Becoming a Signal Above the Noise

Bradley Miles


I’ve always taken a bit of a non-traditional path. Before starting college, I founded a media startup for independent filmmakers with a close friend. We raised a (very) small amount of money but ended up shutting the business down after a year. I remember sitting across the table from a venture capitalist, she couldn’t have been more than few years older than me at the time. She astutely analyzed my now-defunct startup, suggesting ways we could have re-routed marketing efforts by looking closer at customer acquisition costs, sales cycles and customer lifetime value.

The conversation went on for some time. I planned on asking if she specialized in the space but the conversation quickly pivoted to transportation technology...and then healthcare, followed by drones. I was drawn to the way she navigated each conversation with such skill and depth. I  knew that if I ever wanted to have a successful business, I would need to see the market like her and really touch the entrepreneurial process of so many brilliant founders as she had.    

The way venture capitalists perceive companies has always impressed me and my aim was to work in the industry after starting college. Aside from a few coffee conversations, I knew next to nothing about venture capital and always wanted a straightforward and easy-to-read book on how to enter the industry. Prospective bankers and consultants had the luxury of these how-to guides so why not VCs? Last year, after a few weeks of searching and finding nothing, I decided to write my own.

#BreakIntoVC is the book I wish I had when I was trying to land a job in venture capital and the response so far has been tremendous. This is the type of mentality we need to adapt when pursuing a career in venture capital or any high growth industry for that matter. Partners at VC firms are trying to source great companies in order to provide great returns to their investors. In order to do this successfully, they need to source great people and often bias their search toward networks, clubs and institutions that have traditionally been difficult for people of color to access. Diverse candidates need to find ways to continually send a signal that they are the most valuable people in the room.  

We've all likely heard that less 1% of venture capital money goes to African-Americans and people of colour — a colleague of mine recently revealed an even more striking statistic: despite black women owning and operating 100,000 tech businesses in the US, only 13 have raised over $1m.

These realities impact people of color who are trying to work on the other side of the table as well. I didn't really have access to mentorship or any particularly strong connections when I was pursuing a career in VC, so I realized the first time investors heard my name it wouldn't have the network effects of my counterparts.  

I thought long and hard about this and decided to build a brief career as a research analyst. No one can dispute a well-written research report. I created an approach where I would get as granular as I could on a sector until I became an asset to the venture capital community. I realized my barriers to entry were not just my own, and this strategy could work well for others that didn't have connections in venture capital, particularly people of color. I give a thorough outline of how to analyze a company in chapters 8 and 9 of #BreakIntoVC.

In order for diverse candidates to stand out, they need to become what I call “a signal above the noise". This is to say they need to credibly display information about their ability more so than the average candidate in the tech sector. My background is in economics so a lot of my approach drew from Nobel Prize-winning economist Michael Spence and his work on job-market signalling. His 1973 paper — now somewhat novel — simply shows that employers search for signals from employees that indicate a high level of job performance. Spence uses education credentials as the main signal but we can extrapolate the model to include research as well. 

A research-driven approach

If you were to google my name and blockchain (“Bradley Miles blockchain”), the first page of results contains articles I’ve written on the space as well as quarterly and annual reports, The State of Blockchain, which summarizes key trends, data, and insights from the prior period.

Outside of being the author of #BreakIntoVC, if I were to have a conversation with an investor, the dialogue would naturally shift towards bitcoin and blockchain. I’d become "the blockchain guy”, which isn’t a bad thing as the latest report shows. The State of Blockchain gave me a personal brand and access to some of the most brilliant people in the industry, which also gives me access to new deals quicker than most VCs, a huge value-add in the industry.

I only mention these things because what I did in the bitcoin and blockchain space is highly replicable and value-accretive for anyone serious about pursuing a career in venture capital.  

A portfolio of research will continue to pay dividends in your career whether you pursue opportunities in VC or the larger tech ecosystem. Showcasing a body of work demonstrates exhaustive industry analysis and is your way to become a signal above the noise.

 You’re not only aiding yourself, but the venture capital industry in aggregate. Many studies indicate that diverse cohorts out-innovate and out-perform others as well as stimulate creative outcomes. Could the market be correct that only 13 of 100,000 black female-owned tech businesses (.013%) deserve venture capital? Of course not, there’s drastic inefficiency but also opportunity.  

My friends at Harlem Capital Partners and Troy and Marlon at Cross Culture Ventures are continuing to find businesses like Mayvenn and Blavity that are modernizing entire markets. There are multitudes of diverse entrepreneurs out there trying to do the same. Let’s find and support them by publishing a strong research-driven analysis of their business.    

-- 
Bradley Miles is the author of #BreakIntoVC, a simple and approachable guide to thinking like a venture capitalist. He is also an investor at Stripes Group, a leading late-stage venture capital firm that makes $10-150 million investments in Internet, Software, Healthcare IT and Branded Consumer Products businesses.

 Bradley’s  goal is to become one of the most accessible VCs in the world. He’s given lectures at Harvard and Wharton on #BreakIntoVC and this research-driven approach and he’s looking to explore more of the industry in Europe.

His book is available on Amazon now, and you can contact him on bradley@breakintovc.com

 

Diversity Champions

We're not the only ones who are passionate about diversity.

Check out some of the fantastic initiatives below, from supporting flexible jobs to women in private equity. 

Why Venture Capital doesn’t work (as well as it could)

TLDR: in Venture Capital, diversity of thought is either missing or not ‘in play’ in 90% of venture firms. In order to improve fund and industry performance, as well as for the benefit of society as a whole, this must be urgently addressed.

Despite talk of inflated valuations and bubbles, it’s a great time to be a Venture Capital investor, especially in Europe. Accel and Octopus have just announced new funds, following hot on the heels of Local Globe, Mosaic and others. Even investment from China is coming. From London to Berlin, Stockholm to Lisbon, Tel-Aviv to Athens, there are many reasons to feel optimistic.

However, Venture Capital is still a sector with one of the most homogenous workforces in the world. Until VCs address this issue properly, they will make worse decisions, they’ll be less likely to find innovative ideas, they’ll have an imperfect understanding of new markets and they will struggle to hire the best talent.

VC’s problem with diversity

This is by no means the first article about the lack of diversity in VC and it definitely wont be the last. The subject of diversity in tech is already a well-worn (and some might suggest wearying) theme, so much so that it is the subject of frequent parody by the excellent FOMO Capital.

FOMO Capital’s pinned tweet about #diversity

However, there are good reasons why diversity in tech is still frequently spoken of, particularly with regards to diversity in Venture funds. Venture still lags behind so many other industries on diversity, tech companies included. A 2015 US Study (data here), that looked at 71 top firms, representing more than $160 billion in assets, found that at partner level, 77% were white and 91% were male. Only 2% were female and not white. A Fortune study from 2016 showed only 6% of VC professionals in larger US funds are women, and that has actually declined since 1999. It is still the case that if you’re from a different race, religion, sexual orientation, age or professional background from the industry norm of a white heterosexual middle-class male, you are going to find it more difficult to get a job in a VC.

There are many possible explanations for the lack of diversity in VC — hiring practices, feeder industries, life stage. However, there may be a more fundamental reason for why a lack of diversity persists in VC particularly. It may be because of a structural bias in the way that VCs make decisions. Most VCs practice “pattern matching”, where the investor searches for the same metrics, the same leadership qualities, the same network effects/ stickiness/ mission driven teams [/insert investment thesis here/] with which they have succeeded previously. While pattern matching is an important part of assessing dealflow and therefore can be useful, it can also lead to the VC surrounding themselves with similar companies, similar hires, similar investment committees and therefore similar thinking. This type of pattern matching is the enemy of innovation. It leads to group think and consensus around the median, the middle of the road— whether this be companies or people.

Remind you of anyone?

Will increasing diversity increase fund returns?

Data in VC mapping diversity to performance is hard to come by and where data on individual or fund performance does exist, for example the Midas List, it is hard to draw any conclusions because the composition of the list largely reflects that of the industry (with 5% of women in 2016 for example). A proven positive effect on fund performance is likely to prioritise the issue. So we desperately need to get a lot better at tracking and reporting data. The recently launched Project Include is a great place to start if you are at a fund and want to understand how to do this (or take a look at the real world example set by the team at Homebrew). Until we have access to this data it is impossible to say definitively that increasing diversity will increase returns. But the evidence from numerous studies across industries and stages that increasing diversity improves company and industry performancestrongly suggests it should.

What can you do today?

So apart from collecting the data on diversity statistics in your fund and portfolio, what else can you do today? To answer this question, we startedDiversity.VC*, which launched a month ago in partnership with Kea Consultants and supported by EVCN and Astia. We held a discussion with some of the best known VCs, from the most highly regarded funds in Europe, exploring the question of whose responsibility it was to encourage diversity of thought in VC firms. What came out most strongly from the discussion was the desire for change and for practical advice on how to bring this change about, and quickly. So in that spirit, below are the five simple things you can do to increase diversity and therefore, we suspect, the ultimate success of your fund:

1. Acknowledge the issue and act on it. The first step to addressing the diversity challenge in VC is to acknowledge that it exists. There are some people working in the industry who don’t. Once acknowledged, rather than hand-wringing, it is easier than you think to take the first step towards addressing it (even if it might feel small to you).

2. Work out whether you’re sending the right (or the wrong) signals.Take a step back to see whether your firm is sending unconscious messages that discourage applications from certain groups. These resources are an excellent place to start, and people like Brittany have written and spoken on this subject for the start-up community but her tips can be applied everywhere.

3. Take proactive steps when hiring. If you are looking for your next intern, associate, principal, venture partner or partner, take these steps (many of these are taken from GV’s excellent video on unconscious biases):

a. Clearly define what you are looking for (i.e by writing a job description with specific roles, responsibilities), even if just for yourself. For help in writing job descriptions that are not biased, see here

b. Look beyond your networks (whether they be school, university or social)

c. Conduct a formal interview process where candidates can be fairly compared

d. Acknowledge your unconscious biases (you can take a simple test here)

e. Hire by committee (as diverse a committee as possible). It sounds counter-intuitive but having multiple viewpoints and perspectives will reduce the influence of unconscious biases

4. Create a supportive environment for everyone. Consider your maternity and paternity leave policy, flexible working policies, investment committee protocols and office environment and consider whether these might be biased or skewed to any particular group.

5. Help the community. Whether you are in a position to offer your time as a mentor, suggesting speakers for conferences when you see a lack of diversity on panels (for more on this see here and here), or whether you want to help with Diversity.VC, the community will benefit from your engagement.

Who we are

*Diversity.VC has one simple aim: To increase diversity of thought in venture capital. Diversity of thought covers many types of diversity, educational, cultural, professional, gender, racial, sexuality, income and much more. We are doing this by:

  • Building a network of diverse VCs. If you are a VC who is interested in being part of these events or in promoting diversity of thought within VC, please get in touch with us and we will add you to our mailing list. We’ll be running events throughout the year.
  • Helping to connect VCs with more diverse applicants. If you’re responsible for hiring at a VC and are looking for more diverse candidates we can help.
  • Promoting the broader organisations across the technology world who have similar objectives to ours to our community. This includes collaborating on conducting a piece of research to map diversity of thought against fund performance. If you’re aware of any research or organisations that you think we should talk to about collaboration, or you are doing something related yourself, please let us know.

We’d love to hear from you with feedback and advice. Please pass on and if you want to talk, you can contact us on email at: diversityvc@gmail.com, or contact me on Twitter.

Thanks to all those who have done studies in this area that we have cited here. Thanks also to everyone who has advised us on this journey or attended our event and our panellists.

Research and resources

[1] https://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=8128F3C0-99BC-22E6-838E2A5B1E4366DF

[2] http://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters

[3] http://brittanymlaughlin.com/post/113154741023/how-to-start-talking-to-your-team-about-diversity

[4] https://hackpad.com/Diversity-Resources-vZ0swkC900b#:h=Unconscious-Bias-Resources:

[5] http://blogs.wsj.com/venturecapital/2012/10/04/women-executives-make-venture-backed-companies-more-successful-study/

[6] http://www.babson.edu/Academics/centers/blank-center/global-research/diana/Pages/home.aspx

[7] https://business.linkedin.com/content/dam/business/talent-solutions/global/en_US/site/pdf/playbooks/linkedin-diversity-hiring-playbook-en-us.pdf

[8] https://implicit.harvard.edu/implicit/takeatest.html

Whose responsibility is it to encourage ‘diversity of thought’ in VC firms? And why?

Last month, Diversity.VC*, supported by Kea Consultants and the EVCN and held a panel discussion covering this question and many others with a group of 30 venture capitalists and a group of fantastic panellists from many parts of the VC industry.

The discussion was personal, free flowing, challenging at times and the room hummed with debate and ideas. Thank you to all those who came and especially the brilliant panellists. Chatham House rules apply so we can’t disclose who said what specifically. Nor can we give you a definitive set of answers and a rulebook on how to increase diversity of thought in VC firms. 

However, the discussion raised many thought provoking questions, from the philosophical to the practical, and we wanted to share these as widely as possible in the hope that they will promote introspection and consideration from everyone at every level of our industry, as they did on the night for us.

  1. What does diversity of thought really mean? How should we measure it? One thing that came up strongly in the discussion was the lack of educational diversity of thought in our industry. The majority of people we work with will have been educated in very similar ways at a handful of institutions, as that’s the shorthand that is used for ‘good’. Until we are around people who have been educated differently, who have a different cultural context, will we struggle to think differently?
  2. Is the structure of VC working against diversity of thought? 90% of the deals bought into VC partners are from associates, are partners training them to seek outliers and challenge the status quo? Or are partners encouraging pattern recognition, which hasn't exactly been proven to generate the best returns. How can we prove that diversity actually improves fund returns? 
  3. Should we be looking at the broader structure of VC? In Venture Capital there are three parties, the LP, the GP and the investee company. Even if the diversity agenda is top of mind amongst the GP, and the investee, do we need the format to change for LPs who provide the capital? Many LPs have it written into their constitutions that they cannot invest in first time funds (many of which are more progressive on the diversity of thought agenda), does this leave us in an impossible position with a sluggish trickle down rate of change? Three of the best performing funds worldwide (Sequoia, Benchmark and Accel) are far from diverse, so what does this tell us?
  4. Is diversity of thought a positive or negative thing for VC / company relationships? The business of VC is all about relationships, choosing whether to ‘get married’ to the partner or partners you choose to run your fund with, choosing companies that you will be working incredibly closely for the next 5–10 years. So we are programmed to look for harmony in these relationships and often harmony comes from not having cultural discord or structural reasons to disagree. However, the relationship between harmony and performance is an inverted U, so how do we reconcile harmony and performance? Some collision and conflict has been proven to generate better team performance. So how can we strike this balance? 
  5. What is more important — choosing the ‘best’ candidate or achieving diversity of thought? The question was raised about what the definition of ‘best’ was in this context? Is best based on ‘cultural fit’, being able to agree with the structure’? Having a certain number of twitter followers? (this criteria was apparently cited as a deciding factor in hiring of associates) Are we all chasing a definition of ‘best’ that is wrong-headed? How can we think differently about the idea of merit?
  6. How can the VC culture be changed to make it more inclusive? Does this have to come from the partners only? Should ‘culture workshops’ where the team gets together and writes up some words on a white board and then everyone forgets what they were four months later be banished? Is there anything that junior people coming into a homogeneous firm can do? Is it each of our responsibility to continue to educate people about what is acceptable and what is not, what is inclusive and what is not?

*Diversity.VC has one simple aim: To increase diversity of thought in venture capital. We are doing this by:

  • Building a network of diverse VCs. If you are a VC who is interested in being part of these events or in promoting diversity of thought within VC, please get in touch with us and we will add you to our mailing list. We’ll be running events throughout the year.
  • Helping to connect VCs with more diverse applicants. If you’re responsible for hiring at a VC and are looking for more diverse candidates we can help.
  • Promoting the broader organisations across the technology world who have similar objectives to ours to our community. This includes collaborating on conducting a piece of research to map diversity of thought against fund performance. If you’re aware of any research or organisations that you think we should talk to about collaboration, or you are doing something related yourself, please let us know.

We’d love to hear from you with feedback and advice. Please pass on and if you want to talk, you can contact us on email at: diversityvc@gmail.com, or contact me on Twitter.