Published in Finance

VC firms seek to boost diversity within industry, through investments

BY Sunday, May 01, 2016 12:16pm

Venture capital firms in Michigan do better than their counterparts nationally, but women and minorities still account for a small number of investment professionals who work in the industry and the entrepreneurs it supports.

Of the 128 venture capital professionals working in Michigan, 15 percent are people of color, versus 13 percent nationally, and 16 percent are women, compared to 11 percent nationally, according to a diversity study included in this year’s research report by the Michigan Venture Capital Association.

As venture capital grows in Michigan, directors at the trade association have given diversity a high priority. Their goal is to increase the diversity of talent within the industry and of prospective investment targets.

“Within the board, there is recognition we’re going to be a stronger industry if we’re able to seize the diversity opportunity,” said Maureen Miller Brosnan, the executive director of the MVCA. 

Miller Brosnan considers venture capital as an industry that’s “more right than ever to tackle the diversity issue and create an opportunity out of it.”

“Good ideas, good entrepreneurs (and) good capital managers are coming from all different perspectives,” she said. “That’s the nature of our industry, to embrace new ideas and embrace things that are different as a way of finding disruptive technologies, as a way of finding solutions. … We just have to make sure that’s reflected in who’s running our companies and who the venture capitalists are.”

The association’s 2016 research report begins that process by offering a look at the present status of an industry that has historically been dominated by white males.

Among the other key findings are:

  • 24 of the 141 venture capital-backed portfolio companies in Michigan, or 17 percent, are led by people from underrepresented groups.
  • Venture capital firms last year invested $6.8 million in 13 startups led by people from underrepresented groups. That equates to 2.4 percent of the $282 million in venture capital invested in Michigan last year and 18 percent of the 74 companies that received investments.
  • 8.5 percent of CEOs at startup companies backed by venture capital are minorities and 10 percent are women.
  • 2 percent of investment professionals in the state are members of the LGBTQ community.

The MVCA’s diversity study “does show that Michigan’s venture capital and startup communities generally reflect diversity in proportions greater than national averages, with significant populations of women and minority venture professionals and CEOs, especially in southeast Michigan,” according to the annual research report.

“Beneath the surface, however, statewide funding data suggest these organizations led by people from underrepresented groups may be systematically underfunded, possibly due to embedded biases or lack of access to opportunities within the community. Identifying and overcoming race or gender biases to surface the most meritorious venture professionals and CEOs could be a profitable goal for the entire industry in 2016.”

At one leading venture capital firm in the state, pursuing that opportunity involves making a deliberate effort to reach out to women and minorities to work in the industry and to target diverse companies for investments.

Ann Arbor-based Arboretum Ventures Inc. actively seeks to recruit women and minorities when it has openings, and tries to identify companies with “A-plus” management teams that include “people from a wide variety of different backgrounds,” said founder and Managing Partner Jan Garfinkle.

“The best people come from a wide variety of different backgrounds. It’s just really important to have all of those different constituencies represented in leadership roles within the companies,” Garfinkle said. “What I hope happens is that other venture funds internalize this necessity to bring along more diverse people and hire more diverse people into their organizations and invest in companies with diverse leadership teams.

“The best companies will be the ones with diverse leadership teams, and I’m a firm believer that the best leadership teams have diversity.”

Garfinkle serves on the board of directors at the National Venture Capital Association that also has made diversity a high priority.

MVCA directors intend to address the subject this year as they embark on developing a new five-year strategic plan for the industry. For now, association staff members are using the data in the annual research report to generate awareness, which begins to send the signal that the industry is open to underrepresented groups.

“All communities — whether LGBTQ, whether minorities, whether women — are generating good ideas. They’re all generating leaders. They’re all generating potential founders and potential investors,” Miller Brosnan said. “The more that we look like we are inclusive, and the more that we actually are inclusive, the more we’re going to attract that additional talent.”

Garfinkle at Arboretum Ventures, which has $450 million in capital under management and 19 active portfolio companies, calls creating awareness “half the battle” to increasing diversity within the industry.

“When I look at the Michigan data, it’s better than what you see in the national data, although it’s still very slight. It’s not nearly as strong as it should be,” she said. “Now the task is how do we change it? When people start to become aware of it, they start to think of creative ways to start to improve it.” 

The MVCA’s 2016 research report details the industry’s continued progress in Michigan.

Capital under management by both state-based and out-of-state venture firms reached a record $5.26 billion last year, up from the $4.84 billion in 2014 and about double the amount of five years earlier, according to an annual research report from the Michigan Venture Capital Association.

Across the state, 74 companies in Michigan collectively received venture investments of $282.5 million in 2015. That represents a 48 percent increase over five years in the number of companies funded and up 174 percent over a decade earlier. The 2015 investment level included the funding of 32 new startup companies.

The growth of venture capital in the state coincides with a push for greater entrepreneurism in the wake of the auto industry’s near collapse years ago, said David Brophy, finance professor and director of the Office for Study of Private Equity Finance at the University of Michigan’s Ross School of Business.

“The demand side of everything seems to be cooking up,” Brophy said. “We’ve all been trying to find a new way of make a living and it seems that entrepreneurship is close to the center of what most people are trying to do. They’re trying to start companies, they’re trying to engage with smaller companies, and so on. And increasingly we see investors trying to respond to that.”

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