Just about every company has a statement to support diversity. Some have programmes to increase minorities and women working for the business. That’s admirable, but a venture capital firm is putting up the money to make a huge difference.
Los Angeles-based Backstage Capital is entirely focused on two things: making money (of course) and investing in underrepresented founders. Arlan Hamilton founded the firm nearly three years ago while she was homeless.
Hamilton believed it made no sense that 90 percent of venture capital goes to back white men. So, she did something about it. Investing in women, people of colour, and members of the LGBT+ community not only helps the founders get their startups off the ground, it’s a great business opportunity that many other firms miss.
The businesses Backstage invests in are as diverse as the founders behind them.
Blendoor is a recruiting tech firm that helps companies hire a more diverse workforce by removing data that cause unconscious bias through AI. On Second Thought developed a way to let people “unsend” text messages. Solstice Energy Solutions focuses on emerging markets with their IoT-based system to improve energy usage in buildings. Meanwhile, Airfordable allows passengers buy flight tickets earlier when they’re less expensive and pay for the airfare over time.
The initial goal was to invest in 100 companies by 2020. They reached that this year. Now, they’re onto the next big plan: a $36 million fund to back black female founders.
Director of the Deal Flow Team at Backstage, Brittany Davis, says despite the common thought among many investors that it takes a lot of work to find diverse startups, the opposite is true.
There are now so many startups reaching out, her team acts as a filter for firms coming down the pipeline.
Davis has a unique viewpoint: a Harvard MBA with five years spent at Bank of America who launched her own startup before working for Village Capital and #Angels, an angel investor. She spoke with the Dublin Globe at Inspirefest in Dublin in June.
Dublin Globe: Take us through how your Deal Flow Team works within Backstage.
Davis: They were noticing that though our pipeline we are getting a lot of access to founders. How do we essentially scale our ability to make decisions on investing in more and more companies. We actually have a whole team now doing it. Everyone has a totally different background. It’s so interesting to see everyone’s kind of thoughts and opinions when we all evaluate different opportunities.
Dublin Globe: For a startup that’s reaching the phase where they’re looking for investors, they may not have business backgrounds. Many Irish startups spin out from university research. What should they be looking for to have the right venture capital, the right firm, the right team?
Davis: They should look at who they think would be a fit for them as well. They really should be looking at people who, at least VCs, who are looking to support them in their vision. [The VC should] understand why they’ve built this company, why it’s important, and what their vision is. I feel like that’s something that we spend a lot of time doing at Backstage. Sometimes even in the early parts of our conversations before diving into someone’s company, I’ll even just ask, “tell me about yourself and why.”
If you’ve started a company you’ve kind of committed to leaving a certain lifestyle, potentially, or quitting a job, and putting everything into this one project. Why are you doing that? So I think as an entrepreneur you should hopefully want to connect with an investor that wants to understand that and really wants to be on that journey with you. Because it’s a journey. You’re essentially becoming a partner with your investor. They’re going to be a part of your company, and part of your success, and also part of when the shit hits the fan. So you want to have someone who really is is down for that whole ride. Really understand who your investors are and look to see if they’re trying to understand you as well.
Dublin Globe: You’re looking at the pipeline, like the plumber, looking at everything coming down the pipeline. Obviously some startups are going to stand out as better prepared or more ready. What are some of the qualities you think that startups should have that some of them don’t have quite yet?
Davis: I’m focusing this whole conversation really on pre-seed and maybe some seed stage companies. These are your first few investments. It’s really about telling your story. Again every VC probably will approach this a little differently. I think storytelling can not be understated. I feel like some founders still need to connect those dots a bit more clearly to an investor. I’ve heard this concept within investing called founder/market fit. So there’s product/market fit which I think most people have heard of that one. So essentially even before you were really building your products in market yet, you should prove you are the right founder to be solving this market challenge.
We’re constantly digging into that. If you’re not making it abundantly clear that you’re the one that should be doing this, it’s really hard to build a case for it. From a VC perspective, I should be walking away from that meeting saying this person has to be doing this. Whoever is going to win this challenge in this space is this person, because they’ve spent years in this career field or they had this personal problem and they quit their job and have been researching this for years and are now you know investing everything they have into this problem. Communicating that story is probably what resonates with a lot of investors in the early stage. You’re really betting on that person. The product will iterate a little bit and what probably have some pivots but is it that person that can solve that overall market challenge is really what we’re trying to solve for.
Dublin Globe: What do you think makes the difference for Backstage in that case?
Davis: I think, especially in the Valley, it might be a little bit easier to get caught up in some of the trends that are going on, like block chain for emojis or whatever. There are a lot of hype companies. I think we really do believe in that founder’s story, and particularly the founder that can overcome a lot of things. We look for that grit. In Arlan [Hamilton]’s earlier days she was saying she was really looking for someone essentially like her, in that sense. She went through a lot to raise this fund. And just seeing her story, she’s also pulling kind of those types of characteristics. Would [the founders] do all of that to get their vision realised?
One of our other things is that we really back really scrappy founders. We’re a small check investor. I think in our first fund our average check size we range from about $25k to $100k. We want to make sure that that amount is going to go far. If you’re the type of founder that can take a dollar and make it ten dollars. There are some times where you know you’re not going to have a lot. Can you get your product to market without having to hire an entire expensive research and development team? Typically underestimated founders are also more creative about spending resources. So if you don’t have a lot of growing up or maybe you have had challenges in your life financially or even otherwise. If you’re up against a lot you tend to do a lot with less.
You’d be surprised to see like what comes out of that company versus typical Silicon Valley type of company.
Dublin Globe: I was just out in Silicon Valley two weeks ago, and I interviewed Irish entrepreneurs. The ones who went out there were saying they had to go [to San Francisco] because that is where the money is. You guys seem to be at least making a little bit of an effort looking at other parts of the U.S.: Chicago, Detroit, Philadelphia. Tell me about that.
Davis: We believe that good opportunities can come from anywhere. There’s definitely some ecosystem components. But, we really feel like with our network, and all that we kind of provide, we do feel like we can be helpful to companies that might be not in the most active startup community. We can still have mentors. We have a whole platform of services that we offer our founders. So, I understand we’re some VCs might think like if I invest in a company in some middle state in the U.S., how are they going to grow as quickly if they don’t have the startup ecosystem infrastructure in the city itself. We think we can really provide that. I really do think there is some layer that I think that we’re building into our fund. We do the different types of educational content there’s a lot of things I think we’re trying to layer in that. We feel confident in investing in people across particularly the U.S. in non-core startup markets outside of the Bay in New York.
But a lot of VCs are just missing it honestly due to think laziness, just being totally honest. Because it does require a bit of work. If you’re in the Bay Area, it’s easier to invest in companies that are in your neighbourhood. It just is easier, and there’s a lot of them there. But then you’re missing out on really good opportunities that even make economic sense. If you can invest $100k in a company in the Midwest, those dollars go farther in terms of hiring comparable talent and even just office space. Everything is quite cheaper in areas that are not New York or the Bay Area. So that’s another thing that I think people are kind of not really really seeing the opportunity there.
There are hubs of different industry [too]. It’s interesting to look at different startup ecosystems outside of those areas to understand what’s coming out. I think there was health [innovation] happening in Nashville and Houston: very specific industry innovation that isn’t happening in some of the Bay Area. That’s interesting thinking globally. I think you really do have to just open your mind in terms of seeing what innovation is happening in other places because I think the profile of a Bay Area startup, yeah it’s not as diverse as the whole world.
What do you think? How can venture capitalists seek out more diverse founders and startups from different locations? We would love to hear from you! Tweet us @DublinGlobe or mail firstname.lastname@example.org.
— Liza Donnelly (@lizadonnelly) June 22, 2018