How VCs Can Actually Support Diverse Founders

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Hey Shifters!

2024 was another year of a dismal set of statistics for underrepresented founders:

• Women Founders - In the first half of 2024, startups founded by women received only 2.2% of capital invested in all venture-backed startups in the United States.

• Black Founders - Black founders in the U.S. received only 0.48% of all venture dollars allocated in 2023.

• LGBTQIA+ Founders - Between 2020 and 2022, only 0.5% of the $2.1 trillion in startup funding was raised by LGBTQ+ founders.

(I tried to find data for other underrepresented groups like Latinx or people over Age 50, but there’s not much available, which is probably a sign that the stats are even worse than what’s shared above.)

The question is: Will this ever change?

The pessimist in me says probably not.

But if venture capitalists actually want to improve diversity (big if), here are five things they could start doing in 2025.

1. Ban the Warm Intro

I wrote about this recently, but it bears repeating: the warm intro system is fundamentally broken.

You can't get a warm intro if you don't know someone who can make that introduction. I was lucky – I'd worked in tech and built a network through LinkedIn. But what about founders breaking into tech, living in remote locations, or earlier in their careers? These are often the people solving the most critical problems.

When VCs rely solely on warm intros, they see the same types of companies and founders. This leads to overcrowded spaces and copycat startups while real, unique problems go unsolved. The most innovative solutions often come from founders who've experienced firsthand the issues they're solving. When access to capital requires social capital, we leave money on the table.

2. Be Direct with Your "No”

VCs are notorious for disguising their no’s. Instead of a clear rejection, you get:

• "Let me know when you have a lead investor"

• "You're too early for us"

• "Keep us updated on your progress"

I've received all of these responses, which all meant the same thing: no.

While raising for Chezie, I spent weeks following up with VCs who had already decided they wouldn't invest. Every follow-up was time I could have spent either building the business or talking to investors who might write a check.

Underrepresented founders are already at a disadvantage regarding fundraising resources and access. Therefore, the quicker we understand it's a no and move on to other investors, the better.

Look, I get it. Nobody likes delivering bad news. But if you're going to pass, pass. Send a quick email saying, "Thanks for sharing Chezie with us. After reviewing, we don't think it fits our fund because [reason]."

Is that so hard?

3. Give Real Feedback

Even when they passed, the best VCs I've worked with gave honest, actionable feedback about Chezie.

Here's an example of feedback that I received from Andrea Funsten, a former partner at Alumni Ventures.

If you’ve raised VC before, you know an email like this is exceedingly rare. I would show you what the usual investor feedback looks like, but the usual feedback is no feedback at all.

What makes investor feedback valuable is specificity.

• Instead of "your metrics aren't quite there," tell us which metrics matter to you and what benchmarks you're looking for.

• Instead of "too early," tell us what milestones interest you.

It doesn’t need to be as detailed as what Andrea wrote. Just a few bullet points will suffice. Also, you don’t need to give feedback to every founder you turn down; prioritize the founders you took the time to meet with.

Feedback helps underrepresented founders improve their pitch and understand what investors seek. It takes time, yes, but it's an investment in the ecosystem.

4. Look Beyond SF and NYC

When VCs focus only on major tech hubs, they're essentially saying they only want to invest in founders who can afford to live in cities with astronomical costs of living.

The math doesn't work for most founders. For example, assuming rent in SF or NYC is $4,000/month, that’s $48000/year just for housing. Once you add basic living expenses, we’re looking at $80k post-tax to survive.

This automatically excludes founders who:

• Have families to support

• Don't have the privilege of living off savings

• Need to stay in their communities to be close to loved ones

• Haven’t raised VC and don’t yet have the funding to pay themselves enough.

Some of the biggest tech companies weren't built in SF. Mailchimp (Atlanta) sold for $12B. Calendly (Atlanta) is worth $3B. Duo Security (Ann Arbor) sold for $2.35B. Investors who don’t actively look for deals outside of Silicon Valley will miss out.

5. Invite Diverse LPs Into Your Funds

if you want to fund diverse founders, start by diversifying your LP base. Most VC funds are funded by university endowments, family offices, institutional investors, and/or high-net-worth individuals.

The problem is that these sources tend to look exactly like the founders getting funded. It's not a coincidence.

Working with underrepresented LPs would have four potential benefits:

1. They bring different networks. They have access to networks of talented founders that traditional VCs would never meet

2. They understand markets that traditional VCs often overlook or undervalue

3. They can better evaluate opportunities in communities they're connected to

4. They can become VCs themselves, creating a pipeline of diverse investors

In full transparency, I am not totally sure how sourcing LPs works for venture capitalists raising funds, but if it’s anything like the VC → startup funding pipeline, then there’s room for improvement when it comes to diverse representation in LP bases.

Will Any of This Happen?

Similar to what I wrote about banning warm intros, VCs are unlikely to implement any of these changes because it would mean changing systems that work really well for them and their existing networks. It might cost them some traditional deal flow and require more work.

So, long story short, no, it won’t happen.

But I can dream, right?

Maybe in 2025, we'll see some brave firms try something different. Until then, we'll keep building, growing, and finding ways to succeed despite the barriers.

See you next year,

Toby

P.S. - If you're a VC or know a VC who would like to discuss these ideas, reply to this email. Let's talk! 🤝🏾

P.P.S. - (Quick heads up - the newsletter schedule has been a bit off for the last couple of weeks due to the holidays. I’ll be back on my Wednesday at 9 am ET schedule starting next week.)