix, she is also an LP, having committed from her personal capital to four women-led venture funds. They include Dream Machine, a VR, AI and blockchain investor led by Alexia Bonatsos, and Dorm Room Fund, an investor in start-ups created by college students that was co-founded by Molly Fowler.
“Molly has such an interesting point of view about the types of companies being built by Gen Z entrepreneurs in particular,” Darabi says. “I thought, ‘I want to learn from Molly.’”
“It takes women and people of colour two to three times longer than their white male counterparts to raise a fund”
Courtney McCrea
Recast Capital
She backed Bonatsos, a former co-editor at TechCrunch, for her insider knowledge of Silicon Valley’s tech scene. “I felt like she would be somebody whom I feel comfortable with and whom I can learn from,” she says. “As an LP, there is a level of comfort that you’re looking for, and that’s why I wish there were more women writing cheques as limited partners into funds, because we will grow together.”
Darabi believes women are more likely to be LPs in female-led funds, not out of philanthropy but “because we feel like we see things that others may overlook through antiquated ideas of pattern recognition”.
Speed need
A growing list of incubator and accelerator programmes are geared to women and minority company founders. Less well known are similar programmes that cater to women and other under-represented emerging fund managers.
Alongside its launch in 2020, Recast Capital, a fund of funds in San Francisco, created the Enablement Program, a 12-week tuition-free educational programme focused on making the fundraising process more successful for cohorts of 12-15 diverse emerging GPs twice a year.
Courtney McCrea, Recast’s co-founder and managing partner, says to earn a place in the program, participants “need to have a vision as to what their fund is doing, they need to have a fund name and they need to have relevant industry experience that will allow them to be good pickers of great companies. They also need to show how they will gain access to add value to those businesses”.
“[There is] a huge imbalance interms of who’s managing the capital”
Chrissie Chen Pariso
MPowered Capital
Cohort members get six sessions of free executive coaching provided by a team of professionals, the opportunity to meet other emerging VC managers and hear feedback from McCrea and her co-founder, Sara Zulkosky.
Recast’s experience with its Enablement Program gave rise to another initiative called Recast Accelerate, which hypothesises, “By increasing the number of emerging general managers that identify as women or non-binary, particularly those focused on investing at the earliest stages of company development, you will also increase the percentage of VC funding to founders of under-represented backgrounds.”
Using a fiscal sponsor, Recast Accelerate raises charitable dollars to pay 30 GPs $100,000 each in expenses to help them along their journeys. In addition, the 30 VCs get to go through the Enablement Program and receive executive coaching.
“It takes women and people of colour two to three times longer than their white male counterparts to raise a fund,” says McCrea. “This programme is intended to keep them in the market for longer and be able to fundraise for longer.”
Recast is trying to raise additional funding from other philanthropists to support the programme. Recast Accelerate launched in March and stopped accepting applications in late May. A seven-member selection committee from the LP community is whittling down the 86 applicants to 30. Applications for the 2024 cohort will open in March.
Yet another resource for women who are fundraising is the Pinklight Propel programme run by the Private Equity Women Investor Network. The programme provides women GPs with constructive closed-door feedback on strategy, presentation content and style and information on the institutional fundraising process. After completing the programme, participating GPs continue to engage with Pinklight Propel panellists, who serve as mentors and provide feedback during their fundraising efforts.
Since its launch in 2016, Pinklight Propel has counselled about 40 emerging female GPs that have gone on to raise about $4 billion in capital and have invested in more than 250 women-led companies, says Jill Kitazaki, a PEWIN board member who co-chairs Pinklight and is also COO at Denning & Company.
Pinklight Propel isn’t a fundraising exercise where GPs pitch LPs for capital. “However, the LP panellists have a deep interest in supporting women emerging managers and take the time to provide invaluable feedback and insight to help Pinklight Propel GPs put their best foot forward before formally launching their fundraise,” Kitazaki says. “Think of it as an inside look into the LP process.”
Tapping into networks
Many of the women VCJ spoke with for this article point out that addressing the funding gap for women- and minority-led funds requires expanding the top of the funnel through which women gain access to the asset management industry.
Rather than relying on referrals from peers, LPs need to be more proactive about broadening their networks to meet more diverse fund managers, says Sophia Tsai, managing director of Trinity Church Wall Street, which sold part of its legacy real estate holdings in 2015 to diversify its portfolio. Trinity Church has allocated about $200 million, or one-third of its private equity AUM, to venture funds, mostly in the US and Asia.
“We don’t feel we’re sacrificing returns by investing in diverse managers”
Harisha Koneru Haigh
Northwestern University endowment
One way that Tsai has expanded her network is by participating in roundtable sessions with diverse fund managers that were originally organised by First Republic Bank. “I sourced one of my female-led venture funds from those speed-dating roundtable events,” she says.
Networking can be more informal as well. Many of the alumni from Recast’s Enablement programme host dinners for fellow women GPs that invest in different areas, each of whom will invite two of their LPs. “You end up going around the table and giving your pitch on your fund, who you are and why you’re doing what you’re doing,” McCrea explains. “And hopefully some of these LPs will be interested in investing in my friend’s fund. This community is very collaborative and I think that’s helpful to each other and to the community.”
Ford of Edison Partners credits some of her LPs who are women with pulling her into networking organisations when she had just made the move from being an operator to partner nine years ago. Gatherings for the Women’s Association of Venture and Equity (WAVE) and other organisations have given Ford exposure not only to prospective LPs, but also to other talent across the ecosystem, which has facilitated recruitment efforts, she says.
Pariso at MPowered is a member of WAVE’s board and the Midwest steering committee, and she helped launch WAVE’s Career Forum seven years ago to improve access to the industry for the next generation of women.
“We realised you’re not going to change the landscape if you’re only going to recruit from the top three business schools and the top investment banks,” says Pariso. “Last year we had over 500 scholars apply – from undergraduates to three-year post-grad school students [representing more than] a hundred educational institutions. It’s instrumental for broadening that funnel.”
Women who are raising their first or second fund may want to reach out to Transact Global, a community of nearly 500 emerging managers that extends from North America and Europe to Africa and Asia. One of its goals is to increase the number of women LPs in the VC ecosystem.
Transact Global has helped women get warm introductions to numerous LPs, says Trail Mix’s Darabi, who co-founded the organisation. “I’m very proud of the fact that there are many fund managers who received their first seven-figure investment through a warm intro that we made. It’s truly women helping women.”
A core tenet of Transact Global is “to demystify the funding experience for people who are not formally invited to the table”, says Darabi. Transact Global invites more than a hundred GPs at a time to listen to interviews with both male and female LP guests in Google Meet gatherings.
“My co-founders and I are action-oriented, and we wanted to recreate the equivalent of a golf course for networking in a low-touch virtual setting, hence our WhatsApp groups,” Darabi says via email. “True friendships have formed from our community; we see photos posted of member meetups multiple times a week. Deals have been struck and co-investments have been made. It’s become more than just a community. We think of it as a movement.”
For LPs looking to diversify their portfolios, Tsai of Trinity Church points to Institutional Allocators for Diversity, Equity and Inclusion, a consortium of 700 institutional LPs that she helped to found. The group maintains a database of about 800 diverse managers across private and public markets, about 40 percent of which are VCs, which makes it easier for LPs to find diverse managers.
IADEA also runs diverse manager pitch sessions to facilitate LP access for diverse managers and offers content sessions to help LPs incorporate DEI into their governance and learn how to recruit and better retain diverse talent.
Most recently, IADEA said it is launching an inaugural Fellows and Forum Program with cohorts of CIOs and CIO-track senior investment professionals and asset class heads who want to amplify DEI in investment teams and portfolios. The small group discussions will cover equitable underwriting, monitoring and engagement, among other topics.
Flexible underwriting
Because so few women have long track records as general partners, LPs would do well to take a more nuanced approach in how they underwrite emerging managers, says Tsai at Trinity Church. That would enable them to add more women-led funds to their portfolios.
Pariso agrees, citing the greater odds that many diverse emerging managers are up against for lack of an attributable track record or because their teams haven’t worked together before, which can lead some LPs to opt not to invest in them.
It is still relatively rare for women launching their own firms to have existing LP relationships because there aren’t that many who have spun out of well-known venture firms. Exceptions include Mary Meeker of Bond Capital and Katie Haun of KRH Partners, who were able to quickly raise billions of dollars for new funds after they spun out of Kleiner Perkins and Andreessen Horowitz, respectively.
“I sourced one of my female-led venture funds from [one of] those speed-dating roundtable events”
Sophia Tsai
Trinity Church Wall Street
Tsai says she has “backed successful emerging managers even though they were not partners in their prior firms, but they were able to articulate their investment theses and show differentiation in their strategy. We were also able to get very strong references from the founders that they have backed”.
Battling bias
Although Trail Mix Ventures backs both male and female founders, “alarmingly the majority of investors we meet think we invest exclusively in women because we are women”, says Darabi. “There are a lot of unconscious biases out there that can feel insurmountable [in] a very competitive fundraising environment. And I think it’s the same reason why a lot of capital doesn’t flow into the hands of women.”
This bias persists even though LPs understand that diversified portfolios provide a competitive advantage and despite all the data attesting to women GPs often being more responsible fiduciaries and delivering equally good returns, she adds. “If the majority of cheque writers, starting at the top from institutional LPs, don’t reflect the way the world truly looks, then how can we expect those dollars to [not] reflect the same?”
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