We have chosen to define the term “underrepresented” within the context of the venture capital industry, which has traditionally been dominated by non-disabled, cisgender white men (who have traditionally come from a small handful of elite schools).

By that measure, we consider “underrepresented” to encompass those who self-identify as:

•   any gender other than non-transgender male;
•   any race other than White;
•   any sexual orientation other than straight/heterosexual;
•   a person with a history/record of having a disability.

We recognize that identity is complicated and intersectional. If you feel that your self-identity or background is underrepresented but is not listed above, we welcome you to reach out and tell us more about yourself and your fund.

Market dynamics demonstrate the financial value of diversity. For example, First Round Capital’s “Ten Year Project” (2015), which reviewed “10 years’ worth of our proprietary investing data” found that female founders outperform their male peers (“companies with a female founder performed 63% better than our investments with all-male founding teams”).

Yet, Fortune Magazine reported that women received only 2.2% of all venture capital funding in 2018 – less than they had the prior year. (Emma Hinchliff, “Funding For Female Founders Stalled at 2.2% of VC Dollars in 2018”, January 28, 2019).

We don’t subscribe to a theory of racial or gender exceptionalism.  If non-white and non-male VCs are being underfunded or shut out of investing altogether, then it stands to reason that there is tremendous “hidden” talent simply waiting to be unlocked.

Venture capital funds are typically structured as limited partnerships, which have two types of partners: limited partners (LPs), which are passive investors in the fund and Principals – called general partners (GPs) – who are in charge of running the fund and making investments out of it. The general partner interest of the fund is commonly owned by a limited liability company and is also called the GP. Should a fund’s investments perform very well and return more than 100% of capital, it is a Principal’s ownership interest in the GP that entitles them to a portion of the Carried Interest.

We want to help underrepresented managers own and benefit financially from the fund complexes they run – which is why we do not invest in funds where passive investors have purchased a majority of the GP ownership. Therefore, we invest in funds in which underrepresented managers own 50% or more of the GP based on both economics and headcount.

All investment decisions are made by our eight-member Investment Committee.  Our evaluation criteria includes (but is not limited to) fund managers’ investing track record and operating experience, fund thesis, portfolio model, sample investment memos and references. We prioritize managers who want to be active, generous contributors to a diverse ecosystem. Because systemic bias and lack of generational wealth has precluded many underrepresented individuals from assembling an investing track record, we may apply other proxies to predict investing potential.

When considering investments directly into companies or via an SPV, our investment committee considers the investment timeframe, management team, business concept, target addressable market, product differentiation, use of funds, and growth projections, among other factors.

First Close Partners has a diverse group of limited partners, many of whom are highly successful venture investors or entrepreneurs, and all of whom are committed to broadening access to the industry. In addition, all of the members of our investment committee have made a significant investment of their own money into First Close Partners.

They can, and in many cases, they do. But it takes time and significant resources to screen, interview and evaluate venture funds – and there may be structural barriers to investment, such as minimum check size, a limited number of new investment ‘slots,’ or target portfolio allocations that are already at capacity. We enable our LPs to support a vast cohort of underrepresented managers via a single investment, and through our sidecar fund, we enable them to double down on any funds or investment opportunities they find particularly exciting in our portfolio.

No. First Close Partners is in the business of generating returns for our LPs. We believe that a diverse group of funds has incredible potential to deliver outsize returns, and we intend to deliver on that promise.

Given the impact that systemic bias has had on “out of network” outreach across venture capital, we assess all applications in the order in which they are received, and we ask all managers to provide us with the same information, which is assessed via our proprietary rubric.

Aside from helping to debias, data supports that it makes financial sense to reprioritize away from a ‘warm-outreach’-based VC system. First Round Capital, founded by our co-founder Josh Kopelman, found that cold outreach yielded better deals (based on their 2015 ten year retrospective across 300 portfolio companies and nearly 600 founders – see “Finding Nine”):

“For a long time, VC has been predicated on this idea that the best opportunities come through referrals, yet companies that we discovered through other channels — Twitter, Demo Day, etc. — outperformed referred companies by 58.4%. And founders that came directly to us with their ideas did about 23% better.”

But VCs continue to lean into warm intros and the systemic bias doing so supports. Morgan Stanley’s “Beyond the VC Funding Gap Why VCs Aren’t Investing in Diverse Entrepreneurs, How it’s Hurting their Returns, and What To Do About It” (2019 at fn. 2), explains:

“Nearly all (96%) of the VCs we surveyed report that they source their investment opportunities “directly from my own network” and 89% use “warm introductions/ referrals from someone I know.” The next closest response was “incubators/accelerators” at 60%.”

Surprisingly, we have not seen a major shift in venture capital embracing diversity despite academic research finding that diverse investors will enhance returns. See, e.g., Professor Paul Gompers and Silva Kovvali “The Other Diversity Dividend” (Harvard Business Review, July–August 2018).