DAOs: Redesigning VC to capture the $ trillion opportunity of diverse founding teams

Executive Summary

  • Diverse founders are a massive and overlooked opportunity 🤑
  • Venture Capital (VC) is broken: funds and their investments are not diverse
  • The diverse founder pipeline is NOT the problem. 👨‍💻
  • The lack of diversity in funds is due to pervasive structural barriers 🚧; hurdles we faced ourselves 🙇🏾‍♀️  
  • A swarm of diverse investors is needed to redesign VC 🔧 from the ground up
  • Community-led 💡 funds offer a simple, scalable solution to capture the multi-trillion $ opportunity.
  • With FTW.DAO, we are building a hive to find 🔎, fund 💰, and foster 🌱 diverse founders

Authors: Isla Munro-Hochmayr and Benjamin Hoelzl

Diverse founders are a massive and overlooked opportunity 🤑 🤯

Diversity in all its forms is a strong indicator and/or pre-condition for future success. There is not just one type of founder that is better than the other. Leaders who are leveraging talent from the widest pool, and hiring the best talent for their companies will ultimately prevail over those who don’t and many studies - from McKinsey to BCG, Harvard, and the World Economic Forum - have confirmed this: the business case for diversity is overwhelming.

Diverse-led start-ups achieved higher revenue and delivered more than twice the financial return on each dollar invested, despite receiving less than half the investment dollars that their non-diverse peers were given. McKinsey found that having more women on the senior executive team provided the single biggest performance uplift in their data-set on company performance: with every 10% increase in gender-diversity, EBIT rose by 3.5%. And it’s not just that better firms have a better chance of hiring a wider group of people, Harvard Business Review checked that scenario, and was able to confirm that it truly is a case of causality: more women (i.e. more diversity) led to better performance. Diverse-led start-ups are also less likely to fail, and interestingly, achieve exits faster.

VC is broken because funds are not diverse and the pipeline is NOT the problem 👨💻

Despite superior results, capital is being allocated elsewhere. In the US, a measly 2.2% of VC funding goes to female founders, just 2.6% to black and LatinX founders, and in Europe, the vast majority of funding (93% of VC) is going to all-male founding team, while a mere 5% of it is going to mixed-gender teams (and the numbers haven’t been improving). This represents a market failure at play, which means everyone is losing: the LPs, the VCs, the founders, and ultimately, society.

Many VCs, when challenged, repeat the tired and defunct ‘it’s a pipeline problem’, which serves to deflect and distract from the actual data. The data shows that the pipeline of diverse talent is bountiful. In many developed countries, women outnumber men in the graduate and postgraduate ranks. Across Europe, the US, and Oceania, women make up around 30% of graduates from top MBAs and tech universities. Approximately 21% of all technology founders in Europe are women. Keeping in mind that gender is just one form of diversity, it is likely that 50% (or more) of top graduates across Europe and the US represent diversity of one kind or another.

Strong evidence shows that when there is more diversity on investment teams, significantly more investment rounds and funding go to diverse-led teams, indicating that the so-called pipeline problem is simply an unwillingness or inability of existing fund managers to find and fund the diverse talent that is emerging and not a pipeline problem. Funds with women VC partners are twice as likely to invest in startups with at least one woman founder and more than three times as likely to invest in startups with a woman CEO. Funds with women partners also tend to be much more diverse in ethnicity.

Research from Babson College shows that 92% of the partners in the VC industry are men, mostly white, and a good percentage of them went to elite business schools. In Europe, 87% of decision-makers in VC firms are white and male. According to US data, 40% of venture partners went to one of just two schools: Harvard and Stanford, while 79% of VC capital in the US is allocated to companies in just three states, despite start-ups outside these states often outperforming their metropolitan peers. This lack of diversity in VC firms means the vast majority of diverse talent isn’t identified by VCs, and that even when VCs do come across diverse founding teams, they are unlikely to fund them due to biases in their perceptions of which ideas hold merit and offer the potential for value creation at scale.  

We can do better and get better returns
We can do better and get better returns

This market failure is not just a problem for diverse founders. It is also a problem for VC firms, their investors, and society at large. Funds with diverse investment teams are also shown to perform 20% better on average and a study in Harvard Business Review found that VC firms, which increased the number of female partners by 10% experienced a 1.5% increase in fund returns each year, as well as 9.7% more profitable exits. More than just returns, VC plays an important role in society: funding groundbreaking innovations that solve important problems at scale, while they are in their earliest and riskiest stages, and other forms of finance aren’t yet available. When potentially half of the innovations that could serve and improve our society aren’t being funded, we all miss out. Morgan Stanley estimates the value of these missed opportunities at $4.4 trillion in the US alone.

The lack of diversity in funds is due to pervasive structural barriers 🚫 🚧

So what’s stopping us from capturing this $4.4 trillion opportunity? The challenge preventing VC from being more diverse (and achieving better returns) is just how hard it is to get in the door and contribute without being born with significant privilege. All of the paths to work in or manage a fund in VC require an unusual level of wealth, privilege, persistence, or bravery (usually a combination of these). Frustrated with the incredible difficulty of getting ahead in VCs run by people who don’t recognize their value, diverse mid-career VCs have, in recent years, started to make their own angel investments and launch first-time funds.

In many cases, there’s not a path to equal partnership, or it could take years to achieve. Starting a small proof of concept fund (typically under $10 million) can be the fastest way to get ahead in venture and build a track record. - Women In VC

Because of this exodus, a number of diversity-focused VC firms have emerged in the US and Europe, though these have been mostly micro-funds and often focused on one gender or demographic as opposed to genuinely diverse-led funds investing in diverse teams. While the trend towards diverse VCs starting their own funds is a positive sign for things to come, we should not forget that the end goal is diversity, that teams in the start-up ecosystem reflect the vibrant diversity of all of society and that should be the goal we strive for.

Despite the huge level of media attention on diverse founders and fund managers, and the first efforts to support them, funding going to both groups is actually decreasing. In 2020, the number of new women investment decision-makers in the US halved. So did the quarterly funding to women founders in 2020. 

In short, yes, there is awareness, there are first starts, there are initiatives–but we are still missing the networking and networked power...Most importantly, we need to admit across the board that a cultural shift will be needed in order to tackle the issue of diversity in VC. Just hiring the odd female partner won’t be enough. - Crunchbase

The lack of progress is no doubt due to the fact that launching one’s own fund is far from fast or easy. Would-be fund managers are expected to be out developing a pipeline of companies to invest in, investing their own money, building track-record, pitching investors, and after all, that, investing a certain percentage of their personal net worth in their emerging fund (so-called skin-in-the-game that can amount to $1 million or more for a relatively small $100 million seed fund). 

Raising a fund is a huge feat for all VCs, but especially for new funds run by industry outsiders with little experience and nontraditional backgrounds, all of which describe your average emerging fund manager...Even as these new VCs attempt the impossible, they are limited in their ability to run a full fund operation on a micro-fund budget. The economics of a small VC fund are punishing: most funds charge 2% of assets under management to operate the fund. That means that a $10,000,000 fund must subsist on a $200,000 annual operating budget. This might sound like a lot, until you take into account that this budget must pay for salaries, payroll tax, rent, travel, legal fees, and every other aspect of operating a business. - Fast Company

The talks and gatherings aren’t enough. The fact that there are so many hurdles for even the most committed, capable and talented candidates from diverse backgrounds to get into the industry means that people facing any other time, travel or personal limitations like disability or family care, find it virtually impossible to enter or grow in the industry. A timely illustration of this is a well-meaning but ultimately discouraging recent article, which made clear to all would-be parents - VC is not for you, if you ever plan to take parental leave.

We experienced the barriers for emerging investors ourselves  🤦🤦🏽  

After two years of working together for the world’s largest wealth manager, daily discussions about the incredible investment case for diversity and the perplexing lack of investment in diverse-led funds and companies, we (Ben and Isla) set out with the idea to build a VC fund ourselves - investing in diverse founders. 

We aimed to build a truly diverse-led fund, that was fully remote, global, and inclusive regardless of where potential founders or employees were based. We also wanted to invest over longer time horizons, to reduce pressure on founders and their teams to deliver fast exits; and we aimed to promote an open dialogue on mental health issues, reserving funds for coaching and therapy so our portfolio founders would be prepared for the leadership and personal challenges that they would undoubtedly face in scaling their teams. 

Like most players who are trying to capture the trillion $ opportunity of diverse founding teams, we were initially keen to take the traditional route, despite the hurdles we knew we would face as first-time fund managers, and launch a fund with a standard legal structure. However, our principles were far from standard and that required structural innovation. We looked in-depth at the available legal structures for funds and thought at length about how various approaches to the problem might allow us to address the funding gap and solve some of the issues that make VC so incredibly exclusive and homogenous.

We were lucky to have amazing advisors, mentors, and supporters right from the beginning. Nonetheless, creating a first-time fund requires significant time and capital commitment and can take years before any revenues are achieved. None of these things was entirely new to us, but as the months went on we realized: if this is so hard for us, people with industry experience and great connections in the VC and finance worlds, no wonder there is almost no diversity in fund management. 

Frustrated with the barriers we were facing, we started thinking more about the bigger problem: the pipeline and pathway to fund management and all of the incredible hurdles and biases that are limiting diversity in VC and ultimately creating and perpetuating the funding gap for diverse start-ups. Along the way, we highlighted these barriers and the catch-22 first-time fund managers were facing to investors at events around the World Economic Forum, the Gender Smart Investing Summit, and in round tables with government organisations at the European level, advocating for changes in fund-manager criteria that would allow emerging managers to get investing faster.

A swarm 🐝 of diverse investors is needed to redesign VC 🔧 from the ground up

Even if things start to move in the right direction, the pace of change is incredibly slow and emerging managers need time to prove themselves before they are given larger funds. At this rate, it will take decades before diverse founding teams become the norm. If the VC industry is to achieve the level of diversity that it actually needs in order to serve founders and investors properly anytime soon, existing structures need to be torn apart and redesigned from the ground up.

If we think of diverse founders as seedlings, the following metaphor comes to mind: If plants aren’t growing in a given pot, you don’t just sow more seeds, you rethink the potting mix, the environment and the position in which you have placed their pot. In our view, the start-up ecosystem, at the very minimum, needs a new potting mix: new, healthier soil that will allow diverse talent to flourish. 

While opportunity abounds, unlocking the economic opportunities from a group of founders that have been underserved is not without unique challenges, which we must recognize to deploy capital and human resources efficiently. Here’s how: First, if we invest in tech entrepreneurs that do not fit the old Silicon Valley pattern, we might need to complement these founders’ unique experience and skills with a different set of knowledge and resources. - Betaboom

We need more than one or two new investors here and there. There needs to be more than just a trickle of one or two new investors and micro-funds, but rather a massive, unabating seachange. Many, many more diverse investors need to have a seat at the table. They need to have the opportunity to become cheque-writers, investors, fund managers, and fund-of-fund managers. These seats will not appear out of nowhere; to claim their places, the pool of global, diverse talent needs many more opportunities to get experience as investors.

Community-led funds offer a simple, scalable solution 💡  to capture the multi-trillion $ opportunity 

We believe that the fastest route to real change at scale for diverse founders and investors will come by leveraging the networks and networked power of communities and ecosystems globally, uniting their knowledge, ideas and capital to invest in diverse founders outside of traditional funding structures.

When it comes to coordinating capital and community at scale, few movements can parallel the achievements of the blockchain, Web3, and Decentralized Finance (DeFi)  community in recent years. In the way that the internet revolutionised information and connection in the 90s, the financial innovations of the blockchain community are paving the way for vast and powerful changes to the way we manage money and coordinate communities around ideas. 

One of the most interesting developments in DeFi are Decentralized Autonomous Organizations (DAO). DAOs represent a new organisational form which has the potential to revolutionise VC.

‍*DAOs are internet-native organizations collectively owned and managed by their members. They have built-in treasuries that are accessible with the approval of their members. Decisions are made via proposals, the group votes on...those with a stake in a DAO get voting rights and can influence how the organization operates by deciding on or creating new governance - Cointelegraph*‍

DAOs, by aligning incentives, offering transparency, accessibility and inclusivity, foster collaboration, and are in our view the ideal platform on which to collaboratively rebuild VC.

DAOs enable organizations, collectives, granters, and more to come together* over the internet in a seamless way, even if nobody in the DAO has ever met before. DAOs have become a popular way to manage all kinds of processes, assets, and projects, as they offer a radically transparent and efficient way to organize and build together online.-  Foundation Labs*

Over the past year, the acceptance, infrastructure, and legal clarity around Web3 and DeFi has evolved at breakneck speed. DAOs have become a common way in which decentralised finance communities organize their grants and investments to support new projects in the ecosystem. Out of this, a movement is emerging that sees DAOs as the future of VC. Funds like The LAO (a legal DAO investing in Web3 start-ups with $33 million in assets under management) are leading the way, working actively with legislators to implement real-world legal structures that reflect the new, emerging form of decentralized  ‘corporate governance’. 

The business model is the message. From that business model flows company culture and beliefs, strategies for success, end-user experiences, and, ultimately, the very shape of society.- Zebras Fix What Unicorns Break

We believe DAOs are the business model of a better VC future. We believe that by relieving VC’s obsession with exclusivity and creating a new form of VC that is accessible to all and built on values of fairness, transparency, openness and continuous improvement we can create real change for diverse founders and investors and capture the multi-trillion $ opportunity.

Drawing on four decades of research into motivation, researchers argue that the secrets to sustainable high performance and job satisfaction come instead from three intrinsic incentives: autonomy, mastery, and purpose. People want the freedom to control their workflow, they want the flexibility to learn and improve, and they want to find a bigger purpose to which they can link their job performance. For investors that may involve managing the investment process; continual learning and process improvement; and linking their performance to specific social objectives- Institutional Investor

With DAOs, we can capture the diverse-led startup opportunity faster, and bring more people with us. We want to gather and grow a swarm of investors who reflect the diversity of the society we live in and enable them to make investment decisions together in an efficient, transparent, and founder-friendly way. We call it “DAOversity: for the win”, and that’s why we’re calling the community that we build around it FTW.DAO.

Values: for the win.
Values: for the win.

At FTW Ventures we are building a hive to find 🔎, fund 💰, and foster 🌱 diverse founders - the FTW.DAO.

FTW.DAO sets out to become a DAO-based community to fund diverse‌ ‌founding‌ ‌teams‌ ‌with‌ ‌bold‌ ‌visions‌ ‌for‌ ‌the‌ ‌future‌ ‌of‌ ‌society globally.‌ ‌Our‌ ‌focus‌ ‌will‌ ‌be‌ ‌on‌ teams that‌ ‌are‌ ‌leveraging‌ ‌‌innovations ‌to‌ ‌solve‌ ‌large,‌ ‌meaningful‌ ‌ problems. We aim to foster a swarm of investors who reflect the diversity of the society we live in and enable them to make investment decisions together in an efficient, transparent, and founder-friendly way. All this can be achieved without centralised leadership or investment committees.

With a community-led model, we will create opportunities for young and upcoming investors to build their track record in a supportive environment, while at the same time leveraging the incredible knowledge and networks of some of the best serial founders, investors, and operators around the globe. Leveraging the hive mind will allow the DAO to overcome existing biases with unprecedented transparency, flexibility, and autonomy. We want to get rid of ‘winner takes all’ and start building diversity, for the win.

‍We are at the beginning of a journey.

If the FTW mission speaks to you, come and join us.

🪂 Take the leap and request a spot on the waiting list.🔥

👉 Share this article with other great people (so they can sign-up)

💸 Feeling generous? You can support the movement at ftwdao.eth

👩🏽💻  Follow FTW.DAO and join the conversation on Twitter.

FTW.DAO: DAOversity For The Win
FTW.DAO: DAOversity For The Win
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