September 27, 2019

Feedback requested: an "opportunity fund" for underrepresented founders

Hi Indie Hackers, would love to collect some feedback on an idea we've been working on: https://earnestcapital.com/help-design-the-earnest-opportunity-fund/

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    Some thoughts that spring to mind:

    • The first step to becoming more diverse is acknowledging the lack of diversity.

    • To get diversity more effort needs to happen in reaching out, most people don't do this because it requires extra work. As you mentioned, many people feel these things are not for them. Or perhaps they lack the confidence/skills/bravery to take things or even to enquire about the investment.

    • I saw the founders of Code Untapped give a talk the other week. They run hackathon/meetups and they are always experimenting and changing the times of them to try to reach more people who otherwise might not be able to attend.

    • And if you want to reach a diverse audience have diversity in your team, easier said than done, I know. But if you do things like Venture Partners, you could make a point of only having Venture Partners who are minorities. But also be prepared for white males to kick up a stink if you do this <--- I see this a lot!

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      you could make a point of only having Venture Partners who are minorities. But also be prepared for white males to kick up a stink if you do this

      Excluding people on the basis of their anatomy will do that. I've seen this play out in vastly disparate cultures and it's never well received.

      While you may, in the short term, be able to justify this kind of discriminatory behavior in the name of rectifying past discriminatory behavior, it's not a path towards a more egalitarian society (or world) in the long term.

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        While you may, in the short term, be able to justify this kind of discriminatory behavior in the name of rectifying past discriminatory behavior, it's not a path towards a more egalitarian society (or world) in the long term.

        You're probably right on the macro level (eg "all businesses need to be run by minorities") but I don't see this being a problem on the micro level.

        After all, there are plenty of funds which have made the choice to have all white/male Venture Partners - why shouldn't one make the choice to do the opposite?

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    Hey Tyler,

    Kudos on recognizing the lack of diversity & looking for advice on how to become a more diverse fund.

    A few notes:

    • When looking at your list of mentors, I only noticed one female. I'd image that recruiting more female mentors would help more women see Earnest Fund as good opportunity for them.

    • There's a lot of people/communities working on helping companies build more diverse talent pipelines for hiring (https://www.diversifytech.co/ & https://www.hiremorewomenintech.com/ are just two that have a ton of resource available)

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    I think it's a great idea to have a separate fund for the underrepresented. If Earnest Fund 1 is seeing 85-90% applications come from all-white-male founding teams do you think a lower barrier to entry would help, or do you feel the challenge is reaching out to a more diverse set of people?

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      I don't know the answer to that question but I strongly suspect it's the latter. I got advice from a bunch of folks who have had real success creating an inbound stream of diverse job candidates and the thing I heard over and over again was that you really have to plant a flag about who you are looking for in order to cut through all the noise and filter bubbles. That's the general idea here.

      Our version of this only works if we can generate a good return for our investors (and thus continue it and scale it up) so we definitely won't be lowering the bar in any kind of way.

      A version that isn't "lowering the bar" that we are looking at is can we make much smaller investments earlier to give folks runway to even build an MVP. But don't have a good model for that yet and likely won't be a part of this idea.

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    Hey Tyler -

    I like your idea, and encourage you to persist at it, though I'm going to be very candid and direct here.

    I've setup a few international programs that support early-stage engineering startups, two of them focusing on Sub-Saharan Africa ( see https://source.institute/ ) and before that was involved in setting up the accelerator industry in Europe (http://www.foundercentric.com/ ) I've experienced sharp differences between those places, and noting that you're generally US-based, I recognize that who we're talking about when we say "underrepresented founders" differs a lot, as does the context. (Also a note, I see you mentioned Cape Town, and I want to point out that South Africa is a very unique context, and quite different from the rest of Sub-Saharan Africa.)

    Anyway, here's what I've experienced that might be useful:

    You're probably already familiar with the pipeline problem. For example, why is California's population less than half white, but mostly white applicants for software development jobs? At a young age, people know what paths are likely to work for them, and that's signaled in a lot of ways: lack of role models, discrimination in accepting interviews, cultural clashes and norms all play a role in persisting that divide.

    One of my programs (The Africa Prize For Engineering) supports African PhDs with high-growth businesses, looking to raise in Europe. We had a version of the pipeline problem. One thing: a lot of African founders are pretty pragmatic about knowing they need a white co-founder to have a good chance of raising money. (https://community.source.institute/t/wheres-the-mzungu/1328 ) Even so, the nature of relationships between strata in the investment business (where do the companies in your portfolio raise when they outgrow your fund) has similar pipeline problems. We had great connections in London, and still, there was a big divide to address: cultural norms were different, and funders were interested but not experienced in the paths our engineering companies were on.

    It was more than just finding the right experience and expertise, the funding paths ended up being very different: https://qz.com/africa/780118/heres-why-its-so-tough-for-african-startups-to-raise-funding-internationally/ I see you're able to spot these differences, like you did with the Shared-Earnings Agreement, but I'd expect you'll see an upstream pipeline problem even if you solve the downstream one.

    Given this, I'd also be careful about generalizing "diversity." Different groups have different paths and therefore specific needs. So I'd invite you to consider if by diversity you mean "everyone else that we're not supporting now". that's likely to end up being an incoherent mix of different people with different paths. We found big differences on a country-by-country level, as well as different types of technology and economic strata of different target markets.

    I don't mean to be patronizing, but I'd encourage you to go through the same exercise you'd ask a founder to do with selecting a target market, and find more specific groups with commonalities you can address. (Sometimes the cobbler forgets to fix their own shoes ;) )

    I think the closer you look, the more categories you'll discover outside of the ontology you're used to (VC, bootrap, etc.) For us, that was things like not seeing "social enterprise" but seeing NGO and grant-funded, projects led or not-led by development money mandates, etc. How do you fund an energy startup in Namibia? Totally different category and nothing to do with an SMS service for pregnant women's health in Kenya. And neither fit into the pre-existing categories I would have put them in.

    That gets to the third heads-up: the context your portfolio is in will be new to you, and change things you didn't expect to be different. New goals and new paths to support meant we needed to do a lot of unlearning and be way more responsive/adaptive. (Some specific lessons learned about supporting the right challenges here: https://peerlearning.is/incremental-improvements/)

    I had no idea what I was really doing until I took a few months and toured Sub-Saharan Africa, spending a week+ at a time working with each company, with their teams and customers -- not as an advisor but a temporary team member, getting things done. Without doing that, I would have been hopeless but not realized it. I wouldn't have understood so many cultural aspects of how customers think, how deals are done, how to connect with people, how teams work together. A lot of observations of small things that made a big difference.

    Especially when people are grateful for support but inexperienced, we put ourselves in a false positive feedback loop. So I recommend that kind of immersive experience to really get your head around the challenges you and your portfolio will face. You'll benefit from knowing what part of your skills and network are useful for this group, and what parts will be deceptively counter-productive.

    Happy to talk more if it's useful. You can email me at: smile at saintsal.com

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    Have you tried Founder Gym? https://foundergym.com/

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    Hey @tylertringas, this is an awesome idea and I hope you move forward with it. I'm no expert but some thoughts I wanted to share:

    • I don't think there is a "perfect" definition for under represented folks. Certainly you will have to set some criteria, but I think it needs to be an iterative process that you regularly evaluate and assess. I'd suggest reaching out to people working in diversity and inclusion to better understand the best practices for setting this criteria.

    • Even if you build a network in under represented communities, people won't necessarily come to you. You need to come to them. You need to seek individuals out. It's hard work. Perhaps consider if you are ready to do that level of work if you truly want this to succeed. In under represented communities, we talk a lot about "labor". You're creating an opportunity but we have to do the work of spreading the message in our networks and recruiting people for you. Not trying to be rude, but under represented folks are tired of jumping through hoops for white dudes and it comes off very half-assed and more like a publicity stunt. For instance, you mention posting this article here, on HN, and on your twitter. But you did not research or seek out under represented communities like Women Make, Elpha, Hire Tech Ladies, or Diversify Tech (to name a few that I know of off the top of my hand) to post to. You blasted it to your mainly male and mainly white network and asked if there was anyone out there to do the work for you. Again, I support what you're doing and I'm sure your heart is in the right place, just trying to make my point clear. If you don't get this right, you'll end up pushing under represented people away.

    • You need some members of under represented communities to help lead or consult on this initiative. There are things they will understand about these founders that no amount of research can explain to you, because it only comes from lived experience. Earnest Capital seems like it has a good understanding of the support founders need while building a company. You alone can not fulfill all of these needs for under represented people with out the "lived experience" tidbits.

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      Thanks for the feedback Allison.

      Definitely part of the public process here is to solicit some input and best practices on how to define this. Obviously don't expect folks to do that work for me, and we're doing our own homework here, but wanted to get feedback as much as possible.

      You need to seek individuals out. It's hard work. Perhaps consider if you are ready to do that level of work if you truly want this to succeed.

      Totally. I tried to acknowledge that in the post here:

      Whether in investing, recruiting, or conference organizing, everyone who does this well seems to agree, it takes work to build a network and a pipeline of underrepresented people. It doesn’t just happen.

      This is feedback from dozens and dozens of conversations I've had on this topic since we launched a year ago. Earnest is still a tiny under-resourced team, so it's a fair point that we may simply not have the people and bandwidth to do the work to make it succeed. Appreciate that feedback.

      But you did not research or seek out under represented communities like Women Make, Elpha, Hire Tech Ladies, or Diversify Tech

      Have had at least one call or will have shortly with the folks who run all those organizations and quite a few more for input and opportunities to collaborate prior to publishing this.

      Not trying to be rude, but under represented folks are tired of jumping through hoops for white dudes and it comes off very half-assed and more like a publicity stunt

      I'm sorry to hear that. How could we better communicate the work that has been done and is being done here.

      You need some members of under represented communities to help lead or consult on this initiative

      Yes, absolutely the section on "Who will Run it?" outlines the plan to bring on a diverse group of folks to help make this happen (already have a bunch of them in mind).

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        Communication: Talk to under represented people directly. Seek out their communities or individuals connected to those networks. Prioritize those channels over mostly male/white platforms like HN. Also, since they are giving you valuable access and information, it's helpful if you can give value in return. You could partner with these organizations, sponsor something for them, invest, etc.

        Sounds like you've done some good research already (THANK YOU!), but so many people just don't get it, I can't help but over explain everything!

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    "In our personal experience, from asking lots of founders in private, a large portion used their own accumulated savings from a high paying job, had a spouse that covered the bills, had a windfall or inheritance, or relied on loans and help from family members. Every one of these is systematically harder in some way for founders of color, female founders, LGBTQ founders, and founders from underprivileged geographies.".

    I don't get why for female and LGBTQ founders should be "systematically harder" to get the same conditions that others get.

    People of color tend to be at a disadvantage for socio-economic reasons (they usually come from lower income families compared to white people and asians). While it is generally true, I find dangerous to assume that all the people of color and founders from underprivileged geographies lack of money.

    And to make your fund more diverse you are considering just skin color and sex, but in your own website, you say that money is the big factor here. So you are automatically excluding white males who happen to be poor because your fund is made by 85% of white males but all your founders have more important aspects in common than skin color and sex (socio-economic background, loving family, good education to name a few) so accepting a person of color with all these attribute isn't really increasing your diversity.

    Another thing that seems you didn't take in consideration is the fact that females are simply less interested in entrepreneurship. There is scientific evidence that suggest that males prefer working with things and in most of the internet startup you will spend more time with your Pc than with your family, while female prefer working with people and there are jobs thst makes it a lot easier than entrepreneurship.

    It's enough to look at online communities that are free to join and require no competence test like subreddits, hacker news, product hunt, IH. If you have an internet connection you can join, still you will see an overwhelming majority of males. Paraphrasing what Pauk Graham sad about VC backed compabies founded by female "Don't attribute to malice what csn be explained by numbers". In synthesis, you can't look at the percentage of male and female founders, compare it to the percentage of both sexes in the population, and assume that females lack resources or are discriminated.

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      "There is scientific evidence that suggest that males prefer working with things and in most of the internet startup you will spend more time with your Pc than with your family, while female prefer working with people and there are jobs thst makes it a lot easier than entrepreneurship."

      Entrepreneurship in general, and fundraising in particular involves working with people intensely. You have created a sexist narrative from "scientific evidence" which you haven't even bothered to link.

      The fact that you "don't get" why women and other underrepresented groups have a systematically harder experience in fundraising is your own shortcoming. It's no one else's job to teach you the basics, but because you seem to be earnestly mistaken: https://techcrunch.com/2015/09/24/the-surprising-bias-of-venture-capital-decision-making https://techcrunch.com/2019/02/12/investors-are-still-failing-to-back-founders-from-diverse-backgrounds/ https://news.crunchbase.com/news/q2-2019-diversity-report-underwhelming-funding-for-female-founders-we-ask-vcs-why/

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        https://www.researchgate.net/publication/38061313_Men_and_Things_Women_and_People_A_Meta-Analysis_of_Sex_Differences_in_Interests

        You will find tens of studies like this. I understand that for someone who is living in the Bay Area bubble some truths like the difference between sexes are taboo but that's just reality.

        VC backed startup are mostly founded by tech guys. When the company matures, yes you will work with people but before then you won't spend much time on that. Most companies never mature. Social jobs are HR, nursing, teaching, PR, entrepreneurship is not.

        And honestly I seriously doubt that being interest in things and spending thousands of hours in frobt of a screen is something I should be proud about. I will dig deeper in those links, numbers are nothing if you don't tske into consideration how they were collected and two short articles don't answer all the questions I have. Please keep your dumb labels away from me. Thank you.

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          VC backed startup are mostly founded by tech guys.

          Earnest isn't a VC, they support bootstrappers.

          ~40% of companies in the US are founded by women. If you include side hustles (not incorporated, eg Etsy, service businesses and Shopify etc) that number rises to over 50%.

          So - whatever your personal opinion of how differences in interests between sexes manifest themselves in the real world - it's clear that there is a problem here when >40% of businesses are started by women, but only 10% (a quarter of what you'd expect) end up applying to Earnest.

          When the company matures, yes you will work with people but before then you won't spend much time on that. Most companies never mature. Social jobs are HR, nursing, teaching, PR, entrepreneurship is not.

          This just isn't true.

          I'm a founder. I've worked at all levels of different startups, bootstrapped and funded. For >99% of startups/businesses, there is never a point at which people skills (and enjoying working with people) aren't important.

          You might really, really, really want it to be so, but it just simply isn't.

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            it's clear that there is a problem here when >40% of businesses are started by women, but only 10% (a quarter of what you'd expect) end up applying to Earnest.

            It's late here, so maybe my head isn't working anymore, but I'm confused by this.

            From what I understand from a quick glance at Earnest's website, they seem to be a fund aimed at tech companies that want to prioritize building a sustainable business, as opposed to going for the growth at all costs Silicon Valley thing.

            So you can't take the "40%+ of all businesses in the US are started by women" and then say "it's a problem that only 10% of Earnest's applicants are women".

            You need to look at the gender distribution among founders of businesses that Earnest is targeting (tech, focused on profitability, want to raise capital).

            I don't think we have a data on this, but I wouldn't be surprised at all if the gender distribution is something along the lines of 80% men and 20% women, or even 90% men and 10% women.

            Assuming your data on 90% applicants being men and 10% applicants being women is correct, then it does seem more or less representative of the type of business that Earnest is targeting.

            @tylertringas feel free to correct me here on what Earnest is targeting and on the applicant gender distribution.

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            the number 1 rule is to read before commenting. I was answer to a user who liked to articles that talk about VCs, so your first observation is completely irrelevant.

            Did you know that over 70% of basketball players all around the world is white but in the NBA 75% of the players is black. According to you own logic, this proves that white people are being discriminated against. Clearly, it is not how reality works.

            People skills and social jobs are to different concept. I don't want nothing to be different from what it is. I am the founder of two startups and manage a 12 people remote team every single day. You never heard me talk about it because, unlike you, I don't need to do consulting nor to beg for subscribers on IH.

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      I don't agree with the zero-sum thinking here. Our main fund doesn't take founder diversity into account one way or the other, as do almost all funds. Nobody is excluding poor white males and there are plenty of places, including our fund, that they can look to for investment.

      Our proposal here is just for an additional fund focused on underrepresented founders.

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        I'm with @Luqa on this.

        I'm not a founder, and even if I were a founder, I doubt I'd be seeking outside capital (just a personal preference, bootstrapping seems more appealing to me).

        That being said, I'm not sure why being a Lithuanian woman ("underprivileged geography" + woman) should give me access to some special fund?

        Can't I just apply to the normal fund?

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          Can't I just apply to the normal fund?

          Yes. Tyler says so several times.

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            That was a rhetorical question :D

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              I was being a bit silly.

              That being said, I'm not sure why being a Lithuanian woman ("underprivileged geography" + woman) should give me access to some special fund?

              Was this also rhetorical?

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                I understand the reasoning behind the idea of a fund for "underrepresented" founders.

                I just disagree with the underlying premise that "diversity" is something valuable that we need to strive for.

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                  Maybe it would help to reframe the argument.

                  As I understand it, "diversity" isn't the goal.

                  Instead, it's just the most useful tool (in this situation) to achieve equality of opportunity.

                  You don't dislike that, presumably?

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                    I think equality of opportunity is already provided by the regular fund that they have.

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        Poor white males can apply to one fund. The underrepresented founders have two. According to your own essay the underrepresented founder are so because they lack access to financial resources. That's the same for poor white males.

        "Nobody is excluding poor white males and there are plenty of places, including our fund, that they can look to for investment". Doesn't the same apply to underrepresented fonders? Sorry but this to me appears like a way of riding a trend more than really working to solve a problem.

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      I don't get why for female and LGBTQ founders should be "systematically harder" to get the same conditions that others get.

      That's because you aren't an underrepresented founder. And it's kinda the whole point. Presumably, if you did understand why they have it harder, you'd do something about it.

      I find dangerous to assume that all the people of color and founders from underprivileged geographies lack of money.

      Nobody said this.

      Another thing that seems you didn't take in consideration is the fact that females are simply less interested in entrepreneurship.

      This is incorrect. Women aren't significantly likely to be innately less interested in entrepreneurship. Even if there is some evidence to suggest they're more likely to be risk averse.

      Even if it were true, they're hardly likely to be 6x less interested in starting a business (which is the current ratio of m/w applications to Earnest)

      There is scientific evidence that suggest that males prefer working with things and in most of the internet startup you will spend more time with your Pc than with your family, while female prefer working with people and there are jobs thst makes it a lot easier than entrepreneurship.

      Again, wrong. I've founded and sold a few businesses. And taken a few rounds of investor money. I'm also a developer (albeit not a great one)...

      Simply put, as a (successful) founder it is much more important to to enjoy working with (and helping) people than it is to enjoy sitting in front of the computer.

      If you want to optimise your time for less people interaction and more coding time, you're way better off getting a full time developer role.

      It's enough to look at online communities that are free to join and require no competence test like subreddits, hacker news, product hunt, IH. If you have an internet connection you can join, still you will see an overwhelming majority of males.

      I think you've asked and (ironically) answered your own question there.

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    Love what you're trying to achieve here.

    My main worry is how you can do this at a non-net-negative return for your fund while also not coming across as predatory to the people you're trying to help.

    We often talk about ‘bootstrapping’ but very few founders actually build a business with literally no outside capital, savings, or help. In our personal experience, from asking lots of founders in private, a large portion used their own accumulated savings from a high paying job, had a spouse that covered the bills, had a windfall or inheritance, or relied on loans and help from family members. Every one of these is systematically harder in some way for founders of color, female founders, LGBTQ founders, and founders from underprivileged geographies. Note, none of these are insurmountable and we all know folks in every one of those categories who has successfully bootstrapped a business, but bootstrapping as we know it is systematically tilted against underrepresented founders in a way that we believe justifies a countervailing strategy.

    You seem to be arguing (and I'd agree) that underrepresented founders find it much more difficult to get to the point at which Earnest (and others) would normally invest. What with them not having access to the considerable personal or F&F capital necessary to get there.

    So it seems like you'd have to invest earlier, when there's more risk.

    Now, I'm happy to believe that - because these founders are underrepresented - you can find 'better' founders overlooked by others.

    But still, at that early stage, the risk will be significantly higher than at the P/M fit, post-revenue stage.

    So I'd love to hear how you plan to offer terms that won't be called out as predatory (or somehow taking advantage of underrepresented founders) by others?

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      Very good questions. Frankly the plan here is not to address this challenge directly. The idea we're presenting here is the exact same investment thesis as Earnest has had, just specifically carved out for underrepresented founders.

      We're not addressed the 'downstream' challenges that I point out in the quote above (yet). The plan is to start somewhere and iterate from there.