Black start-up founders say venture capitalists are racist, but the law protects them
“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 start-ups, 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 percent 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 start-ups. Those investments in turn become self-fulfilling prophecies, elevating certain start-ups and giving them an edge in recruiting, marketing and future fundraising. Start-up 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 percent of black entrepreneurs reported that 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 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.
Erwin Chemerinsky, a lawyer representing the National Association of African American-Owned Media, which was a co-plaintiff with Allen, said in an email that the ruling effectively means entrepreneurs in Silicon Valley now have fewer protections against discrimination.
“Imagine a venture capitalist says: ‘We don’t invest in that area of the economy, and besides, I don’t want to invest in an African American-owned business,’” he wrote. Because of the Supreme Court’s decision in the Comcast suit, “that would not be enough to state a claim for discrimination in contracting” because it wasn’t just because of race.
Some lawyers have argued that the Supreme Court’s decision in the Allen case won’t have a large impact because many lower courts had already interpreted the law that way anyway. In a memorandum sent to Comcast and shared with The Washington Post, former solicitor general Donald B. Verrilli Jr. wrote, “The decision is a balanced and judicious one that is not, and should not be seen as, a setback for the cause of civil rights.”
The ruling also leaves that decision up to federal judges and not juries. If judges don’t believe a plaintiff can prove that race was the sole motivating factor, the judge must throw out the case even before the plaintiff has a chance to gather evidence and documents, let alone bring it to a jury.
In California, where many technology start-ups and venture capitalists are based, there are state protections that go far beyond federal law. The Unruh Civil Rights Act outlaws discrimination by business establishments in California. California courts have held that plaintiffs only need to prove that race played a role in alleged discrimination, not that it was the sole reason for it.
California’s Supreme Court has also rejected the federal “stray remarks doctrine,” which holds that off-handed discriminatory remarks can’t be used by plaintiffs in a civil rights case. In an age-discrimination case against Google decided in 2010, the tech giant had argued that comments about the plaintiff’s age were simply “stray remarks” and shouldn’t be considered, but the court disagreed.
But despite the California courts’ tough stance on discrimination, fighting the cases in court has proved an uphill battle. The Unruh Act has been used sparingly to combat alleged racism in the white-collar business setting, lawyers say. That’s in part because it is still extremely difficult for plaintiffs to prevail.
“The problem with race cases is that people have held them to a much higher standard than almost every other civil rights case,” said Larry Organ, an employment lawyer who often represents black plaintiffs in discrimination cases. “That’s in part because people don’t want to believe that racism is continuing. You bring a race case in any courtroom anywhere in America and you know people are skeptical.”
Organ said he mostly represents low-income workers. It’s rare that he gets calls from people in the corporate setting. “The stakes are so high for these guys,” he said. “Who speaks up?”