A Model Framework for An Equitable Venture Capital

Below is a draft framework towards an equitable venture capital (VC) industry.

Please note:

  1. The word “equity” is used frequently lot in this post. The primary meaning of equity in VC refers to ownership in private companies. In this post, “equity” refers to economic fairness and justice for all people.
  2. This framework is modeled from Praxis’ Redemptive Entrepreneurship. In the Redemptive Frame, redemptive entrepreneurship is not a destination; instead, it is an outer edge that companies strive for.
  3. Similarly, in this proposed framework, pure equity is not an achievable destination — based on the complication of systematic layers of venture capital, society, and racism. Equity is at the outer edge of the framework, and we work towards it as we eliminate the multitude of systematic barriers.
  4. I may re-write this blog post multiple times in the future to clearly articulate this vision I see in my head. Please send me your questions and comments to help me refine this post.

Equity is not Impact

There are two models of venture capital frequently compared when discussing equity — Impact Investing vs. Everything Else (Traditional VC/Returns-driven). Impact investing is defined as investments into companies with a measurable impact on the environment or society, alongside financial returns.

The discussion of equity within venture capital gets grouped and capped within the ‘S’ (society) in impact investing. However, the entirety of venture capital influences equity and the disparities created by its absence. Also, the current definition of impact investing is in direct conflict with the fundamentals of equity.

Impact Investing Frame

Impact investing measures two separate planes, returns and impact, and attempts to maximize for both. There is a perception that impact competes with returns. When optimizing for returns, there is a trade on impact. When optimizing for impact, there is a trade on returns. This is what we believe in Impact Investing. However, equity is not a tradeoff metric against financial returns. On the contrary, it is rooted at the core of financial returns. Therefore, equity cannot be impact.

A Framework For An Equitable Venture Capital

3 Dimensions of Investing: People, Operating Model & Capital Allocation

We should focus on three dimensions of investing, PeopleOperating Model, and Capital Allocation for an equitable venture capital.

People focuses on the demographics and diversity of venture capital. Questions to ask: Who is investing? Who profits from the investment?

Operating model focuses on policies and procedures. Questions to ask: What policies and procedures influence deal flow? What policies and procedures influence how we make decisions in funding?

Capital Allocation focuses on where the money is going. Questions to ask: Which founders are receiving funding? Which founders are not receiving funding? Which type of businesses are receiving funding? Which businesses are not receiving funding?

3 Types of VEnture Capital FIRMS: Current State, Intentional, & EQUITABLE

The long-term goal is to identify the types of venture capital firms and provide a framework for self-assessment and tools supporting the industry in its advancement towards equity. In the future, I will provide examples and best practices for each type of venture capital firm across each dimension: (People, Operating Model, & Capital Allocation).

Current State. The Current State VC accepts traditional norms and practices of venture capital. It analyzes historical returns and forecasts similar results without input and context of changing demographics, politics, and cultural shifts. The Current State VC lacks tools and accountability to self-assess in biases, discrimination, and harassment.

Intentional. The Intentional VC is aware of shifting demographics and culture changes. It is also aware of the dangers and financial risks of unchecked biases and power dynamics. The Intentional VC has created pledges and carve-outs to support advancement towards equity. The Intentional VC views equity as standalone initiatives separate from the fiduciary duties of its organization.

Equitable. The Equitable VC views equity and its fiduciary responsibilities as one and inseparable. It strives to uncover, identify, and eliminate barriers that limit access from disconnected communities, as removing barriers increases venture capital markets’ growth.

Example Radar Chart for Mapping On the Equitable Framework

to be continued…

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About Hadiyah

Practicing loving God, neighbors, and myself daily. Leveraging venture capital to advance racial equity at HBCUvc.