Fixed Pies And Controlling Outcomes

Read this in the email from TermSheet.  (italics mine)

WOMEN IN VC, BY THE NUMBERS, IN THE PANDEMIC: PitchBook, alongside Microsoft for Startups and Beyond the Billion, analyzed the coronavirus’ impact on women founders. It found that the “pandemic has disproportionately impacted female founders and CEOs negatively, despite undeniable, long-term gains in VC investment over the past decade.” In the first three quarters of 2020, funding to female founders dropped 31% compared to the same period a year earlier while funding to all-male teams fell just 16%. Read more.

Here is the line that bugs me; “while funding to all-male teams fell just 16%”.

The data cited says nothing.  It doesn’t tell me anything about what sorts of businesses the women-led ones were.  What if they were all in the entertainment and events industry?  What if they were commercial or retail real estate plays?  What stage were they?  Were they live in the market or were they an idea on a spreadsheet/PowerPoint?  There are way too many variables for funding.  You could make the case that it had nothing to do with gender and everything to do with the market.  Or, you could make the case that Fortune is simply publishing clickbait.

What a stupid way to keep score.  There is no way to sugarcoat it.  Not only does it tell you little about businesses that applied and were rejected but it imagines a world in which there is a fixed amount of capital that will go into venture-backed companies.  My friend Marc Halpin wrote a blogpost about raising money.  I invested in Marc’s company Kapow and it failed.  I lost 100% but we are still friends.  In his post Marc says,

When I met Jeff back in 2010 across 365 days, $27B was deployed in venture capital across the USA. Pretty strong, right? 

The numbers just came out for Q3 2020. Over just 90 days, $37B was deployed. That’s right: $37Bn in 90 days! Q3 2020 just became the second highest quarter of deployment in venture capital history.  

Remember, capital is being allocated in a worldwide pandemic where almost 100% of the meetings are virtual.  If anything, there is heightened awareness to any sort of bias among VCs combined with the public-virtue signaling that would go along with any investment.

I am sorry, the current data doesn’t point to a “fixed pie” type allocation situation.  In fact, more and more capital is finding its way to alternative investments as people chase yield.  One of the great things about the internet is information is more transparent and disseminated faster.  People that do research on asset returns are able to get their data out into the market to be digested and acted on.

Returns to venture are better than the stock market.  Returns to private equity are better than the stock market.  That’s why we have seen more capital flow to alternatives.

Of course, there are opportunity costs of liquidity and risk and other things but each asset manager can decide what their preferences are and act accordingly.

The flip side of this is in the VC community there is a movement to control outcomes.  There are so many engineers in VC that they want to “solve for a problem”.  When you approach something from that perspective that means there is an answer.  Like a differential equation.

Markets don’t work like that.  That is the fatal flaw in their analysis.  The real tough thing about the free market is that you allocate money to it, and you have no control over the outcome.  Engineers absolutely hate to lose control.  They hate uncertainty.  They want a solution.

Besides, if there is in fact racism on the part of LPs that allocate the money to funds, or racism on the part of funds that allocate money to businesses, where are the lawsuits?  Wouldn’t you be able to sue in court if there was racism or discrimination?

Venture investing has highly dependent variables.  Distributions are not iid.     Venture investing also is highly dependent on networks.  This doesn’t mean that women and minorities shouldn’t get capital.  THEY SHOULD.  But they need to be evaluated based on their merits as investors just like old white guys.  There are white guys without track records that raise money, and I would agree that women and minorities be judged with the same lens.

When anyone gets rejected, it would be helpful for the LPs to say exactly why they are being rejected in certain terms.  Not some generic response.  Transparency might hurt, but it’s good.  It stops people from playing the victim card and helps them get better so the next time they might succeed.

I’ll leave it to the LPs to decide what objective criteria they would use to analyze one manager versus another manager.  But, simply looking at skin color or gender is unobjective and is trying to control outcomes versus participating in a market.

If someone wants to allocate capital to women only, or minorities only, I don’t have a problem with it at all.  It’s actually better for me, because I know not to spend time trying to interact there.  Will they get better returns?  The same returns?  Worse returns?  It’s hard to know and far too soon to tell.  We know from the data on stock market investing that if you bias your portfolio to “socially conscious investing” you will do significantly worse on ROA than if you invested without that constraint.

Here is an anecdote that sort of sums up the bias in the larger venture community these days.

A company applied to an accelerator.  The accelerator’s managing director was female.  During the initial conversation, she rejected the company because it was staffed with all white people.  She never asked the CEO about why.  Turns out he had interviewed 9 PhDs, all female, and none of them wanted to take the risk of working with a startup.

Was she wrong?  Was she right?  All I know is when you paint with a broad brush and inject your own confirmation bias you get what you get.  You aren’t following the market and you are trying to control outcomes.  In my experience, that usually doesn’t work out so well for investors.

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