All For One: Over 70 Venture Funds Band Together, Sign Open Letter Denouncing Lawsuit Against Fearless Fund

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The affirmative action debate has entered the venture capital building, with a bang. On August 2, 2023, the American Alliance for Equal Rights founded by the notorious conservative crusader Edward Blum, sued the Atlanta-based Fearless Fund, claiming the fund is operating a “racially discriminatory program” in violation of Section 1981 of the Civil Rights Act of 1866.

According to the Wall Street Journal, over the last 30 years, Blum has made it his mission to seek out plaintiffs and bring “reverse discrimination” legal cases, mostly in the higher education space, but also against diversity efforts in corporate America. Blum has said: “You cannot remedy past discrimination with new discrimination” and seeks to remove “racial preferences from American life”.

It was in fact Blum’s nonprofit organization, Students for Fair Admissions, that successfully sued the University of North Carolina and Harvard College, in the two landmark Supreme Court cases that struck-down affirmative action, on the basis that taking into account racial considerations in the college admissions process violates the Equal Protection Clause of the Fourteenth Amendment.

Now, less than two months after that shocking Supreme Court ruling that literally rippled across the country, Blum’s mark is set on diversity-focused funds and programs providing start-up capital to entrepreneurs and small businesses.

The first target: The Fearless Fund, a $42 million seed-stage venture capital fund and non-profit foundation, launched in 2018 by Black women executives Arian Simone and Ayana Parsons, with a mission of investing and empowering women of color-led businesses.

As If It Wasn’t Hard Enough for “DEI” Funds

Simone, recently appeared on CBS Mornings to defend her business, sharing that “this program wouldn’t even exist if there wasn’t a need for it.” According to Crunchbase, Black women receive less than 0.35 percent of all VC funding (2021 figures); while Black founders more broadly receive approximately 1% of all VC funding in the US – an estimated $2.254 billion out of the $215.9 billion in venture capital deployed (2022 figures).

In a 2022 report published by Diversity VC, under 2% of the $31 billion held by the 200 venture capital funds surveyed for the study, was allocated to startups with women and minority leaders. And while the reasons for the racial and gender disparities are plentiful, as Simone points out, much of it boils down to proximity – and more specifically, a social phenomenon called homophily, or the tendency for people to seek out or be attracted to those who are similar to themselves. Hence, the importance of getting capital into the hands of diverse asset managers cannot be overstated.

What many do not realize, however, is that those who seek to address the funding gaps – as capital allocators and asset managers, face equally challenging obstacles. According to the nonprofit Diversity VC, funds focused on DEI and funds managed by under-represented talent are disproportionately underfunded compared to their peers. Why?

Perhaps most obviously, the mercurial corporate attitudes towards DEI, which were comin’ in hot during the “season” of George Floyd, have now cooled, as the appetite for diversity line-items in tightening budgets has grown thin. In addition, DEI funds are often led by first-time fund managers, without a track record, and thus it’s hard to get limited partners (“LPs”) to invest – particularly institutional investors with deep pockets such as pension funds and university endowments. And finally, many women and minorities lack the network of capital relationships that can write the size of checks needed to raise a substantial fund.

As a hypothetical, let’s say, you were a new VC who wanted to raise a modest $15 million fund. Based on SEC rules, you cannot have more than 100 investors in the fund, so each LP would need to contribute at a minimum, $150,000. Assuming your LPs are allocating 5-10% of their investment assets to venture capital (venture is after all one of the riskiest asset classes), you would need to find 100 high net worth individuals who have at least $1.5 million – $3 million in assets to invest. Simple, right?

I spoke with Atlanta-based venture capitalist Shila Burney of Zane Ventures, a solo Black female GP, who shared, “raising capital to invest in underrepresented founders…has been an uphill battle, particularly as a Black woman and a first-time fund manager…I’ve faced a confluence of biases – be it gender, race, or regional stereotypes – that have made it challenging to secure the funding needed to empower these promising entrepreneurs.”

Simone and Parsons of the Fearless Fund, are first-time fund managers, focused on early-stage investments in the DEI space, and were able to raise $42 million from LPs, including Mastercard, Costco, Bank of America and PayPal. And, to-date, their foundation has awarded over 356 grants between $10K and $20K, while the fund has invested over $26.5M in 41 companies, with check sizes ranging from $500K to $1.2 million. But make no mistake, they are the exception to the rule.

And for many in the venture capital community, who are acutely aware of the herculean efforts of DEI fund managers, the injustice and absurd irony of this lawsuit has stirred a resounding war cry.

All for One: The Venture Capital Community Speaks Out

Over 70 venture funds, many led by Black women GPs including Arlan Hamilton of Backstage Capital, Melissa Bradley of 1863 Ventures, JoAnn Price of Fairview Capital and Monique Woodard of Cake Ventures, have signed an Open Letter denouncing the lawsuit against the Fearless Fund. These investors are part of a bold, class of diversity-focused capital allocators, committed to addressing the rampant racial, ethnic and gender disparities in venture capital.

The Letter reads, “Black Women are grossly underrepresented as investors and underfunded as entrepreneurs. Over $288B of venture capital was deployed in 2022, with an estimated 0.41% share invested in Black Women founders. This approach to twist efforts to counter the impacts of racial and gender discrimination as harmful to women of color is not only transparent, unoriginal, and unconvincing, but it also unjustly targets Black Women while threatening the civil rights of all women….We will fight and we will persist in doing this important work; anything to the contrary only perpetuates this attack and creates undue influence over our decision-making.”

The three women who organized the Open Letter: Shila Burney at Zane Ventures, Kimberley Nixon at Open Venture Capital and Tessa Flippin at Capitalize VC, discussed the origins of the campaign.

They explained: “We were all gathering on Martha’s Vineyard. During the month of August, it is more than just an idyllic getaway; it’s a nexus for Black excellence, influence, wealth, and a catalyst for empowering change. Martha’s Vineyard becomes a magnetic hub for Black investors, entrepreneurs, and trailblazers to congregate, connect, and cultivate new relationships and opportunities. This year, we hosted the largest gathering of Black women general partners on the Vineyard and in light of the recent Fearless Fund lawsuit, the time was right for our gathering to engage in crucial conversations about investing in Black businesses and advancing the economic interests of Black communities.”

Many other allies in the venture community have also posted messages on LinkedIn, Twitter and other social platforms, expressing support and re-sharing the Fearless Fund’s petition website.

Ed Zimmerman, prominent Startup Lawyer, Angel Investor and Founding Partner of First Close, a Fund-of-Funds backing underrepresented managers, shared a statement of solidarity.

Will the Fearless Fund Win in Court? It’s Possible.

While many are publicly readying for battle, they are also privately asking a difficult question: is this a frivolous lawsuit, or does it have merit?

Blum’s case is being brought under Section 1981 of the Civil Rights Act of 1866 – one of the nation’s first civil rights laws enacted right after the Civil War, along with the Reconstruction Amendments (i.e., the 13th, 14th and 15th amendments), to specifically address racial discrimination perpetuated against formerly enslaved Black people.

The language in Section 1981 states:

“All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens, and shall be subject to like punishment, pains, penalties, taxes, licenses, and exactions of every kind, and to no other.”

As it has been interpreted today, Section 1981 allows individuals (including white folks) to sue for discrimination based on race or ethnicity, in private contracts, no matter how small the employer or business.

Blum claims that the Fearless Fund’s Strivers Grant Program powered by Mastercard, which awards small businesses owned by Black women $20,000 in grants, along with technical support and mentorship, violates Section 1981, because (1) entering the contest this formed a contract and (2) restricting the prize winners to Black women discriminates on the basis of race.

Now if you’re shocked that a law designed to protect Black people – is now being used to harm Black people – it’s time to cue Alanis Morissette’s 1995 hit “Ironic,” and join the chorus.

Plenty of sharp legal minds have opined that Section 1981 has failed to live up to its promise. And, over the years, Section 1981’s effectiveness has been gradually eroded. Most notably, in 2020, in a case called Comcast Corp. v. National Association of African American-Owned Media, the Supreme Court raised the bar for bringing claims under this law, ruling that a plaintiff asserting racial discrimination under Section 1981 had the burden to prove the racial bias was the “but for’‘ cause of the plaintiff’s injury.

This case was actually brought by Black media executive Byron Allen, who alleged that Comcast’s refusal to carry his company Entertainment Studios Network (ESN) channels on the network was based, at least in part, on racial animus against ESN, as an African American-owned multi-channel media company. The Supreme Court disagreed, ruling that ESN would need to show not just that race was a motivating factor in Comcast not carrying the channels, but that the network would have carried its channels “but for” racial bias. And Comcast had plenty of reasons to not carry ESN channels – bandwidth constraints, a lack of adequate viewer interest in ESN’s programming, and the network’s preference for sports and news programming that ESN did not offer.

For the Fearless Fund, if they could show any number of plausible reasons for denying grants to non-Black women recipients (i.e., lack of founder commitment, weak business traction, poor marketing strategy), it wouldn’t seem to matter if race was a motivating factor. And thus, in this situation, a weakened law actually serves the Fearless Fund – as the alleged racial offender. Again, isn’t it ironic?

What Comes Next?

There are so many investors, limited partners, venture funds, funds-of-funds, and even nonprofits, all working on what author and executive John Hope Bryant calls the “silver rights movement” – to make free enterprise and capitalism work for the underserved through wealth-creation opportunities. So what’s the path forward to keep doing the work, in the face of existential threats lurking just around the corner?

Click here to sign the Open Letter and join the movement to create an open dialogue about this issue. The organizers of the Letter recognize the “chilling effect” that this lawsuit may have on some in the investment community, and thus are bringing together a business roundtable of experts to strategize and mastermind how best to manage risk and exposure, particularly for fellow asset managers.

And in the meantime, there is a simple fix that concerned citizens can choose to make. Play by the same rules that have allowed white folks to evade claims of racial discrimination for 150 years. And do it quietly.

This post was originally published on this site