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The fallacy of vanity metrics: Why they do more harm than good for underrepresented founders

Research shows that raising money is harder for women and people of color than it is for white male founders.
Darrel Frater - Divisão de financiamento

Follow Darrel on Twitter @Darrel Frater

Research shows that raising money is harder for women and people of color than it is for white male founders. In 2021, investors spent nearly 17% more time on pitch decks from all-white teams who then went on to raise over 40% more money than diverse teams. Time spent on individual slides remained equally unbalanced. For example, VCs spent 78% more time on the competition section for minority founders even though it ranked near the bottom for all-white teams.

Relatório de divisão de financiamento de 2022

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While data points like these shine a spotlight on disparities across the industry, they don’t explain why these biases exist and what the root causes are. From my standpoint as a pre-seed venture capitalist and a Black founder, the pre-seed stage is where we’re seeing underrepresented founders get overlooked the most. The “why” stems down from two things: Investor bias mixed with the fallacy of vanity metrics.

Without a relationship, traction is the only validator

Earlier this year, I sent a cold pitch to a VC for my startup, TheClub. His dismissal was as swift as it was concise. After a 25 second scan of my deck, he quickly responded: “…we wanted to see a bit more traction…”. As a VC, I can’t invest in every founder who sends me a deck so I completely understand. What was alarming in this case was the fact that by using DocSend to share my deck I was able to see that he stopped reading my deck before he even got to the traction slide.

Why did he say he wanted to see more traction when he didn’t even bother to look at the metrics right in front of his face? Did he stop viewing because he realized I was Black? Was it because he just didn’t know me?

Establishing trust with investors can be hard: without a warm introduction, VCs tend to be more skeptical about whether your idea has the potential to become The Next Big Thing. One reason why a lot of investors find it harder to believe in and invest in Black, Brown, and other underrepresented founders is that they simply aren’t in the same networks. They don’t know these people because of the school they went to or where they grew up. Without these common connections, investors spend less time reading decks because they’re only looking for one thing: company traction. If the company has meaningful traction, there’s no need for them to rely on their trust in the founder. The traction speaks for itself.

The problem with this approach, and why it’s inherently flawed, is that at the pre-seed stage there rarely is any traction available to make meaningful judgment of. So if your metrics don’t match up with what the VCs are used to seeing, they use that as reasoning to not fund you or even take a meeting to learn more. Without these common connections or traction metrics, minority and underrepresented founders are far less likely to get the funding they need that will give them the opportunity to get initial traction. Hence, creating a cycle of underrepresented founders being left out of the funding ecosystem.

All traction is not created equal

At later funding rounds, it’s much easier for companies to stand on their own merit. Investors can look at all sorts of growth and revenue metrics to find the validation they need. But for pre-seed stages, the only qualifier that exists is company traction, which can look drastically different based on the founder’s background and/or their available resources.

For example, take a founder who doesn’t have any financial backing and funds their company on personal credit cards versus one whose rich family member invests $200,000 in their startup. Founders with capital early on can quickly rack up a 50,000-person waitlist by running a subpar ad campaign on Facebook. On the flip side, founders who don’t have early capital will talk to hundreds of people to build a 2,000-person waitlist.

On paper, this ends up looking like a no-brainer. A startup showing 50,000-person waitlist clearly outshines one with 2,000 people. Or does it? In reality, the quality of those 2,000 people tends to be far stronger than the 50,000 strangers who clicked on a targeted ad. But investors take these numbers at face value because they overlook the work necessary to effectively evaluate founders at this stage. Funding decisions are then anchored on these vanity metrics and they miss out on the stronger business opportunity due to their inability to assess business fundamentals.

Finding Alpha: Solving problems other folks simply can’t see

Fixing the funding divide is far bigger than solving one or two problems. We’re looking at an interconnected web of different complex problems with individual focuses and solutions. One thing, however, is certain: The work needs to start at the very earliest moments in companies’ lifecycles.

To get more underrepresented founders to series A, B, C, D, and beyond we need investors to back them at the earliest stages. This can’t happen if VCs continue to pattern-match based on who they know or what they’ve seen in the past.

Adding diversity to the problems we’re solving unlocks a new level of value. Black, Brown, and other underrepresented founders are solving problems in the market other founders aren’t able to see. These are net-new problems other investors and founders aren’t exposed to and VCs and their LPs can get greater returns because of it.

Visible Hands is a venture capital firm founded on the belief that investing in women, people of color, and other minority groups is key to a more prosperous and equitable future for everyone. That the best solutions come from those closest to the problems. And as our world and problems evolve, so should our problem-solvers. Finding these blind spots and, more importantly, the right people to solve them, is where the greatest opportunities lie.

To put it into perspective, picture the popular iceberg meme. The tip of the iceberg sticking out of the water represents problems that most folks see today. Underneath the water are all of the problems that actually exist. These problems aren’t easy for everyone to see, yet they make up a much bigger picture of the total market opportunity.

Tapping into all this underlying knowledge, innovation, and market potential only remains that much harder and slower if minority founders and their ideas are overlooked from the very beginning.

Applications for the next cohort of the Visible Hands accelerator opens on April 5th. We invest up to $175K into ~40 underrepresented founders at the pre-seed (Idea, Pre-Product, Pre-Revenue, Early Traction) stage each year. If you are or know an underrepresented founder that deserves a fair opportunity to build their world changing business, we would love to meet them. You can learn more about Visible Hands at our website.