Black startup founders say venture capitalists are racist, but the law protects them

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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 inves

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, the 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 that defendants were not intentionally biased but also would have made different business decisions if race were not a factor.

“You almost need a smoking gun, an email that says, ‘I have discriminated against you and I’m not investing with you because of your race,'” said Kristin Johnson, a professor at Tulane University Law School and a former vice president at JP Morgan. “It’s created a situation where we are no longer looking to the courts for justice.”

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 startups, there is effectively no legal backstop that ensures people of color have an equal opportunity to share in its wealth creation. And in general, they don’t. Only 1% of venture capital money goes to companies founded by Black entrepreneurs, according to a Silicon Valley Bank study.

The world of venture capital is famously exclusive, secretive and chummy. A small handful of top-ranked firms get first dibs on funding the most sought-after startups. Those investments in turn become self-fulfilling prophecies, elevating certain startups and giving them an edge in recruiting, marketing and future fundraising. Startup investing relies heavily on stories of financial success far off in the future. Therefore, the person doing the storytelling becomes an important factor, and relationships play an outsize role.

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% of Black entrepreneurs reported that their profits were hurt by lack of access to capital, compared with 10% 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 that of the 713 members of senior leadership, there were seven Black men and zero Black women.

A Stanford University experiment published last year found that 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.

“If one is interested in making a point and finding a new career, they could try to bring a novel legal action against a venture capital firm for not investing in their company, but I don’t know how they would ever get that company funded,” said Freada Kapor Klein, a venture capitalist and diversity activist.

In March, one Supreme Court decision in particular sent shock waves through the Black business community, and it has direct implications for Black entrepreneurs in Silicon Valley, lawyers say.

Byron Allen, an African American and the founder of Entertainment Studios, sued cable TV companies Comcast and Charter after the providers refused to carry Allen’s channels.

Entertainment Studios alleged in a 2016 suit that a company executive at the time yelled racist comments at African Americans who had gathered outside Charter’s headquarters to protest the decision. “Race played no role whatsoever in our programming decision regarding these networks and we will continue to vigorously defend against these false claims,” said Maureen Huff, vice president of corporate communications for Charter.

In a separate suit against Comcast in 2015, Entertainment Studios alleged that a Comcast executive said the company’s rationale for refusing to add Allen’s channels was that it didn’t want to “create any more Bob Johnsons,” a reference to the founder of Black Entertainment Television. Comcast said in court filings that the comment was mischaracterized and denied that Allen’s race was a factor in whether it carried his channels.

Laws protecting employees and job applicants from discrimination didn’t apply in Allen’s case, so he sued under the Civil Rights Act of 1866, which gave all races an equal right to make and enforce contracts. It also required proving that defendants were not just biased, but “intentionally racist.”

Comcast argued to the Supreme Court that Allen must prove Entertainment Studios would have earned the contract, were it not for race. The Supreme Court unanimously agreed with Comcast.

 
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