Pando

Expanding the borders into hell: Can a new crop of female and minority founded venture funds rescue us from the “hoodie kings”?

By Sarah Lacy , written on January 31, 2018

From The Money Desk

Lately, I’ve found a new reason to hope.

New waves of startups always begin before you realize it. There aren’t clean breaks, where the old wave of companies all go public and then everyone has a post-mortem on how that went, and then starts up again. The new wave begins while the old wave is still sorting its shit out.

And each new primordial soup is almost always inoculated against the bullshit of what came before.

My journalistic spidey sense tells me that a new wave of startups is sloshing around and forming now. I hope it’s looking at the cost of the toxic cultures like Uber, Zenefits, and SoFi, and saying “no thanks, toe-stepping, hard-drinking, bro culture.”

I hope it’s looking at Snap’s stock chart and the upcoming Dropbox IPO, and saying, “no thanks, hyped up valuations for the benefit of the founder’s ego.”

I hope-- I hope-- it’s doing what Silicon Valley always says it does: Looking at the data. Because if it does, it will see that diversity makes companies more profitable and more resilient. It will see that a 24/7 always on culture has diminishing returns. It will see that benefits like parental leave have helped large companies like Google and Netflix retain workers.

Or at least, it’s looking at the embarrassment and pain that Binary Capital, 500 Startups, Sherpa Ventures, and so many others are going through and say, “Maybe, we need women here after all… and not just as models at cuddle puddle parties.”

Just like women and people of color decided in 2017 that they need to run for office if they want better elected officials, I hope that women and people of color in Silicon Valley are saying, “Fuck it, I’m starting the next company I work at…”

Because slowly more sources of early stage capital are lining up to fund exactly them.

“It’s been alienating to watch the triumph of the hoodie kings,” says Jyri Engeström in an interview with Pando. “In some way, we will have failed if the same thing re-emerges.”

Yes. This is what I hoped I would hear when I saw the news that Caterina Fake and Engeström were starting a new venture firm, called— appropriately— Yes VC. It was a validation that my tiny flicker of hope may be more than just wishful thinking. That a new wave of seed investor is getting pissed and getting funded and we might get new kinds of startups as a result.

As a two person team comprising a woman and a European, both Fake and Engeström have chafed at the era of the “hoodie kings.” They talk about how painful it is to watch people from other cultures or ethnicities or genders come to the Valley and struggle to fit the mold. To get the right black t-shirt and jeans and a 415 area code, lose their accents or disguise who they are to fit the pattern.

The Valley is always at its strongest when it’s a counter-cultural force, which is why investors always talk up the deals that are made during economic slowdowns, when no one in their right mind would start a company. As mega-rounds keep flooding to pump up (often) mediocre tech giants, the Valley has now just become “culture.”

Tech companies are not only where billions of people on earth get their news, it’s what wins entertainment awards in Hollywood, and what controls elections globally. It is the center of financial, political and media power in the US. What tech wants has never been more dominant.

But amid those quarter-after-quarter record breaking numbers, we’ve seen a decline in seed and angel and seed funding. “Venture capital” is overrun by mega-deals, with most of that cash coming from Asia. Meantime, a lot of the hot money that was investing in seed and angel deals as the last wave is now flooding to crypto.

Beyond the overt toxicity of Valley culture— the sex in stairwells, the doxing of rape victims, the company-sponsored trips to Korean brothels, the stolen trade secrets, the memos arguing that women and people of color biologically deserve their inferior place in the ecosystem— there have been other damaging cultural ramifications of the unicorn wave.

One is that everyday employees aren’t making money. “There is an entire generation of people in Silicon Valley who have never seen people get rich of stock options,” said Precursor’s Charles Hudson to me recently.

If you can’t believe in either money or mission… why are you here?

The stories of the admin who worked at a startup and one day became a millionaire from stock options have given way to aspirational wealth stories like this one:

So as bros and quick profit seekers are distracted elsewhere, maybe-- just maybe-- this new startup primordial soup will be a reaction to everything that seems so toxic in tech now.

“If we just give up if we let these creeps have their way, we’re going to have another two decades of this,” Engeström says.

“There’s a necessity to being counter-cultural,” Fake adds. “Saying, ‘I am this and not that.’ If you are in the middle of love and hate, that serves no one. Social media has had a refusal to enforce values, and that’s extraordinarily important.”

Fuck yes.

I don’t think it’s overstating things to suggest that investing in more diverse entrepreneurs will necessarily change the culture. As Joan C. Williams wrote, in this unicorn era, the chasing of valuations at all costs was as much about chasing masculinity as it was about money.

That all starts with who is doing the investing. Some $84 billion was invested in startups in 2017. And women-led startups got less than 3% of the money. Startups led by women of color got some .2%. It isn’t a surprise that the ratio of female to male investing partners is 1 to 14. Firms with a single female investing partner are twice as likely to fund other women.

Fake calls seed investing the “most human part” of venture capital, because you are backing little more than an idea and a person. It’s “human” in good ways and bad ways. It’s also where unconscious bias seeps in the most, because there isn’t a check-list of qualifications VCs can use to vet deals. It’s about feelings and hunches. So all data predicts that more diversity in investors at the seed level will lead to more diversity in deals. And that alone will usher in a radically different era.

This playbook for how we create change is catching. Last week, Melinda Gates announced she was investing in female-run VC Aspect Ventures’ new $181 million fund. She told Fortune: “In many ways, the venture and startup ecosystem is still a boys’ club—one that all too often excludes, disadvantages, and mistreats talented women who want to contribute to it. The data tells us that’s harmful to society and bad for business.”

Reinforcing my earlier point, Aspect’s employee make up is 50/50 male and female and its portfolio reflects a similar balance. 40% of their portfolio companies are founded by women, and 30% are started by minorities. The demographics of who writes the checks matters greatly.

At $180 million, Aspect’s new fund is said to be largest female led fund in the US. It breaks a new record set by Rethink Impact when it announced a $112 million fund last year, with an open pledge not to be creeps. They too were backed largely by a more diverse set of LPs who want to see a different venture capital landscape with different values.

Starting your own funds has become a route to the Midas List: Kirsten Green and Aileen Lee have become two of the most successful female VCs in recent memory after starting their own funds. Susan Choe announced a new solo-GP $34 million fund called Katalyst.Ventures in recent weeks as well.

The media powerhouse Susan Lyne started a fund called Built By Girls. It actually has “girls” in the name. Can’t wriggle out of that investment thesis if you lose faith. She isn’t the only investor to telegraph a shift from rankling at being called a “female VC” to owning it. Sequoia’s first female partner Jess Lee embraces the presumed put down of being called a “girly investor,” and helped pioneer Female Founders Office Hours, where female VCs from a variety of firms band together to create a more robust pipeline of female-founded deals.

These are just a few examples. Already, we are seeing inklings of an impact. The percentage is still infantesimal, but all-female founding teams got $1.9 billion of the $85 billion invested in startups last year. That’s actually up from $1.4 billion the previous year, and is the second largest percentage of venture capital going to women led startups since Pitchbook started tracking the data in 2006.

Call it the “Fund #metoo” wave.

But Fake’s fund isn’t just exciting because she’s a woman. She is also an icon from an earlier era. The pre-bro days of Web 2.0 when there was no Softbank Vision Fund, there were no decacorns, and there was no raising a mega round so you could force your company into a market dominating slot by spending your way there. It was the days when you bootstrapped, when you relied on word of mouth and virality to grow, when you relished the lower cost of building a company and the decreased reliance on VCs that came with it.

At a recent event in San Francisco, another veteran of those days looked around the ballroom we were standing in and said, “Remember when the entire Web 2.0 industry could fit in this room?” I do. We are so far from those days, the industry feels unrecognizable.

As I’ve written since— well, almost the founding of Pando more than six years ago— investors and founders have been trying to talk Silicon Valley into a crash for a while now. VCs have watched with increasing unease as their companies continue to rake in all the money they need to keep going… and yet, remain in a sort of suspended adolescence of free-spending, no board oversight, and valuations that make little sense.

Some of the most successful companies of the era— Uber, Dropbox, Snap, Twitter, Pinterest— are in valuation traps that will be hard to unwind.

And increasingly, there’s a lack of belief. Facebook and Google were two of our most idealistic companies, hoping to bring the world into one big family and democratize information and “do no evil.” In the wake of Arab Spring, Twitter proposed to remake the world in a Democratic image. In the harsh light of 2018, employees of those companies are grappling with the idea that they may have ushered in a wave of xenophobia, racism and old-style propaganda instead. The best companies of the social media era are being called the new big tobacco.

And the idea that the Internet would lead to a more even playing field was flat wrong: We used to have a handful of broadcast networks controlling information and dominating the advertising markets. Now, we have Google and Facebook controlling more than 85% of the digital advertising market.

Making the world worse, making the world less competitive, and perhaps not even making any money off this wave of unprecedented paper value in stock.

It’s causing a lot of lifelong Valley managers to wonder what the point of all that 24/7 “crushing it” was. Look closely: One by one you are seeing Valley executives suddenly picking now to make some major lifestyle changes that absolutely, positively have nothing to do with the companies they are leaving, they just…. need to pursue some long-neglected lifelong passions like making their own sourdough bread, going on long road trips, becoming an artist, or just not wanting to work at, say, Uber anymore.

Nothing is crashing. Nothing is resetting. Softbank single-handedly has given a testosterone booster shot to the toxic masculinity ecosystem. But that’s mostly at the later stages. And companies like Uber and Snap and Facebook don’t look that aspirational if you are just startup up right now. Toxic masculinity alone cost Uber 20% of its valuation in 2017. And Uber is the best this wave has to show for all that “disruption.”

For a lot of us who were involved in this early on, it’s been like, ‘I can’t believe this is happening,’” Fake says of the rise of bro-culture and how it took over an industry she loved. An industry where she made her fortune. An industry she’s credited with helping create.

“This year it hit rock bottom,” Engeström adds.

For a reminder on Fake’s early impact on the Web 2.0 world, listen to this recent episode of Reid Hoffman’s podcast “Masters of Scale.” Hoffman tries to give her and the Flickr team credit for the social media era, but she rejects it. Fake argues those platforms treat users like a “customer service problem” when they have to interact with them, not engage with them like a true community. She takes issue with social media’s amorality, its allergy to taking a moral stance. Which is sort of a cowardly moral stance in and of itself.

In the episode, Hoffman details how Fake’s search for true communities lead her to invest in three companies that were huge wins (and ones that he passed on): Etsy, Kickstarter and Blue Bottle.

Fake didn’t actually realize how good her track record as an investor was. Initially when Engeström decided he was going to raise a fund, Fake was just going to be an advisor. But once she actually put together a spreadsheet of her angel investments, she changed her mind. “Move over, I’m joining you as a GP,” she said to him.

Indeed, a TechCrunch story on the new fund dug up an interview from ten years earlier where recruiters talked about how impossible it was to get Fake to take a job as an investor. “I felt like being a VC was too far outside the company,” she says. “I didn’t want to be in the stands.”

But it wasn’t just that. She hated what community online had become. “We are in a shift right now,” she says. “This shit is just coming down finally. If we don’t step up, we’re going to have more of the same shit. It requires that people get involved who are the change the want to see.”

All may not be lost. As Fake and I talked about entrepreneurship and the Valley, we got sidetracked talking about our daughters and their places in the broader toxic masculinity of the world. She says that one reason she’s always been so outspoken, always been one of the women that could navigate and find her way in Silicon Valley and demand what she was due, is because her mother raised her “as if she’s living in the world (she wanted) her to live in.” She’s raising her tiny badass daughter the same way.

“When I experienced injustice, I had great outrage, because it wasn’t how I was raised to think the world was,” she says.

Her description of a confined part of the world that isn’t awful, that you can control, struck a chord with me as a mother and a founder. At the end of my book, I describe my Victorian in the Mission as the only “control” I found in my research and travels where a patriarchy didn’t dominate what boys and girls needed to be. And last week, I wrote about how my new company Chairman Mom believes so fervently that working moms are the most badass force on the planet, that we prove it with our maternity leave benefits.

Even in 2018 Silicon Valley, there are parts of this place that aren’t awful.  

“We need to take the part of it that is not hell and expand its borders,” she says.