Michigan’s venture capital industry made modest strides in the last few years to create greater diversity within its ranks and in the number of startups run by women or minorities that receive investments.
Now the industry looks to invest further in diversity, equity and inclusion.
A DEI committee the Michigan Venture Capital Association established intends to cultivate ways to drive much more diversity in the sector. The group wants to elevate diversity and craft core principles under which association members operate in an industry that has traditionally been dominated by white males.
The MVCA has three goals: increase diversity among venture capital professionals working in Michigan, grow investments in startup companies led by a founder from an underrepresented group, and drive greater diversity among the talent at portfolio companies “from the boardroom down,” said Patti Glaza, the executive vice president of Invest Detroit who chairs the MVCA’s DEI committee.
The association and its members have prioritized greater diversity in recent years. The social unrest of 2020 and the COVID-19 pandemic that generated greater awareness of existing economic inequities in areas such as access to health care “put more urgency to formalize the path,” Glaza said. Research has shown the startups that are diverse and funds with diverse talent and boards tend outperform companies that lack diversity, she said.
“The venture capital industry historically has very much suffered from a lack of diversity, and underrepresented entrepreneurs have really faced barriers of access to capital, so the MVCA wants to elevate (diversity and inclusion) into the core,” Glaza told MiBiz. “There is a passive wanting things to change, but the events of the past year helped put the impetus to say, ‘The time is now to show a commitment to take action and to capitalize around the momentum around change.’”
Building trust
Data in the MVCA’s 2021 research report indicate Michigan’s venture capital industry has made some progress in recent years, although Glaza and others say it’s not nearly enough.
At the end of 2020, just 15 percent of the 165 startups in Michigan backed by venture capital were led by a person of color, 12 percent were led by women and a mere 1 percent had a CEO who identified as LGBTQ. Of the $287 million in venture capital invested in 2020 in 88 startups in Michigan, $57.8 million went to a company led by a person from an underrepresented group.
In terms of talent, just 17 percent, or 14 of the 81 venture capital professionals working in Michigan last year, were women, compared to 21 percent across the U.S., where more than half of the population is female. An equal number of venture capital professionals in the state last year were a racial minority. That compares to 2017, when only five of the 87 venture capital professionals in the state were women and seven were minorities.
While the industry has become a little more diverse than it was a few years ago, “there’s a lot more that needs to be done,” said MCVA Executive Director Ara Topouzian.
Without greater diversity within its ranks and its investments, “there’s a lot of great deals being missed out on,” Glaza said.
As an early-stage investor, Invest Detroit has driven diversity by following the ideal that “your investment team really has to reflect the community you’re serving and that you want to invest in,” she said. By “being very intentional,” Invest Detroit has accelerated diversity and built an investment team where about one-quarter of the staff are people of color and 25 percent are women.
“Historically, you have to break that chain because it’s easy to want to invest in people that look like you, and it’s not a conscious bias. It’s ‘Oh, we went to the same school’ or ‘grew up in the same neighborhood’ or ‘did the same activities,’ versus truly building diverse teams with diverse experiences that can find and connect and develop trust with entrepreneurs who come from different experiences,” Glaza said. “I think we can make a dent really quickly if we can build some of that trust by having more of these diverse teams.”
Tipping the scales
Inequities in access to capital have led to the creation of new funds across the U.S. that are focused on supporting minority entrepreneurs. In Michigan, the effort to improve access to capital for minority entrepreneurs led to the formation of two new funds last year.
The Right Place Inc. in Grand Rapids led the formation of the New Community Transformation Fund LP that plans to invest in growing, second-stage businesses owned by people of color. The fund also will invest in companies that are going through transitions as owners retire and a person of color acquires the business.
In Detroit, a group of five Black professionals formed and launched Commune Angels last summer to invest in companies across the U.S.
Organizers of the New Community Transformation Fund are “super close” to raising $10 million, said Managing Partner Skot Welch. At that point, the fund plans to begin making investments, with the first three deals coming from West Michigan. Companies outside of the region will have to move here to receive an investment.
The New Community Transformation Fund continues to draw strong interest from prospective investors who share the organizers’ vision, Welch said. Prospective investors have called to say they wanted to “circle back” to talk to the fund’s organizers about their “significant traction,” Welch said.
“Now people are looking at the fact that we’re so close to that $10 million. They say, ‘I’d like to be that organization that tips it over,’” he said. “We’re just trying to look at who the person or that organization is to help tip it to the $10 million, because that sets a lot of things in motion.”
Given what’s occurred in the last year, “there is less of a need to explain why it’s needed,” Welch said. “We’re living within the case study that frames why we need such things.”
‘The face of America’
A number of banks active in West Michigan also committed to DEI initiatives over the past year.
For example, Bank of America in June pledged $1 billion over four years, an amount later raised to $1.25 billion over five years, to a diversity initiative. Bank of America’s $100,000 in seed money to cover startup costs for the New Community Transformation Fund came out of that commitment.
Driving economic growth and prosperity for all means “that the people who are leading and owning the businesses represent the true look of the face of America,” said Renee Tabben, Bank of America’s Grand Rapids market president who serves on the New Community Transformation Fund’s five-member board of directors.
“This idea of having a way to get capital to those that are going to create that healthy, diverse, vibrant economy is critical,” Tabben said. “We as a region are not going to be able to grow at the pace and the success rates of other regions that do have that diverse leadership and ownership.”
The New Community Transformation Fund aims to eventually raise $25 million. Tabben has been contacted by Bank of America peers in other markets across the U.S., including in Miami, Denver and New Mexico who are interested in replicating the model in their community, she said.
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