A group of 10 venture capital firms, including Santa Monica-based Act One Ventures and Marina del Rey-based Fifth Wall Ventures, have pledged to include diversity riders in their term sheets.
Other participants include First Round Capital, Maveron, SVB Capital, Harlem Capital Partners, Plexo Capital, Precursor Ventures, Equal Ventures and Greycroft, which splits operations between New York and downtown.
Riders can serve as standardized language outlining nonbinding commitments to specific practices or actions. The new diversity rider pledges that participating firms will work to include at least one investor from an underrepresented group in their deals.
Act One co-founder and Principal Alejandro Guerrero led the push for the standardized language. He said the deaths of George Floyd and Breonna Taylor, as well as his own experiences as a minority investor, motivated him to push for tangible change in the field.
“When we talk about how we help move the needle forward in terms of diversity, it’s about money and access,” Guerrero said. “This is about access.”
The new riders, according to Guerrero, will help give “capable and successful” people from underrepresented groups the chance to become venture investors. Such individuals often have valuable knowhow and money to invest but, Guerrero said, are excluded from the VC ecosystem due to a lack of preexisting professional and personal connections.
“It’s time that we brought this to the cap table,” he said, referring to a startup’s group of equity investors. “That’s where the money is made. When these companies hit, that’s how you make generational wealth.”
Guerrero said the new riders were not solely aimed at improving society.
“We are here to make money first and foremost, but we know that there is a ton of value in diversity,” he said. “Someone who comes from a diverse background who had to fight their way there is going to bring something else to the table that someone from wealth and privilege might not have.”
To help venture firms locate diverse partners, Act One is working with research firm Crunchbase Inc. to compile a list of underrepresented investors seeking co-investment opportunities.
Guerrero said he hopes this will help address common concerns among well-meaning venture capitalists whose personal networks lack underrepresented investors.
He added that this opens the door for like-minded firms to join in and add the diversity rider to their term sheets. But Guerrero acknowledged that the goal of a diverse venture ecosystem was a long way off.
“No one is going to get it right. There is no expectation that as soon as you sign up you are going to hit a home run,” he said. “This is not going to be solved overnight.”
