Innovation Blog

The Path Forward, Not Backward for Venture Capital Funding


The release of second quarter 2020 PitchBook data highlighted a visible “retreat to the known” in both venture capital fundraising and in deals activity. In an industry that is starkly white and cisgender male with the tendency to fund other white, cisgender males, a further retreat to “the known” will put at risk the recent – albeit minimal – gains in venture capital investment in female founders and will further exacerbate the staggering racial inequity in venture investment in founders of color.

During this time of unprecedented uncertainty, the common investor sentiment is flight to safety. But, the fact is that what feels safe is likely to be heavily influenced by what feels known. This means investors aren’t fleeing to safety but more likely similarity.

We all know this by now: venture capital has a notorious funding problem. Venture funding for female founders hit the tragically low, all-time high of about 3% in 2019. Black founders have yet to receive more than 2% of venture funding. A further “retreat to the known” threatens to derail the limited gains – actualized and intended – in the venture industry at a time when it should be doubling down.

Leading venture investors know that crisis is actually the ideal time not to tread water but to go on offense: accelerating risk-taking, rebuilding business models, rethinking investment theses. Emerging research shows that diversity is a yet under-realized catalyst for outperformance and value creation. This is a is a long-term strategy – HBS professor Francis Frei describes at least three stages of organizational transformation to achieve the level of diversity-performance that actually drives outperformance. Now is the time to engage in this transformation.

The dialogue within the investment community has been signaling intent – intent to be less white, less male, more equitable. We have seen the rise of a new generation of general partners building their investment strategies at the intersection of diversity and value creation. So what’s with this “retreat to the known”?

Why a Venture Funding “Retreat to the Known”

I can tell you that it’s not based on pipeline: out of MassChallenge’s 2020 100+ early-stage ventures more than 50% have at least one female founder and more than 20% of companies have at least one founder of color. BCG analysis of MassChallenge data shows that our startups with female founders out-perform peers on revenue over time*. This is consistent with non-MassChallenge specific research on how diverse teams out-perform. To pick just one, a separate BCG study founder diverse teams have 19% higher revenue due to innovation. A Kauffman Foundation study found that ethnically diverse teams return 30% more to equity holders at a successful exit. (*BCG’s analsysis at the time was specifically focused on female founders. As a result, this analysis did not look at other groups of under-represented founders.)

There isn’t a pipeline problem, there isn’t a talent problem, there isn’t a performance problem – it’s a funding problem. A funding problem that will get worse if investors do not take action to challenge how they work.

I am a white cisgender woman. I am not a founder. I cannot claim the lived experience of female founders and founders of color seeking to raise venture funding. But, as the Managing Director of MassChallenge Boston, I work with founders every day to help them overcome the enormous challenges they face in starting and growing a venture.

Areas for VCs to Focus

We worked together to compile a set of no-excuse recommendations on behalf of the founders that funders too often overlook. These are concrete process-focused steps that are LP-proof. They are relevant whether investors are motivated by their values (which I hope they are), managing risk (which is prudent), or a believer in the data connecting diversity to value creation (which I am).

To be clear, these are not the end state, they are probably more like table stakes.  They do not sufficiently distinguish between the effects of systemic racism faced by founders of color versus gender bias faced by female founders.  And, they are far from sufficient to alone drive change in behavior or funding outcomes.

We still need, as one example, the long-term commitment of angels and VCs alike to change the composition of the investment team to reflect the diversity of ideas, customers, leaders out in the world. Nevertheless, these are actions that can be taken today – that start to question, dismantle and rebuild for better an industry built on pattern recognition and networks:

Deal Sourcing

Intentionally and systematically build relationships with exceptional diverse founders. Join networks like Valence Funding Network to make yourself directly available to black founders. Look hard at your screening criteria and at least flag, if not remove, the criteria that are likely to prefer the “typical” founder profile (e.g. referred within your network, previously raised funding). Increase the number of founders you formally or informally mentor with eye towards founders with backgrounds that aren’t familiar.


Educate your team on the research which has shown the effect of bias on both pitching and the related Q&A. This article in HBR poses a provocative question you can ponder – but in the meantime, read and acknowledge the relevant research. Get diverse representation in the room for the pitches, even if this means by leveraging advisors while you tackle the necessity of building a diverse investment team.

Due Diligence

Take a look at how you ask questions and question assumptions that don’t have data. If you tend to “invest in the founder,” examine the criteria you use to assess the founder and the weight you put on indicators of “social capital” which are known to introduce bias.

Portfolio Management

If you aren’t already, track data on founder, Board, executive, and startup team demographics throughout your pipeline. The data will likely be ugly. Own it. Care about it. Report on it internally. Use it to ask questions about where in your process you are losing out on the teams, talents and technologies that should be on your deal sheet and driving performance post investment.  And then, as MassChallenge Boston Board of Advisors and CEO of NEVCA, Jody Rose and Jeff Bussgang, Partner at Flybridge laid out in their Boston Globe article this spring: #HireorWire.

Support the Community

Contribute to a stronger, more inclusive entrepreneurial by getting involved in your community with your time, talent and treasure. In Boston, for example, investors can mentor at MassChallenge or advise emerging founders through the Roxbury Innovation Center.

More Is Better

These are mere first steps that any investor can take to strengthen their investment processes now. We challenge investors to take any one of these concrete steps (more is better) and to let us know.

We also challenge funders to see these process-oriented steps as initial scaffolding only. Look hard at the data that connects diversity to performance and look hard at your own investment strategy and team. Unleashing the power of funding diverse founders, building diverse teams requires active commitment and long-term strategy. However, we believe those that are ambitious now will redefine top tier performance in years to come. Don’t get left behind by retrenching now.

This article reflects the input of MassChallenge founders and community members who generously contributed their own experiences, challenges and perspectives. MassChallenge is a global nonprofit which directly supports over 400 high-growth startups a year. While many (the majority) prefer to remain anonymous, I am able to acknowledge several:  Madison Rifkin, Diane Quinn, Evaguel Rhysing, Erik Bullen, Katie Hall, Megan Bent. 

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