Supporting Underrepresented Investors (and Founders) Through Round Allocations

While it may seem intuitive to engage diverse stakeholders across your business as a moral obligation, the idea of networking with underrepresented investors is often overlooked.

We sat down with Cenobio Hernandez to dive into why having diverse investors matters. Hernandez is an advisor and investor at Cap Table Coalition, a group that works to close the racial wealth gap by creating investment opportunities for traditionally marginalized investors.

Why Diversity Matters

Inclusion is about a lot more than opening up a few seats at the table. Underrepresented investors are often quickly discounted– on both sides. Not only do founders and investors tend to connect with others who look like them, but founders often seek out the most prominent investors to fill their rounds, which are predominantly white and male. However, having diverse investors in your startup’s cap table actually brings value to both the entrepreneur and the investor community.

• Long-term benefits: Giving underrepresented investors access to your 🚀 means that a more diverse community will benefit when you’re successful. You can create the change in the demographics of who’s successful by dedicating a percentage of your cap table to underrepresented investors who are often left out of the best deals. Their resulting growth in wealth will give them the opportunity to go on and redistribute to more underrepresented founders. In the world of climate business, a greater diversity of people able to act makes for better and broader solutions to sustainability.
• Short-term benefits: Connecting with an underrepresented investor, especially one from a background different than your own, opens your company up to a whole new world of networks that you wouldn’t have had access to otherwise. Not only will this increase your visibility as a company, but it will give you access to even more investors, advisors, customers, and prospective partners. They’ll expand your world as a business, and in turn, your connections will help them to branch out as well. And, with a wider array of smaller checks as opposed to one big firm, you’ll have more individuals who care about adding value to your company.

How to Make an Allocation

To make an allocation for underrepresented investors, you can use a roll-up vehicle (RUV), which is a type of special purpose vehicle that allows you to raise money from many smaller investors without cluttering your cap table. The benefit of RUVs is that there are very few fees involved. AngelList is a great platform to create an RUV quickly and easily. From there, you can network with diverse investors and pitch to them to see if they’re looking to invest in the RUV. Depending on how set you are with access to your network, the process can take as little as three weeks.

Making the Pitch (to prospects and to current investors)

Remember that you’re not doing charity work- you’re giving investors the opportunity to invest in your killer company. Pitch to your stakeholders like you would anyone else– the only difference is that you’ve opened a door for equity and inclusion. Frame your pitch as the creation of an opportunity for the underrepresented investor. And while you want to focus on diversity, keep in mind that you still want investors who will actively support your mission.

For your raise, a good range to start with is an allocation under 10% of your total target (so $1M if you’re planning to raise a $10M Series A), and if you want to increase, you can build it up in subsequent rounds.

Some of your investors may oppose adding extra friction to a fundraising process by locking in an allocation for underrepresented investors. Remember, even though you may not have ownership of your entire company, if a diverse cap table is important to you, you must make your values clear, and stick by them. There’s inherent value in bringing underrepresented investors into your company that cannot be found elsewhere.

Meeting Demand

If you have greater demand for your allocation than you can provide, it's a great sign. Unfortunately, having greater demand than you have the means for may mean making cuts. You can approach this process in 2 ways:

• One choice is to evenly cut everyone’s participation by a certain baseline, and therefore enable everyone (or everyone you want) to participate.
• Another option is to take a deep look at each investor and how they might support your mission, and choose to include only those that best align with your values, have the most impactful network, have relevant operational experience, etc.

Helping Others Follow Suit

If you successfully navigate this process, it’s important that you spread the word to help others do the same. Creating specific allocations for underrepresented investors is NOT yet the norm in VC/startups. If more founders speak openly about this process, it can have a big impact on the lives of both underrepresented founders and VCs.

Cenobio Hernandez is an advisor and investor at the Cap Table Coalition, a group that works to close the racial wealth gap by creating investment opportunities for traditionally marginalized investors. He is also the Technical Product Manager at Finix, a platform for businesses to manage payments.