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Black start-up founders say venture capitalists are racist, but the law protects them

The Washington Post - Reed Albergotti

In tightknit social media groups and private email chains, black entrepreneurs share their Silicon Valley stories. It often starts with a racist comment from a venture capitalist or a subtle jab that reveals a deep bias. The stories usually have the same ending: a decision to pass on investing.

If those entrepreneurs were applying for a job, they might have a shot at a discrimination lawsuit, employment lawyers say. But in the rarefied world of white-collar dealmaking, legal protections born out of the civil rights movement effectively don’t apply, thanks to court decisions that have watered down legislation. As recently as March, the U.S. Supreme Court further defanged a 150-year-old anti-discrimination law that required plaintiffs to prove defendants were not intentionally biased but also would have made different business decisions if race were not a factor.

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That also stands in contrast to major efforts in the tech industry to better address gender disparities following the #MeToo movement. California lawmakers even introduced legislation in 2017 that strengthened protections against sexual harassment in venture capital specifically.

In the clubby world of venture capitalists, who spent $130 billion in the United States last year and helped anoint the world’s four most valuable companies and countless other successful start-ups, there is effectively no legal backstop that ensures people of color have an equal opportunity to share in its wealth creation. In general, they don’t. Only 1 percent of venture capital money goes to companies founded by black entrepreneurs, according to a Silicon Valley Bank study.

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More than a dozen black entrepreneurs, most of whom spoke on the condition of anonymity for fear of retribution, said in interviews that deeply ingrained racism plays a role in the low levels of funding for black entrepreneurs. Several entrepreneurs described being mistaken for delivery workers when they arrived for scheduled pitch meetings with venture capitalists. In one group of black tech employees who share stories online, an entrepreneur described being asked by a venture capitalist to “tone down the black,” according to a member of the group who described it to The Washington Post. The person spoke on the condition of anonymity because the group is private.

A common tactic black CEOs say helps them raise money is bringing at least one white employee to pitch meetings. One black woman described bringing a white friend who wasn’t even affiliated with her company to a meeting. The tactic worked, earning her an offer of investment.

New, stronger civil rights laws, which would come with the threat of legal action, might help change this, lawyers say. “The legal obligations would prompt an organization to develop essentially a compliance framework,” said Johnson. But even if it didn’t, she said, lawmakers should strengthen the laws because “it is the right thing to do.”

“The law unfortunately hasn’t caught up to the fact that a lot of these decisions might be based on implicit biases — not overtly racial conduct,” said Menaka Fernando, a partner at the law firm Outten & Golden.

The disparity hurts black entrepreneurs. In a Kauffman Foundation analysis of a 2014 Census Bureau survey, 28 percent of black entrepreneurs reported their profits were hurt by lack of access to capital, compared with 10 percent of white entrepreneurs.

Adding to the problem, representation of black people in the top ranks of the venture capital industry is extremely low. A 2018 survey of the 102 largest venture capital firms conducted by the Information found of the 713 members of senior leadership, there were seven black men and zero black women.

A Stanford University experiment published last year found the institutional investors who allocate capital to venture firms were biased against VC firms with black partners, evaluating them lower than white firms with the same qualifications in an exercise rating hypothetical firms.

Legal hurdles aside, the black entrepreneurs said complaining about race discrimination, let alone hiring a lawyer and taking action, would amount to a career death sentence. In fact, lawyers said they weren’t aware of a black entrepreneur ever bringing a discrimination lawsuit against a venture capital firm over an investment decision.

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