Illustration: Eniola Odetunde/Axios

Venture capital is beginning a belated conversation about its dearth of black investors and support of black founders, but hasn't yet turned its attention to the trivial participation of historically black colleges and universities (HBCUs) as limited partners in funds.

Why it matters: This increases educational and economic inequality, as the vast majority of VC profits go to limited partners.

The big picture: Many college endowments invest some of their funds into alternative assets like venture capital. This is particularly true for some of the country's richest endowments, like Harvard, Yale and Stanford.

  • But HBCUs have relatively small endowments, with none valued at even $1 billion in 2019.
  • Smaller schools often lack robust internal investment teams and lean heavily on outside advisors.
  • They also may be less willing to tie up their limited resources in a long-term, high-risk asset class like venture capital.

"In order to execute an asset allocation program, it just becomes easier when you have more dollars to put into it," says Plexo Capital founder Lo Toney, whose fund is backed by his alma mater, Hampton University.

  • "When it comes to venture ... you have a lot of closed-end vehicles, and you have to invest into multiple of them to remain dedicated to the asset class," he adds.
  • Still, there are exceptions. Spelman College, for example, last year allocated 37.4% of its $390 million endowment to private equity, venture capital and distressed investments.

Established VC firms rarely need new limited partners, which creates an added challenge for interested HBCUs to get their foot in the door.

  • "A lot of the historically successful firms ... their existing LPs would invest as much as they can, so there’s not really room ... unless you just say, 'this is important to us,'" explains Unusual Ventures co-founder John Vrionis, whose funds have multiple HBCUs as investors.
  • Equal Ventures co-founder Richard Kerby argues that it’s also incumbent on fund managers to educate the schools about the value in investing in venture capital.
  • VC firms do often try to get investments from their alma maters, but there were fewer than 60 HBCU alumni working in VC as of a February 2019 analysis — and nearly 40% of those came from a single school (Morehouse University).

The bottom line: Getting more HBCUs into VC funds can be done — it’ll just require the will and the effort from both the endowments and the fund managers if they see a mutual benefit in changing the equation.

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Editor's note: The story has been corrected to show that 40% of HBCU alumni in VC came from Morehouse (not Howard).

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Updated Jun 30, 2020 - Axios Events

Watch: A conversation on inequity in venture capital

On Tuesday, June 30 Axios hosted a conversation on the impact of Black Americans' underrepresentation in venture capital with Axios business editor Dan Primack and chief technology correspondent Ina Fried featuring Precursor Ventures Managing Partner Charles Hudson, Cleo Capital Managing Director Sarah Kunst and Bessemer Venture Partners' Partner Elliott Robinson.

Sarah Kunst discussed the importance of having racial and ethnic diversity at the decision-making level in venture capital firms and how that drives financial returns.

  • On underrepresentation for Black people in venture capital: "Obviously the funds haven't done a good job hiring diverse candidates even though they're there...Venture just hasn't made that leap to make it a priority in recruiting...It's easy to hire what we know."
  • On how racial and ethnic diversity drive diverse opinions and insights that yield better results: "You're more likely to spot ideas that aren't going to work, and more likely to spot ideas that will work but aren't exactly in your wheelhouse."

Bessemer Venture Partners' Partner Elliott Robinson highlighted title inflation and how it allows firms to appear diverse without giving people real power.

  • On what he calls "diversity theater": "I've lived it...for both black and brown investors as well as female investors. We'll give you an 'investing role' but we won't let you touch things like carry real check writing, sitting on boards, and the like."

Precursor Ventures Managing Partner Charles Hudson discussed what is critical in making systemic change in the industry.

  • On what a lack of diversity signals to potential partners: "When you look at a firm's web page or you look at an industry where you see almost no one who looks like me, I think it can send a pretty strong signal to founders that perhaps I'm not welcome here."
  • On what needs to change in venture capital: "We're an industry that really only hires people from a very narrow set of backgrounds — whether it's academic or professional...As long as we're focused on what's perceived to be low-risk pedigree hiring, we're not going to change anything."

Thank you Cooley LLP for sponsoring this event.

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