Inclusive investing: Change the game to change the world.

Inclusion requires changing the game, not just the cycle.

In Perspective

October 04, 2021
By Isabelle Hau October 04, 2021
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When I first met Chris Bennett, founder of the childcare platform Wonderschool, he did not have the stereotypical profile of someone working in childcare. After all, he was a single male, child-less, with a strong tech background. He also did not have the stereotypical profile of a founder. As a Black founder, Chris is part of the minuscule <1% of entrepreneurs backed by venture capital. However, one asset further sets him apart: lived experience. Raised by his Honduran immigrant parents and surrounded by an extended family of 31 cousins, Chris drew inspiration from the Miami family childcare operator next to his home to create Wonderschool. Wonderschool, whose mission is to make high-quality child care accessible to every child, has now been funded by top venture capital and impact investors, and was named one of the world’s most innovative companies by FastCompany in 2019.

We’re moving toward a society where stories like Chris’ are more common. In the 1980s, the primary source of wealth was inheritance. Y Combinator founder Paul Graham recently reflected that the number of inherited fortunes had been cut in half, as more people create their fortune. Roughly three in four are starting their companies, and one in four are investing. Most of those new companies are supported by funding, typically in the form of venture capital.


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Roughly three in four are starting their companies, and one in four are investing.


On the surface, this is all good news: America as a meritocracy? Not quite. Wealth is increasingly more concentrated among the richest, and the Black-white wealth gap is 10x.  Far from an inclusive meritocracy, Richard Kerby at Equal Ventures has called venture investing a “mirrortocracy.”

Here’s the cycle issue:

Limited Partners (LPs) — those large institutional capital pools, such as endowments, pension funds and family offices — back Venture Capital (VC) funds. VCs then fund startups led by founders who look like them, who then hire teams who look like them — a phenomenon well documented as“similarity bias or homophily.”

Similarity bias

Also known as affinity bias, this is the bias to gravitate toward people like ourselves in appearance, beliefs, and background.

Team members often become founders and/or investors themselves, who then recruit or invest in more individuals.  In this cycle, the composition of VCs and startups keeps repeating — enriching the same non-diverse group, and driving, for the most part, non-inclusive innovation. By the way, a parallel phenomenon exists in philanthropy

How could we see more inclusive ventures thrive, scale, and succeed, led by diverse entrepreneurs bringing their full lived experience to bear? I believe inclusive investing is a big part of the answer.

Inclusive investing

Investing in startups seeking to close the access, opportunity or outcome gaps for communities that have been traditionally excluded or under-supported.


We need to not only change the cycle, Flower Purple we need to change the game to change the world.


Change the cycle

Diverse VC and LP teams

An opportunity for change is at the inception of the cycle. This means getting more diverse LP investors to make decisions in which VC to fund, and more diverse VC investors to allocate capital to more diverse entrepreneurs and inclusive companies.

VC diversity data is notoriously bad, and LPs may be even worse:  under 1% of the $70 trillion wealth management industry are controlled by women or minority fund managers as of 2019. In VC, 4% of teams are Black and 4% are LatinX in 2020.  Two-thirds of VC firms still do not have a female partner. On the positive side, diversity, equity, and inclusion plans have materially increased: 40% of firms had DEI strategies in place in 2020, up from a third in 2018. A third had formal DEI-focused recruitment programs in 2020, and 3 out 4 had informal programs.  

Inclusive investors, like Kapor Capital or Reach Capital, have demonstrated top quartile financial performance and challenged others to invest in gap-closing companies. Diverse venture investing teams are correlated with better returns for investors. For example, a 10% increase in female partner composition increases annual fund returns by 1.5%. Diverse entrepreneurial founding teams perform better and exit faster. Companies with diverse teams are also more innovative.

Yet, progress has been painfully slow. The main issue is that VC firms are typically small (14 in average in 2020).  Turnover is low (4% in 2020 in senior investing positions). And, VC has traditionally been an apprenticeship business with a heavy reliance on existing networks and pattern matching

Some encouraging efforts will yield positive results, but it will take time: more transparent partner hiring processes; scout programs building the pipeline of diverse investors; new ecosystem organizations promoting investor and entrepreneur diversity, such as BlckVC, LatinxVC, AllRaise.  

Diverse LP funds

Another way to change the cycle is at VC formation. The current model makes it difficult for new entrants with diverse backgrounds. LPs generally require two things before investing in a VC fund: (a) a prior investing track record, and (b) a meaningful personal financial contribution (1-3% in average or approximately $1m personal contribution for a $50m fund, tied up for a long period of time). The good news is that new types of LPs are emerging. Take Screendoor, a $50 million investment vehicle backing underrepresented investors raising their first institutional fund.  

Inclusive new funds

Funds led by diverse teams are on the rise – both in number and assets raised. Harlem Capital’s recent $134m Fund II raise is a good example. 

New models are also emerging. A16z, for instance, launched Talent x Opportunity (TxO) to support entrepreneurs from underserved communities. TxO is structured as a Donor Advised Fund, where profits are recycled for future investments, as opposed to being distributed back to investors. 

Change the game

Cultural norms

A nascent wave of diverse artists, athletes, and celebrities are pushing for cultural norm change. Pharrell Williams launched Black Ambition, an accelerator for Black and LatinX entrepreneurs, to bridge the racial wealth and equity gap. Serena Williams launched Serena Ventures with the mission of giving opportunities to diverse women founders. Alicia Keys partnered with the NFL to launch a $1Bn fund for Black-owned businesses. Nas has stakes in dozens of startups totaling $1.4Bn

New models

Other inclusive investing innovations are bypassing traditional VC. Crowdfunding, for example, is becoming a fundraising alternative for entrepreneurs. New regulations have allowed platforms like Republic to raise multi-million campaigns. Maxeme Tuchman co-founded Caribu, the early education video calling platform that was named in Apple’s “Best Apps of 2020.” As a woman of color, she raised millions through creative equity crowdfunding instead of traditional VC. She ended up with 30% of investors being women and people of color. Crowdfunding is also a fundraising alternative for VCs, such as Backstage.

A better future

Entrepreneur Joseph Heller provokingly called equal access to capital for women and historically excluded people the “final civil rights movement”.  Inclusive investing™ holds meaningful promise to reach a more inclusive economy, and to unlock inclusive innovations to address current societal challenges. Let us dream and build together this vision for a future with abundant well-being for the benefit of the many, and not just the privilege of the few. Perspective dark

“Inclusive investing™” is trademarked by trailblazer Nasir Qadree, founding partner at Zeal Capital Partners.

Isabelle Hau has over 20 years of experience in impact investing, venture capital and philanthropy. She has spent much of her professional career focused on building the impact investing field and making high quality education accessible and joyful for all children as a means to creating lifelong opportunities. She was a former partner at Imaginable Futures, a venture of The Omidyar Group. She is currently writing a book on the future of learning. You can follow her on Small Talks.


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