Inside VC Interviews: Act One's Alejandro Guerrero
Act One Ventures has always made it a priority to include diverse founders in its portfolio companies. In the wake of George Floyd's murder and the ensuing Black Lives Matter protests, the firm's principal Alejandro Guerrero introduced a diversity rider to its term sheet to ensure that diverse investors have a chance to participate in its deals. Greycroft Partners, First Round Capital, Maveron, SVB Capital, Harlem Capital Partners, Fifth Wall, Plexo Capital, Precursor Ventures, and Equal Ventures have signed on to the project. I was lucky enough to recently be able to pick Alejandro's brain on how he came up with the idea, what he expects to come out of it, and how it was able to come together.
PS: I first covered the diversity rider in a Bigger Picture Feature. Check it out for even more context.
Q: Act One began with a mission to fund promising startups irrespective of their background. You now have a portfolio with 70% of founders being BIPOC, LGBTQ+, or women. Beyond your dedication to inclusion, do you think your success with this strategy helped convince other investors? Or is the default, unspoken skepticism too deeply entrenched?
A: Our collective body of work — the fact that we have raised two funds, we’ve been doing this for five years, both myself and Michael Silton have been founders — gives us a level of credibility to be able to discuss the challenges that are present. But I wouldn't say that our 70% is what helped to convince other investors because people in our industry have been talking about this for a while. You can't be an investor in the United States of America and not be completely aware of the lack of diversity and the frustration of folks from underrepresented communities who want to get into this industry. As for the rider, the murder of George Floyd caused a seismic moment in time that got everyone to stop and think. It presented an opportunity to have a new kind of discussion as an industry that I don't think was really there prior.
Q: I use Crunchbase’s data fairly frequently and noticed the Diversity Spotlight program right when it came out. One of my first thoughts was that it was US-specific. While the problems in the US are very real, the activity of VCs globally is also highly tiered: Africa accounts for only a tiny fraction. Do you see the rider and the discussion it is meant to start extending into a discussion on a global level?
A: Yes, absolutely. There is no question that if you look at the way finance, in general, is handled across the world it's typically a small group of folks of privilege and access who control that. I don't know what racial and ethnic barriers are keeping certain folks of color out in other countries, but it's fair to say that there still needs to be more done so that it's more inclusive. I hope that this does extend those conversations to whatever part of the world folks are deploying capital and thinking about how they need to do more for underrepresented individuals or communities. I hope the U.S. will be seen as the leader in this pursuit.
Q: You have stated that the deaths of George Floyd and Breonna Taylor were the catalyst for the introduction of the rider. How do you see venture capital investments and startups interacting with the larger socio-economic situation in the United States, and with issues of police violence in particular?
A: This is about creating a level of access to an asset class that historically has driven some of the largest returns out of all asset classes. So if we're talking about how to change the socio-economic situation in the United States, it starts with being able to get access to these types of game-changing investments. When those deals go big, these new investors are going to be recipients of the windfall, and that will seriously positively impact them as individuals and their families as well. The divide between the wealthy and the poor really boils down to these issues of privilege and access, so we need to have more underrepresented folks in seats that can drive change.
Q: A TechCrunch Human Capital feature criticized some of the language of the rider, claiming that the commitment to ‘commercial best efforts’ needed to be replaced with one to ‘make every attempt’ to include diverse investors, as the former is based on somewhat subjective conditions. What do you understand commercial best efforts to be, and to what extent is the wording deliberately vague to allow for flexibility among firms?
A: No question that it doesn't have the teeth to have enforcement, but that was not the point. The point was to create something where the call to action was so abundantly clear that if you signed up for it you knew exactly what that meant. And we designed it with the flexibility and the understanding that every fund is different, but it doesn’t matter your size or how much capital you’re managing, you will be able to use this. If you’re going to adopt the rider, you’re committing to embedding it into how you operate. You’re committing to the fact that it’s going to take work, but it’s work that will ultimately push change and drive the diversity needle forward.
Q: What was it like approaching firms to sign on to your project? No need to name any names, but were there instances of partners or managers turning you down outright?
A: I talked to a lot of firms. I’m very appreciative of the ones who committed. Others provided incredible feedback that ultimately helped shape the final Rider. Some wanted to see the Rider play out a little further. Everything is about timing. I was under no illusions that everyone was going to jump on it right away.
Q: Do you think the inclusion of diverse investors will encourage more people interested in investing in Black people or other underrepresented groups to enter the field? Do you anticipate any currently active investors from these categories to reject offers to get involved and instead insist on operating outside of the established networks?
A: I think that when the industry is more reflective of the racial and ethnic makeup of the United States, more and more folks from underrepresented groups will feel comfortable in this world. And younger generations will take notice and hopefully see new opportunities for themselves.
Q: To what degree is this a short-term solution to a much longer-term problem? There have been numerous criticisms of firms being dedicated to diverse founders, which creates a parallel system. How long do you think it will realistically take to create a holistic, truly merit-based venture capital ecosystem with networks serving people irrespective of skin color?
A: This was not designed to be a short-term solution. This was designed to be impactful and long-lasting. No one involved with the rider has ever thought this would solve the problems overnight or that it would be easy to implement right away. It’s going to take time, it’s going to take some work, particularly for folks who don't have those networks of diverse folks to bring on as co-investors. It all comes back to that networking, and the more folks that we bring into our networks that are coming from these underrepresented communities, the more trust we're gonna start to develop with them, and then hopefully from that, we will see the ramifications of higher levels of deal flow of diversity being shared between the ecosystem. This could be used in any deal that you do. It’s just a question of: does the founder want to ask for something like this and is the investment team willing to put in a little bit of the work to get there.
Q: I recently read about the difficulty BIPOC investors at established firms have when they try to insist on opening investors to more diverse founders. Simultaneously, young investors who set off to found new firms often find themselves with a dearth of LPs. Do you see the rider as a way of bridging these two, somewhat competing problems?
A: I see the rider as a means to have a more consistent discussion around the importance of diversity of the cap table during the deal-making process. If we are consistently having this discussion when we're doing deals, it's gonna drive a conversation around, who is in our networks and if we don’t have them how do we build these networks because we're thinking about access, we're thinking about the future, and I do believe that the more we talk about this the more comfortable we're all going to be around the topic, the more knowledge we're gonna have over the course of years, and I just think overall that's a positive for the ecosystem. I think the rider will impact the two particular segments you mentioned, through the fact that diversity discussions will continue to be at the forefront of how we hire, promote, invest, and support. All of this combined is needed to help move diversity forward in our industry.
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