Silicon Valley is at risk of treating diversity as new asset class

Silicon Valley is at risk of treating diversity not as a challenge but as a new asset class. Andreessen Horowitz and SoftBank Group have new funds to back entrepreneurs of color, prompted by US protests against racial injustice. Yet the problem isn't a shortage of capital – it's that what's there rarely goes to black and minority founders. The fix for that starts with the venture capitalists themselves.

The tech sector remains dominated by white males. Only 1% of venture capital funding went to black founders in 2018, according to a study led by Silicon Valley Bank. Only 3% of investment partners are African-American and another 3% are Latino, according to a 2018 survey by the National Venture Capital Association and Deloitte.

The outcry over the death of African-American George Floyd in police custody in Minneapolis has spurred companies to take action. Last week, SoftBank, a backer of companies like Uber Technologies, Alibaba and Slack Technologies, said it is establishing a $100 million Opportunity Growth Fund. Andreessen's Talent x Opportunity Fund will start with $2.2 million and reinvest returns to finance more founders. 

But VCs already have the means to back people of color – if only they would break out of their bubble. Some do, without forming new funds. Squire Technologies, a barbershop management app co-founded by two black men in Buffalo, New York, on Tuesday announced $34 million in funding led by CRV, a predominantly white-led venture capital firm. But these are the exception not the norm.

Having more representative investment teams would help. Andreessen doesn't have black partners for its major funds while SoftBank has one. But Masayoshi Son's firm's move to put TaskRabbit Chief Executive Stacy Brown-Philpot and TechSquare Labs founder Paul Judge, who are black, on the investment committee of the Opportunity Growth Fund is a good start. 

This isn't tokenism, or quota-ism. African-Americans spend $1.2 trillion a year in the United States while Latino consumer buyer power is expected to hit $1.7 trillion this year, according to Morgan Stanley. Moreover, long-standing systemic bias against black founders suggests equity in their businesses will often be undervalued – suggesting better returns for the investors.

Harlem Capital Partners managing partner Jarrid Tingle told Breakingviews that US demographics make a diverse portfolio compatible with maximizing returns. In other words, founders of color don't need to be held to a different standard. Setting up new funds is fine, but smarter use of what already exists is even better.