* The ongoing nationwide protests over racial injustice and police brutality have forced Silicon Valley in general to confront its own history of racial exclusion.
* The venture industry in particular has a poor track record on race; only 3% of investment partners and just 1% of founders of venture-backed firms are black.
* The industry has a systemic problem that extends from who it hires for entry-level positions to the investors who serve as limited partners to venture funds, said Charles Hudson, the managing partner of Precursor Capital.
* Hudson is hopeful that the present moment will spur the industry to change, but to do so, it will have to confront and address many of its long-standing practices, he told Business Insider.
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The protests over the killing of George Floyd and police brutality have sparked a nationwide conversation about systemic racism and exclusion, up to and including inside the insular venture capital industry.
People inside and outside the industry have been calling out the venture business's lack of diversity both in terms of the people it employs and in terms of the people in which it invests. In response, at least two firms — SoftBank and Andreessen Horowitz — have announced new funds that will be charged with backing startups founded by African-Americans or people from other under-invested communities.
For Charles Hudson, the venture industry's diversity problem isn't at all a revelation. Hudson is one of the exceedingly few black venture capitalists in Silicon Valley. And as the managing partner of Precursor Ventures, he's also one of the rare investors who made it a point to seek out and back black, Latino, and female founders long before the recent demonstrations.
Hudson is hopeful the present moment will lead to real change. But getting to that is not going to be easy and is going to require the industry to take a hard look at itself and its traditional way of doing business.
"There's a lot of positive awakening going on where people are seeing problems that I think both black entrepreneurs and black investors have seen for a long time," Hudson told Business Insider this week. "I think the flip side, though, is I hope some of these firms realize how far they have to go."
The venture industry's diversity problems are systemic
The tech industry in general has a long history of excluding black and Latino people. But the venture industry in particular has been even worse. As of 2018, African Americans comprised just 4% of all employees of venture firms and Latinos only 5%, according to a study released by Deloitte and the National Venture Capital Association. Among investment partners, just 3% were black and 3% were Latino.
Meanwhile, only 1% of founders of venture-backed startups were black and just 1.8% were Latino, according to a study released last year by RateMyInvestor and Diversity VC.
Venture's diversity and inclusion problem extends to all levels of the business, Hudson said, from the limited partners who invest in venture funds to the kinds of people firms hire for entry-level positions.
The kinds of people and institutions who serve as limited partners haven't made diversity a priority, he said. They generally don't pressure mainstream venture firms to invest in black or other founders of color.
Instead, the venture industry as a whole seems to have outsourced the problem of investing in people of color to the very few black or Latino-led firms like Precursor, he said. But limited partners generally haven't made it a point to back those firms or give them a whole lot of funding.
Base10 Partners is the only black-led venture firm Hudson is aware of that has more than $50 million in assets under management; it has about $137 million in investments and commitments, according to PitchBook. Precursor has $31 million, according to PitchBook. By contrast, SoftBank's Vision Fund — a single investment vehicle — had $100 billion in assets and many other VC firms have multiple funds that each have at least $100 million in assets.
"If the default is most of the money that goes to this class of entrepreneurs is going come from people of color and people of color in the investing world don't have much capital, you're not going change anything," Hudson said.
Most VCs likely don't know many black people
But venture businesses diversity problem extends to the way the people who manage the firms have typically gone about finding founders and companies to invest in, he said. As other venture industry critics have pointed out, the industry has long been a kind of closed system. Venture investors tend to be white men who went to prestigious colleges such as Stanford or one of the Ivy League schools and frequently are former startup founders themselves. When they decide on entrepreneurs to back, they often are consciously or unconsciously looking for people like them — white, male, and well-pedigreed.
In recent years, the industry has become somewhat more open to Asian people and to women in both founder and investor roles. But that general hasn't extended to black or Latino people. And a big part of that is that the people who run venture firms likely don't know many such people and aren't encountering them in the places they look for new founders or employees, Hudson said. Stanford and other prestigious schools are typically not very diverse places. There are few black and Latino founders of venture-backed startups. And the bigger tech companies have long done a poor job of hiring and promoting black and Latino people.
"I think a lot of investors, they don't have regular or professional associations with black people," Hudson said. "If you're not meeting black founders, if you don't have black people in your social and professional network ... you're just not that likely to find them, if you only look in the places where you already know to find companies."
And the industry's insularity extends to its own hiring practices, he said. The criteria venture firms use for new employees is typically similar to those they use for founders. There's just aren't that many black people or people of color who are former venture-backed founders or who have worked in a position of authority at a top tech company and also attended a prestigious university and are interested in being a venture capitalist, Hudson said.
"That's really small overlap," he said.
To fix its diversity problem, the industry needs to address those kinds of standard practices and mindsets, he said. And there are good business reasons to do so, he said.
Female founders have opened the eyes of many VCs
Numerous studies have shown that diversity is good for companies' revenue, profits, and return on investment. Having people of different backgrounds on staff opens companies to new markets and new products and helps them address concerns that they likely wouldn't have recognized otherwise.
And the venture industry knows this first-hand, Hudson said. In 2017, Susan Fowler sparked a long-needed reassessment in Silicon Valley of how it has treated women when she wrote publicly about her experiences with sexual harassment at Uber. Following Fowler, numerous women in the industry came forward to talk about their own experiences.
In reaction, tech companies and venture firms ousted certain executives and investors, and many vowed to make changes. In the venture business in particular, there has been a significant uptick in the number of female investors, venture firms with women on staff, and investment in female-founded firms. While still a distinct minority in the industry, those female investors and founders have helped open eyes at venture firms, Hudson said.
"I think people have been pleasantly surprised by the quality of female-founded companies that were overlooked for decades," he said. "People are like, 'Wow, we can't believe that we invested this way before, that we systematically excluded this large group of people. We missed out on a ton.'"
He thinks the venture industry is in for a similar revelation if and when it gets serious about investing in companies started by black and Latino founders.
"As people spend more time with black and brown founders and provide them with capital, they're going to have [the] same a-ha moment," Hudson said.
Beyond the business opportunity, though, backing such people is just the right thing to do, he said.
"This is a missed opportunity, and it's also a justice issue," Hudson said. "It can't just be about ROI. "Some things are bigger than that."
Got a tip about the tech industry? Contact Troy Wolverton via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
* Read more about diversity in Silicon Valley:
* A diversity consultant says real change may hit the tech industry due to the George Floyd protests and the coronavirus crisis. Silicon Valley hasn't changed much after past scrutiny, but this time could be different.
* 'THIS IS NOT A CHARITY': Andreessen Horowitz defends itself against the criticism surrounding the size and structure of its new nonprofit fund
* SoftBank commits $100 million to invest in companies led by black Americans and people of color: 'We need to do better'
* 'Words by themselves are empty': Andreessen Horowitz is launching a new nonprofit fund to invest in founders that 'lack the typical background and resources' to get on Silicon Valley's fast track to success.
SEE ALSO: Silicon Valley billionaires are lining up to condemn racism. But the tech and VC industry has a shameful, decades-long history of ignoring and perpetuating inequality.
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