Sara Choi, a biotech investor and partner at Wing Venture Capital, has invested in nine companies led by women or people of color. But she is not motivated by altruism. Choi is trying to make money.
“I gave these founders a chance, and they are providing me and my company with remarkable success,” says Choi. “It’s not just charity.”
Industry data shows a persistent lag in VC funding to companies led by women or founders of color. A report published last year by the Alan Turing Institute found that AI companies founded by women accounted for just under 3% of venture capital deals in the UK over a 10-year period to 2022.
Black founders often receive a similarly small percentage of funding from VCs. And a more cautious tone about investing in diverse founders has emerged in the wake of a court case involving the Atlanta-based Fearless Fund, which invests in businesses led by women of color but is facing a lawsuit alleging discrimination because of this mission.
Choi says founding a company and raising money requires specific skills, and that mentorship can help new founders. “But the problem is: Who might have insider knowledge?” Choi asks. “It’s the people who come from these backgrounds and privileges, I dare say, who could then coach the next generation on how to successfully do things that are discrete skills, like fundraising.”
“Venture capital is a pattern-recognition business,” says Joy Marcus, cofounder of The 98, an early-stage venture capital firm that has raised nearly $10 million to invest exclusively in women and technology. “And we don’t have the model of women starting businesses and getting funded by venture capital firms. We have role models that venture capital firms are ignoring: women are very, very successful leaders.”
Two of the female-led AI companies in The 98’s portfolio are Private AI and Stratyfy. Marcus says that because women-led companies don’t receive as much funding as those founded by men, they tend to be undervalued. He points to statistics that consistently show that having women on leadership teams results in stronger business performance.
“We have this sort of club of venture capitalists that fund people like them, and it’s a high-risk business, so it’s really hard to break out of that mold,” Marcus says. “But on the other hand, they are ignoring the data.”
Lately, venture capital funds are flowing in a more inclusive direction. Women-founded companies generated a record 22.8% of total venture capital deal value last year, according to PitchBook data, excluding OpenAI’s massive $10 billion raise by by Microsoft. 2023 also saw a record number of private equity firms owned by women and minorities raising capital.
“First and foremost, a venture capital firm’s job is to make money,” says Chris Cunningham, founder and managing partner of C2 Ventures. “By limiting the number of people you talk to, you are potentially limiting [the] greater opportunities to maximize returns”.
C2 Ventures invests in early-stage companies operating in the “dirtiest, dullest, most dangerous” verticals, Cunningham says. VC investments include makers of robotic bathroom cleaning devices and dental supply software. And while half of the founders of C2’s 45 portfolio companies are women or people of color, that level of diversity was never an intentional intent.
“Whether it’s robotics, manufacturing, legal, technology or waste, the founders have already addressed these main points and are using AI, which we love, as a way to create greater efficiency, speed, make money and save money,” , says Cunningham.
Kanjun Qiu has a unique perspective as a founder and investor. He is the CEO of Imbue, a San Francisco-based AI lab that has raised more than $230 million from investors such as Nvidia, the Amazon Alexa Fund, former Google CEO Eric Schmidt, and a partner at Outset Capital, which invests in early-stage startups.
“The technology we build reflects the values of its creators,” Qiu says. “There is a much more humane way to think about developing this technology, in a way that empowers people.”
Qiu founded his first company in 2015 and has noticed a positive change in the tone of his conversations with investors, citing a greater cultural awareness of diversity, which has led to discussions that flow more naturally today. Underrepresented founders can face some challenges in the way they present, Qiu explains, sometimes not stating the magnitude of their goals strongly enough. It may be about culture, as Qiu references her own experience as a young woman that she felt she needed to prove herself more before asking for millions of dollars.
“And investors will hurt people for it,” Qiu says. “They’ll say, ‘Okay, this isn’t big enough.’”
The founders also wondered who would benefit from AI if all the money flowed in a predominantly male, predominantly white direction. Take the example of Tali AI, a virtual assistant for medication dictation that offers transcription in English, Spanish and French. Large language models are more advanced for European languages, and Tali AI is expanding to make the tool available in Arabic and Hindi, for greater inclusivity.
Doctors waste more than 15 hours a week on documentation, says Mahshid Yassaei, founder and CEO of Tali AI, resulting in doctor burnout. This can be facilitated by decreasing the amount of time spent on administration and allowing for more direct care with patients.
“When you have a more holistic view and see the nuances and edge cases of the technology or service you offer, you essentially have the power to support a much larger group of users,” Yassaei says.
Ellie Cunningham, chief operating officer of interior design tools company Canoa, sees things similarly. She believes that in the best use cases, AI allows workers to speed up tedious tasks and allow more time to work on the aspects of their job that they enjoy. “If we don’t bring investment into all types of industry sectors, some groups will end up being left out of those efficiencies,” she notes.
Interior design is a predominantly female-led industry alongside construction and architecture, which are much more masculine and also tend to get more support from VCs. And while we recognize that construction is a larger market globally, there is value in investing more in design.
“I don’t think there’s any active discrimination in terms of investment dollars and capital flowing in,” Cunningham says. “It is a symptom of a chronic underestimation of opportunities in markets that may be skewing more towards a marginalized majority in terms of workers.”
Lorenzo Thione, managing director at Gaingels, says the New York-based VC has a strong affinity for investing in diverse companies, including LGBT+-led startups, but it’s not a requirement. Thione also helps startups in Gaingels’ portfolio build a more inclusive organization in three key areas: leadership, governance and capital.
“Because of the reputation and goodwill we have built, many different founders find us naturally and know that there is a path to being listened to and listened to more than there would be if they cold-applied to some other venture capital firm,” says Thione But, he adds, “this makes no difference in how we value companies and how likely we are to invest.”