[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
COMBATTING TECH BRO CULTURE:
UNDERSTANDING OBSTACLES
TO INVESTMENTS IN
DIVERSE-OWNED FINTECHS
=======================================================================
VIRTUAL HEARING
BEFORE THE
TASK FORCE ON FINANCIAL TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
JUNE 30, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-92
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
48-336 WASHINGTON : 2022
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York BRYAN STEIL, Wisconsin
STEPHEN F. LYNCH, Massachusetts LANCE GOODEN, Texas
ALMA ADAMS, North Carolina WILLIAM TIMMONS, South Carolina
RASHIDA TLAIB, Michigan VAN TAYLOR, Texas
MADELEINE DEAN, Pennsylvania PETE SESSIONS, Texas
ALEXANDRIA OCASIO-CORTEZ, New York RALPH NORMAN, South Carolina
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
TASK FORCE ON FINANCIAL TECHNOLOGY
STEPHEN F. LYNCH, Massachusetts, Chairman
JIM A. HIMES, Connecticut WARREN DAVIDSON, Ohio, Ranking
JOSH GOTTHEIMER, New Jersey Member
AL LAWSON, Florida PETE SESSIONS, Texas
MICHAEL SAN NICOLAS, Guam BLAINE LUETKEMEYER, Missouri
RITCHIE TORRES, New York TOM EMMER, Minnesota
NIKEMA WILLIAMS, Georgia BRYAN STEIL, Wisconsin
C O N T E N T S
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Page
Hearing held on:
June 30, 2022................................................ 1
Appendix:
June 30, 2022................................................ 23
WITNESSES
Thursday, June 30, 2022
Abbey, Wemimo, Co-Founder and Co-CEO, Esusu...................... 7
Abramson, Jenny, Founder and Managing Partner, Rethink Impact.... 10
Haque, Maryam, Executive Director, Venture Forward............... 12
Krawcheck, Sallie, CEO and Co-Founder, Ellevest.................. 5
Michel, Marceau, Founder, Black Founders Matter.................. 8
APPENDIX
Prepared statements:
Abbey, Wemimo................................................ 24
Abramson, Jenny.............................................. 27
Haque, Maryam................................................ 32
Krawcheck, Sallie............................................ 42
Michel, Marceau.............................................. 46
Additional Material Submitted for the Record
Lynch, Hon. Stephen F.:
Written statement of Affirm Inc.............................. 48
COMBATTING TECH BRO CULTURE:
UNDERSTANDING OBSTACLES
TO INVESTMENTS IN
DIVERSE-OWNED FINTECHS
----------
Thursday, June 30, 2022
U.S. House of Representatives,
Task Force on Financial Technology,
Committee on Financial Services,
Washington, D.C.
The task force met, pursuant to notice, at 12:03 p.m., via
Cisco Webex, Hon. Stephen F. Lynch [chairman of the task force]
presiding.
Members present: Representatives Lynch, Himes, Lawson,
Williams of Georgia; Davidson, Emmer, and Steil.
Ex officio present: Representative Waters.
Chairman Lynch. Good morning. The Task Force on Financial
Technology will now come to order.
Without objection, the Chair is authorized to declare a
recess of the task force at any time. Also, without objection,
members of the full Financial Services Committee who are not
members of the task force are authorized to participate in
today's hearing.
Welcome. Today's hearing is entitled, ``Combatting Tech Bro
Culture: Understanding Obstacles to Investments in Diverse-
Owned Fintechs.''
I now recognize myself for 4 minutes to give an opening
statement.
The explosion of fintech in the fintech space in the last
decade has been made possible because of massive amounts of
venture capital (VC) investments that have been made to startup
companies. Fintech companies rely on capital to turn their
innovative visions into reality. The largest players in this
space, including Andreessen Horowitz, Sequoia Capital, and Y
Combinator, are responsible for the growth of many of the large
fintech players that we know today. Venture capital firms
invest in hundreds of companies each year, hoping that just one
of those investments will pay off.
In 2021, venture capital firms invested $35 billion in
fintech startups, up from $18 billion in 2020. When we look at
the founders of companies that received this investment
funding, there is an obvious trend toward White males. While
lack of diversity is a trend in almost every industry that
venture capitalists invest in, it is particularly troubling in
the fintech space, where a significant number of fintechs
specifically target underserved communities, which we know are
disproportionately made up of women and people of color.
The largest fintechs, including digital banks, payment
processors, and cryptocurrency providers, actually market their
products to women and people of color. Yet, when we look at the
founders and the leadership teams, they clearly do not reflect
the communities that they claim to serve. Only 2 percent of all
venture capital funding goes to women founders, 1 percent goes
to Black founders, and less than 2 percent goes to Latinx
founders. These numbers may also be reflective of the lack of
diversity generally in the venture capital firms themselves
because research does indicate that investors are more likely
to invest in founders that they relate to, who look like them.
While it may be easy to assume that there is simply a lack
of founders who are women and people of color, our witnesses
today will demonstrate that there is no shortage of diverse
founders with thoughtful and innovative, substantive ideas.
Additionally, women- and people-of-color-owned startups have
repeatedly outperformed White-male-owned startups. Measurement
and data have shown that companies with diverse founders earn
30 percent higher multiples on invested capital, and almost 70
percent of top performing U.S. funds included women in
decision-making roles. Venture capital firms continue to gamble
on poor investments such as cryptocurrency companies like
Celsius, which recently froze all customer deposits, while on
the other hand, women and founders of color with well-thought-
out, substantive business plans remain in the waiting room.
Funds like Black Founders Matter and Rethink Impact are
specifically working to address the diversity gaps, but it
shouldn't solely be on these funds to pick up the slack. Large
venture capital firms need to diversify their investments and
their workforces to reflect this country which consumer fintech
companies claim to serve. Additionally, investment into diverse
fintech founders should not be limited to impact investing or
performative diversity efforts when it simply makes financial
sense to diversify.
In the past, when faced with pressure to diversify,
industry advocates have argued for looser regulatory
requirements, claiming accredited investor requirements are the
barrier to diversity. Quite frankly, the entrance of retail
investors is not the answer. And I welcome policy approaches,
such as reporting requirements or an SEC scorecard, that would
push venture capital to abandon the sort of old boys club
culture, the exclusive culture to determine where and in whom
they invest.
As we approach the prospect of a slowdown in economic
growth right now, and venture capital funds seem to be drying
up in some spaces, how will we ensure that women and founders
of color are not further left out of the fintech space? I worry
about that. I do thank each of our witnesses, whom I know from
their experience and their work care deeply about this issue,
for their willingness to share their perspectives.
I now recognize my friend, the ranking member of the task
force, Mr. Davidson, for 5 minutes for his opening statement.
Thank you.
Mr. Davidson. Thank you, Chairman Lynch, and I would also
like to welcome all of our witnesses today. We appreciate your
time and your testimony.
The ability to raise capital is the cornerstone of any
growing economy. America, home to less than 5 percent of the
world's population, holds roughly 50 percent of the world's
invested capital, but I am highly concerned that America is
losing the edge that gives us nearly 25 percent of global GDP.
It has given us the best markets for goods, services, capital,
intellectual property, and more. America has dominated the
agricultural and industrial revolutions, automobiles, aviation,
aerospace, computing, the internet, and more. But now as we
look at fintech, we see inaction by Congress and over-action by
the SEC, in particular, driving capital formation offshore. In
fact, 75 percent to 90 percent of the liquidity in this space
is offshore.
So, we really need to look at, how do we get more of that
capital here in the United States of America? Even though a lot
of the founders are either Americans or operating companies
from America, we are seeing that kind of drive off. This
hearing is certainly timely. We must do all we can to ensure
that that talent is paired with capital here in the United
States, to avoid having it migrate elsewhere.
The fintech sector, broadly speaking, is attracting some of
the most brilliant and talented people in this generation. In
the last decade, we have seen this industry improve efficiency,
decrease cost, increase financial access for underserved
communities, and more. For that reason, venture capital firms
are seeing it, and we know fintech was the leading sector for
venture capital firms to invest in last year. However, despite
being a popular investment, there remains a lack of diverse
founders within the fintech industry.
The numbers speak for themselves, and it is important to
note that there remains a lack of diversity in venture capital
firms as well, not just in terms of race or ethnicity, but
geographic diversity. A lot of it is concentrated on the
coasts. And I don't think sitting here and criticizing the
investors does much to enhance or improve capital formation
within the economy, but I do think that we will have a great
discussion today.
It is vital to ask ourselves why fintech founders must be
dependent on venture capital firms. As we will discuss today, I
think we can agree that this has had negative consequences. The
fact that three-quarters of venture capital goes to founders in
just three States--California, Massachusetts, and New York--
likely contributes to the lack of diverse founders that receive
funding due to this geographic concentration, and also kind of
the existing networks. So, what are the downstream effects? We
see that founders outside these traditional VC locales struggle
to raise Series A capital, usually $3 million to $10 million,
propelling them to more easily secure Series B funding from
investors focused on growth and scale. This only compounds the
lack of diversity in the long run.
Committee Republicans have introduced various bills that
would enhance capital formation so that more minority- and
women-owned startups can get off the ground. Some of these
ideas include: first, the Improving Capital Allocation for
Newcomers (ICAN) Act from Mr. Timmons. This bill codifies the
recommendation from the SEC Small Business Capital Formation
Advisory Committee and would increase the cap and number of
investors to help funds invest in more entrepreneurs in their
own communities, many of whom are women and minorities.
Second, the Developing and Encouraging our Aspiring Leaders
(DEAL) Act by Mr. Hollingsworth would expand the scope of
qualifying investments, allowing large VC funds to deploy more
capital to smaller funds.
Third, the Small Entrepreneurs' Empowerment and Development
(SEED) Act by Ranking Member McHenry would create a new micro
offering exemption to allow broader access to capital for
emerging entrepreneurs and small businesses.
And Congressman French Hill and I both have bills to deal
with the accredited investor rule, which basically says that
you can't make investments in these companies unless you have
already made a lot of money.
People are barred, because we know that people with money
do skew with less diversity as you see more accumulation of
wealth. Giving retail investors more options would be one of
many remedies we could supply. Importantly, I would like to
note that one of the most important things we can do in this
accredited investor space remains undone, and is unfortunately
a partisan issue in Congress, where it is not in the founder
community.
I look forward to hearing from our witnesses today, and I
applaud those on the panel who have worked incredibly hard to
build successful businesses. With that, I yield back.
Chairman Lynch. The gentleman yields back.
At this time, I would like to recognize the Chair of the
Full Financial Services Committee, the gentlewoman from
California, Chairwoman Waters, who has been a longtime advocate
and champion for both racial and gender equality during her
time in Congress.
Chairwoman Waters. Thank you so very much, Chairman Lynch.
This is a very important hearing that we are having here today,
and I thank you so much for your leadership.
Research shows that companies led by diverse senior
leadership outperform those that are led primarily by White
male leaders, and yet venture capital funding for new fintech
companies goes overwhelmingly to those funded by White men. In
fact, only 2 percent of venture capital funding went to women
founders, only 1 percent to Black founders, and only 1.8
percent to Latinx founders. Venture capital can mean the
difference between success and failure for new fintechs, and we
can all benefit from promoting diversity in our future fintech
industry leaders. And so, I look forward to hearing from our
panel about the challenges that exist in promoting diversity in
venture capital funding, and I yield back. Thank you very much.
Chairman Lynch. Thank you, Madam Chairwoman.
Today, we welcome a panel of distinguished witnesses, and
we are thankful for their presence: Sallie Krawcheck, the CEO
and co-founder of Ellevest; Wemimo Abbey, the co-founder and
co-CEO of Esusu; Marceau Michel, the founder of Black Founders
Matter; Jenny Abramson, the founder and managing partner of
Rethink Impact; and Maryam Haque, the executive director of
Venture Forward.
Witnesses are reminded that their oral testimony will be
limited to 5 minutes. You should be able to see a timer that
will indicate how much time you have left, and I would ask that
you be mindful of the timer so that we can be respectful of the
witnesses' and the Members' time.
And without objection, your written statements will be made
a part of the record.
Ms. Krawcheck, you are now recognized for 5 minutes to give
an oral presentation of your testimony. Thank you.
STATEMENT OF SALLIE KRAWCHECK, CEO AND CO-FOUNDER, ELLEVEST
Ms. Krawcheck. Thank you. Chairwoman Waters, Chairman
Lynch, Ranking Member Davidson, and members of the task force,
thank you for the opportunity to testify today. I am Sallie
Krawcheck. Having spent my career on Wall Street as CFO of
Citi, and CEO of Merrill Lynch and Smith Barney, I am today the
CEO of Ellevest.
Ellevest is the investing and financial planning platform
for women with a mission to get more money in the hands of
women. We are a diverse company. In an industry in which
leadership teams are 23 percent women, we are 84 percent, and
in an industry in which the leadership teams are 11 percent
people of color, we are 50 percent, with a similarly diverse
board. We proudly count among our investors Rethink Impact,
which is represented here today, Melinda Gates' Pivotal
Ventures, Penny Pritzker's PSP Capital, Sarah Kunst's Cleo
Capital, as well as women-run angel investing groups like Astia
Angels.
Ellevest has just completed a $53 million Series B capital
raise, making us the very rare women-run fintech to reach this
milestone. You have gone over the numbers, but they are
actually sort of worse than you say, because women raise just 1
percent of Series B dollars across industries and just 1
percent of fintech dollars across all stages. That math means
you can count the number of women-run fintechs who got this far
on your fingers, literally on your fingers.
The good news is there has been an influx of capital from
women investors into early-stage funding, some specifically
targeted to underrepresented founders. The bad news is this
hasn't translated into later-stage funding in fintech, and this
matters because fintech can be capital-intensive.
In my experience, it is because few women investors are
enrolled today to write bigger checks, and also because, and
this is actually pretty gutting, raising early-stage capital
from women investors can sometimes make it harder for women
CEOs to get the next round of funding. The research indicates
this is pure bias, on the assumption that you weren't good
enough to get funding from the guys. This despite the research
you have indicated that women-run businesses provide as good or
better results than all male teams on less capital. The
implication is significant given that financial services is our
economy's lifeblood.
First, though, I will just give you a thought experiment.
Do you think it is a coincidence that with 98 percent of mutual
fund assets managed by men and 86 percent of financial advisors
being men, that women report they are not well-served by the
industry, or that when I was running Merrill Lynch, men trusted
their financial advisor more than their doctor, but women
closed their accounts after their spouse's death? Low product
market fit there.
Is it a coincidence, do you think, that Ellevest is the
only wealth tech app with most of its downloads by women, at
about 95 percent, versus in the 20 percents and 30 percents for
the others? And, no, this isn't because women aren't good at
math or they do not like to invest or they are risk-averse.
There is zero evidence of that. It is simply a story we tell
ourselves to explain why women aren't engaging.
The real issue is that few fintechs center on women's
needs, and as a direct result, women entrepreneurs are starved
of funding. As a result your, women constituents invest less of
their money than men do, losing out on historic market returns
and costing them hundreds of thousands, and for some women,
millions of dollars over the course of their lives. And it is
one reason why the gender wealth gap is at $0.32 to a White
man, and $1.01 for Black women, and it has been widening.
It means some of your women constituents are caught in
toxic relationships that they can't leave or dead-end jobs that
they can't quit. They are not starting their dream businesses
because they simply don't have the money. I don't think that
any of us here want that for our daughters. It also means lost
economic growth incalculable in size, the dollars not spent
with small businesses in your hometown, the non-profit
contributions not made, the political contributions not made.
Now, let's be clear: The solution is not for women
entrepreneurs to work harder. If we raise 20 percent, 2 percent
of venture dollars, that means 50 times more investor meetings,
50 times more earnings models sent out, and 50 times more time
away from the business. At Ellevest, we got here by doubling
and tripling down on women, raising some of our round from
accredited women investors investing together through special
purpose vehicles, often sponsored by existing women investors.
They got access to a later-stage deal in a strongly-performing
fintech they wouldn't otherwise have, and we furthered our
mission, a win-win even more so because 70-percent-plus of our
new investors are from underrepresented groups, probably
unheard of at our stage. And we at Ellevest live to fight
another day working to get more money in the hands of women.
Thank you.
[The prepared statement of Ms. Krawcheck can be found on
page 42 of the appendix.]
Chairman Lynch. Thank you. That was exactly 5 minutes.
Mr. Abbey, you are now recognized for 5 minutes to give an
oral presentation of your testimony. Welcome.
STATEMENT OF WEMIMO ABBEY, CO-FOUNDER AND CO-CEO, ESUSU
Mr. Abbey. Thank you so much. Chairwoman Waters, Chairman
Lynch, Ranking Member Davidson, and members of the task force,
thank you for this opportunity to appear before you today. I
also want to express my deepest gratitude to the staff for your
tireless efforts. My name is Wemimo Abbey. I am the co-founder
and co-CEO of a Harlem-based fintech unicorn called Esusu
Financial. Esusu was founded in 2018 and is one of the few
Black-owned fintech startups in the world to be valued at a
billion dollars, raising a total of $144 million in financing.
But my story started in the slums of Lagos, Nigeria. I lost
my father at the age of 2, and my mother and my 2 sisters
raised me. In 2009, I immigrated from 80-degree weather in
Lagos, Nigeria, to negative 22 degrees in Minnesota. Seeking a
way to pay for college, my mother and I were turned away from
major banks because we did not have a credit score. My mother
pawned my father's wedding ring, took out a 400-percent
predatory loan, and borrowed money from church members to
afford my first year of college. Inspired by these experiences,
I co-founded Esusu on three core premises: where you come from,
the color of your skin, and your financial identity should
never determine where you end up in the wealthiest nation the
world has ever seen.
You see, credit is fundamental to financial stability and
upward mobility, but financial exclusion makes the American
Dream unattainable for millions. Data released by the Consumer
Financial Protection Bureau (CFPB) in 2015 confirmed that
approximately 45 million Americans are credit invisible and
unscorable. Every month, over 109 million Americans spend, on
average, $1,100 in rent. That is over $1.44 trillion annually,
which is often their largest monthly household expense. Over 90
percent of renters do not get credit for paying rent on time,
leading to financial exclusion. Esusu helps bridge this gap by
reporting on-time rental payments to the three credit bureaus,
thereby helping renters across the nation establish and improve
their credit scores, which will help them unlock quality
financial products. When renters encounter financial hardship
and can't afford to pay rent, we also pay them with zero-
interest microloans to help keep them and their families in
their homes.
Today, we are here to discuss the obstacles to investment
in diverse-owned fintechs. According to Forbes, U.S. fintech
billionaires are worth a combined $162 billion. More than a
dozen fintech billionaires were created over the past year.
None of these multi-billionaires are Black or people of color.
In 2021, venture capital investments reached $35 billion.
White-male-led startups receive over 70 percent of investments
compared to 1 percent for Black founders in fintech. These
staggering facts shine a light on the realities of investments
in the fintech landscape, and it points to another reason why
the racial wealth gap persists and is growing today.
I offer three thoughts on why obstacles persist in diverse-
owned fintechs. First, investors tend to co-invest in people
they know and with whom they are comfortable . For example,
over 75 percent of Esusu investors are women or Black venture
capitalists. They understand Esusu's mission and also generate
outsized unrealized return from being with us since day one.
Second, due to the implicit or unconscious bias, many
seasoned investors do not consider people of color to be
successful entrepreneurs. Personally, my co-founder and I had
to speak to 326 investors before we got one to bet on us.
Third, investors may struggle to relate to the problems
that entrepreneurs of color, immigrants seek to solve. For
instance, a well-paid venture capitalist may not have personal
experience being credit invisible or underbanked, so a startup
that seeks to address these problems is likely to be of less
interest to them.
With that, I would recommend asking institutions under the
purview of this committee to implement three solutions: first,
create tax incentives to establish banks and main credit
bureaus to work with and adopt technologies developed by
minority-owned fintech startups; second, create tax incentives
established by venture capitalists to place more investment
bets in minority and immigrants' fintech startups; and third,
instruct agencies tasked with regulating the financial services
sector to engage proactively in minority-owned fintech startups
so that founders can share their perspective on challenges.
In closing, I fundamentally believe investing in minority
fintech companies can generate outsized returns and have a
profound impact in the lives of many. Esusu is a perfect case
study. A company founded by the sons of immigrants is now
valued at a billion dollars, and is working tirelessly to keep
families in their homes. Our story is only possible in America.
There is an African saying, ``If you want to go fast, you go
alone, but if you want to go far, you fundamentally go
together.'' True change will take both sides of the aisle
working together to make this union more perfect. So, let's be
caught trying. Thank you.
[The prepared statement of Mr. Abbey can be found on page
24 of the appendix.]
Chairman Lynch. Thank you, Mr. Abbey. You have a remarkable
story.
Mr. Michel, you are now recognized for 5 minutes to give an
oral presentation of your testimony. Welcome.
STATEMENT OF MARCEAU MICHEL, FOUNDER, BLACK FOUNDERS MATTER
Mr. Michel. Thank you Chairman Lynch, Ranking Member
Davidson, Chairwoman Waters, and Ranking Member McHenry. My
name is Marceau Michel, and I am the founder of the Black
Founders Matter fund. I am a passionate advocate for the
underrepresented founders and fund managers, and it is my honor
to share my thoughts and observations on this very timely
matter.
Much like the legal end of slavery, racial integration and
affirmative action, our society needs measurable and
accountable methods to facilitate positive change. And even
though we have seen the change, even though we have seen how
those--excuse me, I am nervous, it is really nerve-wracking to
talk in front of all of you--even though we have seen these put
into place in our society, they haven't created parity for all
of us. However, it has pushed social progress forward. We need
measurable intentionality to be able to do that.
So, what I am asking that you consider is holding the
venture investment industry accountable to finally integrate in
a meaningful way. We haven't seen integration in this space.
There have been many empty valves to improve the abysmal
statistics that we see in diverse investment. However, there
has been no significant movement where they have truly brought
women and Black, Indigenous, and people of color (BIPOC)
founders into their portfolios. This is unacceptable.
In this month, June of 2022, I decided to take action. I
launched the 25 by 25 Pledge for venture funds to make a real
and measurable commitment to change. This pledge entails
investing 25 percent of their current fund in startups led by
BIPOC women, and to hire within their fund 25 percent BIPOC
women as well, because what we need in order to see significant
change in this space is representation both in the portfolio,
but also within the firms themselves. This was done with the
clear objective for all funds to work toward. Without this
measurable intentionality, we won't see any change.
The classist tech bro culture has weakened our economy and
limited the solutions that diverse founders are creating. And
the importance connected to that is really there are lived
experiences that diverse founders have that they are able to
bring to the companies that they create, and they are able to
have their communities specifically in focus when creating such
products and services.
I know in my experience running my own fund, I have learned
the importance of why you have to be intentional. After making
the first five investments from my fund, we realized that we
had only made investments in Black men. And so, we made a
specific effort to only see deals by Black women, and this led
to some of the biggest deals that we were able to get into. We
were able to invest in Olympic legend, Allyson Felix, and other
incredible women, we have been able to invest alongside Serena
Williams, and this all came from making a concerted effort to
focus on female founders.
Our communities have very little choice in the financial
institutions and companies that serve us. Fintechs that claim
to serve and target our communities without any level of
representation or connection to our communities really is a
form of financial manipulation, and without any accountability,
will continue to occur. We have repeatedly seen BIPOC founders
be more capital-efficient and yield higher returns. This should
increase interest in such ventures. However, working with set
founders exists outside of the comfort zone for venture capital
(VC) funds because VC funds benchmark based on what they
already know, based on what already exists. So, when you bring
in diverse founders who are approaching problem solving from an
entirely different direction, it really doesn't benchmark for
them.
Much like when cities and municipalities want to revitalize
districts and neighborhoods, they provide incentives to attract
investment. And I agree with the previous speaker about
creating incentives in order to bring more investments
specifically to founders of color and also to emerging fund
managers that are working to solve this gap specifically. In
recent years, we have seen there are more emerging funds that
have the specific focus on the immense opportunity zone that
has underrepresented founders. These funds need more capital,
more investors, and incentives to bring them all together. So,
are there ways to incentivize funds who are focusing on this
gap? Is there funding that can be created for emerging funds
that are investing in BIPOC women? I believe that it takes
multiple approaches to tackle this disparity.
I know this committee of esteemed leaders has the ability
to put forward policies that will transform not only what can
happen now, but for generations to come. By creating metrics
for VC funds to meet, funding for emerging funds that are
focused on this space and incentivizing investment in these
funds will push the needle forward. What makes our country
remarkable is our ability to push forward and continue to grow.
I yield back.
[The prepared statement of Mr. Michel can be found on page
46 of the appendix.]
Chairman Lynch. Thank you, Mr. Michel.
Ms. Abramson you are now recognized for 5 minutes to give
an oral presentation of your testimony. Welcome.
STATEMENT OF JENNY ABRAMSON, FOUNDER AND MANAGING PARTNER,
RETHINK IMPACT
Ms. Abramson. Thank you. Good afternoon, Chairwoman Waters,
Chairman Lynch, and esteemed members of the Task Force on
Financial Technology. As the founder and managing partner of
Rethink Impact, the largest venture capital fund in the U.S.
investing in female and non-binary CEOs, many of whom are in
fintech, I am honored to be here with you today.
To give you brief context, before I became a venture
capitalist in 2015, I was a tech CEO, and often the only woman
in a given room or on a given stage. As a data nerd from
Stanford, I researched the numbers and learned that only 2.3
percent of venture dollars went to female-founded teams that
year. What shocked me about this was that my own mother ran the
first venture capital fund investing in female leaders 25 years
ago, and the percentage of dollars going to female founders has
actually gone down since then. I decided the best way to change
this pattern was to start a fund that could drives
institutional-scale dollars to female tech CEOs. And my
partner, Heidi Patel, and I were fortunate to get the backing
of major banks like UBS Investment Bank, as well as
foundations, university endowments, and prominent individuals.
With that context in mind, I will address three key areas
of my testimony today. First, why is there a lack of investment
in diverse fintech companies? Second, what is the missed
financial and societal opportunity from this deficit? And
third, how can we reverse these trends?
On the first, people often assume this lack of investment
is a pipeline issue. This is not the case. We experience
diversity of flow firsthand at Rethink Impact. Our firm reviews
600 to 1,000 startups each year, and we, like many funds, only
need to invest in a handful. The real reason that diverse
fintech CEOs don't get these dollars relates to the fact that
women and diverse leaders control a very small percentage of
the $330 billion venture capital dollars spent just last year.
Broadly speaking, 86 percent of investment decision-makers are
men. Given that venture capital is very much a pattern-matching
business, investors often back companies and people who are
most like themselves. COVID has only exacerbated this problem.
Diverse founders already had a challenging time breaking into
longstanding funding networks, but shutting down live events
and in-person meetings made this worse.
During COVID, despite an increase in venture capital
funding, investments in female-founded companies went to the
lowest levels since 2016, and the current economic downturn is
already being disproportionately felt by diverse founders. In
quarter one of this year, VC funding dropped 26 percent across-
the-board, but investment in female-founded companies dropped
by 34 percent. What is the missed financial and societal
opportunity from this deficit?
Estimates indicate venture capital opportunity costs from
withholding investment to diverse founders may be as high as $4
trillion. Venture-backed teams of diverse founders, both in
terms of gender and ethnicity, have better financial outcomes,
including 30-percent higher multiples on invested capital when
companies are acquired or go public. And when you couple that
with the fact that women drive 70 to 80 percent of all consumer
purchasing decisions, and that both women and men and people of
color disproportionately experience the inequalities that many
fintech businesses are tackling, not including these groups in
leading fintechs is just a missed opportunity.
So, how can we reverse these trends? First, sharing the
data in forums like these is key, given that many are unaware
of this information.
Second, we must share individual success stories that bring
this data to life. Four fintech examples in our portfolio
include: Candidly, led by Laurel Taylor, which is tackling the
$1.7 trillion student debt crisis through a financial wellness
platform; Icon, led by Laurie Rowley, which is innovating on
the outdated model of 401(k)s for working Americans; Morty, led
by Nora Apsel, which is democratizing access to home mortgages;
and Ellevest, led by Sallie Krawcheck, whom you heard from
today.
Finally, we need to diversify who controls investment
dollars. Female venture partners invest in twice as many female
entrepreneurs as male ones. We must, therefore, find ways to
enable a more diverse set of leaders to make investment
decisions. Limited partners, the money behind funds, have the
power to change this, since Cambridge Associates data shows
that new and developing fund managers, who often are more
diverse, rank as some of the best performers.
In conclusion, getting more dollars in the hands of diverse
fintech owners is great for consumers, and for investors in our
economy. I started this testimony by sharing my mom's
experience 25 years ago, and while the numbers have not
improved on many fronts, I would like to believe that,
together, the people in this room can ensure that my own
daughters are not sitting here in 25 years repeating this
testimony. Thank you.
[The prepared statement of Ms. Abramson can be found on
page 27 of the appendix.]
Chairman Lynch. Thank you, Ms. Abramson.
Ms. Haque, you are now recognized for a 5-minute
presentation of your oral testimony. Thank you.
STATEMENT OF MARYAM HAQUE, EXECUTIVE DIRECTOR, VENTURE FORWARD
Ms. Haque. Chairman Lynch, Chairwoman Waters, Ranking
Member Davidson, and Ranking Member McHenry, thank you for the
opportunity to testify today on the important topic of
diversity, equity, and inclusion (DE&I) in the U.S. venture
capital ecosystem. My name is Maryam Haque, and I am the
founding executive director of Venture Forward, where we focus
on diversifying, educating, and empowering the VC investor
class to help the industry to reach its full potential.
I want to start by taking stock of where the industry is
today with respect to DE&I. The VC industry historically has
not been diverse, equitable, or inclusive, and this is evident
from a growing body of data. To hit on a few stats, females
constituted 16 percent of investment partners in 2020, up from
11 percent in 2016. However, there has been little progress in
the equitable representation of Black professionals, who
represented just 3 percent of investment partners, or Hispanic
professionals, who represented just 4 percent. This data also
highlights the importance of intersectionality and why Venture
Forward approaches DE&I through this lens. While the percentage
of investment partners who are women has steadily increased,
the percentage of investment partners who are women of color
has not. These statistics are collected in a biannual survey
that Venture Forward has conducted since 2016 to track and
measure the industry's DE&I progress. VC has also lacked
geographic diversity. Three States--California, Massachusetts,
and New York--account for 84 percent of where VC assets under
management are based.
So, how did we get here? VC is a risky, long-term
investment, and the likelihood of success is low. As you know,
VC investors provide risk capital for high-growth, innovative
startups. VC is actively engaged with the founder to grow their
businesses, but these equity investments are essentially
illiquid until a company reaches a liquidity event, like an IPO
or acquisition, which can happen a decade after the first
investment.
VC investors raise funds from limited partners such as
pensions, foundations, or endowments, and the VC also has to
commit a portion of their personal capital. For someone without
financial security or personal wealth, like connections to
wealth or to limited partners, the barrier to entry for someone
starting their own fund can be high when the upside is risky,
and it can take years to realize. Existing firms tend to be
small, and there is low turnover. This means there are also few
available opportunities for new entrants. Other challenges to
DE&I progress include limited access to education on VC, and
investors relying on existing networks or relationships.
What is Venture Forward doing about this? As we see from
the data, women and people-of-color investors and founders
based outside of a few geographies are underrepresented.
Venture Forward's mission is to change that. We focus on the
investor base because investors control where and how capital
is deployed to founders. The data shows that more diversity
amongst check-writers leads to a more diverse set of founders
raising capital.
To hit on a few of our initiatives and impact, we co-lead
VC University, which has educated 2,200 aspiring investors. We
have provided more than 360 VC University full scholarships to
aspiring investors from underrepresented backgrounds to help
democratize access to quality education on VC. We have matched
more than 190 scholarship recipients with investors in a
mentorship program, and we have facilitated more than 500
meetings for 175 underrepresented fund managers to meet with
limited partners, inexperienced VCs through LP office hours.
Despite these stark stats, there are some reasons for
optimism. The demographic composition of junior investment
professionals reflects greater diversity, which suggests a more
diverse pipeline for tomorrow's senior investment partners.
There has also been a wider adoption of firm DE&I strategies,
and we have collected this data through the survey I mentioned.
This intentionality translates to improved diversity outcomes.
Firms with dedicated DE&I strategies achieve greater gender and
racial diversity amongst investment partners. Prioritizing DE&I
has the potential to unlock more innovation, unlock
opportunities for greater economic impact and unlock better
financial performance and returns for the industry.
Thank you again for your time and attention on this
important topic. As you can see from the data, there is still
much more work to be done, and Venture Forward remains
committed to its leadership role on this issue. I am happy to
answer any questions you may have. Thank you.
[The prepared statement of Ms. Haque can be found on page
32 of the appendix.]
Chairman Lynch. Thank you very much, Ms. Haque. And I want
to thank all of the witnesses for your wonderful testimony.
There is a real dichotomy here that it is ironic that in an
industry and in an area where we see so much, the velocity of
change in fintech, it is unmatched. You see the enormous
change, the innovation that is going on in that space, but that
is on the technical side, right? You look at the social side,
and we are at a veritable standstill, as both Ms. Haque and Mr.
Michel have pointed out, with exceedingly small numbers of
women and people of color actually working at high levels.
I have been on this committee now for over 20 years, and we
had a grave problem in the mortgage and banking area, and one
of our solutions, and it was only a partial solution, but it
seemed to work in some regard is, with the banks, we adopted a
protocol under the Community Reinvestment Act. And what we did
in part was we gathered data on the banks, we looked at the
investments they were making in minority areas, and then we
graded them publicly and held them accountable so that their
depositors and their investors would know how they were doing
with progress in investing in areas that were previously
redlined.
And that exposure did a lot, I think. It didn't fix
everything, but it certainly moved the needle. It made banks
more socially aware of their actions and their investments, and
I think it caused the general public and, like I say, the
investors and depositors to get on those banks and judge banks
based on how they were graded in that regard. Is there a role
for that? Would it help? And I am thinking specifically of
legislation that we would proffer to the SEC to say, can we
build a scorecard, a report card on these venture capital firms
and grade them on how they are meeting that goal, those social
goals that we would like to see those firms attain? How many
people of color? How many LGBTQ founders? How many women are
now the object of their support?
And I am also disappointed in some regards where there is
so little information at the very beginning of some of these
startups, where it is simply a White Paper. The substance is
very thin on some of these ventures. And yet, those are getting
funding, maybe because of relationships with fintech, while
Black founders, people-of-color founders, women founders, and
LGBTQ founders are sitting in the waiting room or going to 30
different meetings to try to get the same level of support. So,
I am just wondering if we if we make that scorecard, is that
something that might help? I know, Ms. Krawcheck, you have had
some experience in this area. I wonder how you would feel about
that?
Ms. Krawcheck. Yes, I think more information and more
sunshine is always a positive thing, and people can choose what
to do with the information once they receive it. But I do know,
in part of this raise, I did try to go to original sources of
capital such as endowments, foundations, et cetera. And they
seem to truly believe in the power of diversity, but they tend
to put their funds in managed vehicles. And if we were able to
do this, we could then give then that information for some of
whom it is still opaque that could help them direct their
capital in the direction that they want to.
Chairman Lynch. Thank you. Mr. Abbey, any thoughts?
Mr. Abbey. Yes, sure. Chairman Lynch, I think you bring up
a very important point from a disclosure standpoint. I think
when it comes to measuring impact--on Wall Street, we measure
how our stock markets perform on a quarterly basis. We look at
what is going on in the Dow. We look at what is going on in the
NASDAQ and the S&P 500. If we start implementing metrics, and
holding these investors accountable, and saying diversity
matters, but take it a step further and saying not only having
diversity in your janitorial staff, but looking at your board
members, looking at your executive team, that is when we start
having change. And if they can report back to the SEC, I think
we are going to have a profound impact, and we are going to be
closing the gap from an investment perspective.
Ms. Abramson. Mr. Chairman, may I add one quick point to
that?
Chairman Lynch. Sure. Please do.
Ms. Abramson. I think data is a powerful thing, and I
really like your idea of doing this at the fund level. I think
one other idea to supplement that would be to do it at the
limited partner level, the institutions that are investing in
funds, and to do a scorecard, especially for large pensions and
other significant institutions, to see where their dollars are
going in terms of the diversity of the fund managers they are
backing, given how much that diversity at the fund level
impacts who gets the dollars at the fintech level.
Chairman Lynch. Okay. Thank you very, very much. I now
yield to the ranking member of the task force, my friend and
colleague, the gentleman from Ohio, Mr. Davidson, for 5 minutes
for his questions. Thank you.
Mr. Davidson. Thank you, Mr. Chairman, and I appreciate the
opening testimony from the witnesses. And I will say, Mr.
Abbey, I am impressed with the business that you and your co-
founders have built, and congratulations for identifying such
an important niche to establishing a more robust credit
reporting system. I think I would just be interested in your
perspective in terms of how your own lived experience helped
you identify the problem, and maybe solve it?
Mr. Abbey. Thanks a lot, Ranking Member Davidson, and I'm
really humbled by your kind words. When my mother and I came to
America, we didn't have a credit score and had to go borrow
money from a predatory lender. And that experience really
inspired me and my co-founder, who had the same experience, to
create a product that creates a win-win-win construct. The
product we created at Esusu is one that doesn't point fingers.
Landlords win, the residents win, and society at large wins
because we are not solving homelessness backwards.
And what really perturbed me was when you pay your
mortgage, that data is reflected in your credit profile, but
when you pay rent, for the 109 million Americans, in an
average, spending $1.44 trillion to their landlord, that data
is not visible. And that is what essentially led us to build
this billion-dollar business, making sure we can pave a
permanent bridge to financial access and inclusion for those
who have been predominantly left behind. I think we still have
a long way to go, but like my grandmother always says, you have
to build a doghouse before you build the White House.
Mr. Davidson. Thanks for sharing your story, and
congratulations on your success. And I just think, thank God, I
am so thankful for the country that I got to experience, but I
was born here. Thanks for coming here and making a difference,
growing your business here and, frankly, helping solve a
problem for a lot of people. And from a personal view, I am
sure your own personal experiences helped you, but
fundamentally, you just had a really big idea that solves a
problem. And I am glad that you found the capital. Thanks for
your persistence in doing it.
Ms. Haque, you have focused on helping people find capital
in your own path. Would you describe how Venture Forward as
well as the industry is taking the initiative to address some
of the kind of broad issues, maybe from a broad perspective,
but specifically, what are some of the initiatives that you
have seen address the testimony today?
Ms. Haque. Ranking Member Davidson, thank you for the
question. I want to hit on a few programs that we have found to
help meet some of the needs of the industry, and the first one
I want to mention is VC University, to which I briefly alluded.
And what we recognized a few years back was a recognition that
talent is not a pipeline problem or diversity and talent is not
a pipeline problem. However, in the industry, because it has
traditionally been small, it has run as an apprenticeship
model. And if you don't know someone in the industry or live
within a few miles of a few cities in this country, the
recognition or the understanding of venture capital can be
hard. And that initially is just a barrier that we felt that we
could play a role in, to scale some of that education more
broadly.
And so, VC University, in which we partnered with UC
Berkeley, has now grown over the past 4 years to have more than
2,000 aspiring investors across the country come through this
program. Many of them are underrepresented, and we offer them
education to really understand the nuts and bolts because we
don't want just purely the education or information on VC to be
a barrier. But we recognize that just education is not enough,
and so we have added in additional elements of making sure
investors in today's industry are supporting these up-and-
coming investors through a mentorship program, through a
scholarship program that we offer to underrepresented and
aspiring VCs across the country. We have seen a lot of
diversity within these cohorts. For example, our most recent
scholarship cohort was 90 percent people of color, 60 percent
women, 60 percent based outside of California, Massachusetts,
and New York, 20 percent identified as LGBTQ, and 7 percent
were active military or veterans.
Mr. Davidson. Yes, thanks for the background. I will say
that I have seen quite a bit of diversity in the industry, and
have personally been involved extensively in trying to push
legislative clarity for the space. I am thankful for groups
like the Women of Color in Blockchain. They have invited me
numerous times to speak with them, and they, of course, are
focused on women, but in particular, women of color. There are,
of course, a lot of White males in the industry. It is male-
dominated, but it is also encouraging to see the diverse folks
who are involved in terms of heavily next probably Asian and
certain areas of the Middle East. But I look forward to
providing regulatory clarity for the entire United States
because, again, a lot of the liquidity is moving out of our
economy because Congress hasn't taken action, and the action at
the SEC, in particular, has frightened a lot of capital law.
With that, I look forward to the rest of the testimony, and
I yield back.
Chairman Lynch. The gentleman yields back. The Chair now
recognizes the Chair of the Full Committee, the gentlelady from
California, Chairwoman Waters, for 5 minutes for her questions.
Welcome.
Chairwoman Waters. Thank you very much.
Mr. Michel, venture capital's investments in 2021 reached
well over $35 billion, yet most of the investment has been
directed towards White- and male-funded companies. But multiple
studies have found that companies with diverse leadership,
specifically with more than one gender, and/or one race, or
ethnically represented are more innovative and make more money.
The Harvard Business Review found that venture capital
investing teams limited to any one gender or any one race do
much worse. I assume that venture capital firms are heavily
profit-driven, but it seems they are ignoring clear data on how
to boost those profits. Why do you think this is the case, and
what are the ways we can help businesses with high growth
potential to have a fair shot in receiving venture capital
funds?
Mr. Michel. Thank you, Chairwoman Waters, for such a
considerate question. I believe that it is because of the
outdated model connected to how venture capital evaluates
companies. I brought this up in my testimony, but there is this
thing of benchmarking, which really is about sameness. It is
really about, how does something match up with something that I
already know, something I am already comfortable with,
something that already makes sense to me, right? In an industry
that has been built predominantly on White male culture, it is
really about benchmarking how does this female founder, how
does this Black female founder benchmark with someone that I
know, benchmark with someone that I went to school with,
benchmark with someone who is already in my social network?
These are biases that implicitly end up locking out people
of color, and locking out women, because they don't benchmark
in the same way. They don't have the same lived experiences.
And so, funds like mine have emerged to close gaps like these
to ensure that there is funding that is very specifically going
to certain communities. And people have asked, is that too
exclusive, but really, it is really about the fact that there
is an immense need for more funds and more organizations in
general that are focusing on closing this gap. Not only do we
need to hold venture capital accountable, and I really agree
with what Chairman Lynch said about having a scorecard for
ventures so that it is really transparent how well a fund is
doing when it comes to how they are diversifying, and how they
are when it comes to their staff from within and when it comes
to their portfolio, but it is also important to create more
funding structures to go to diverse fund managers, but who have
authentic--
Chairwoman Waters. If I may just interrupt you for a moment
here, when you talk about benchmarking, if you have venture
capital companies whose leadership has never met, or interacted
with, or know very many Black people, and come with the belief
that we are not good entrepreneurs, how do you deal with that
kind of attitude and those kinds of feelings? You are talking
about how important it is, and we are talking about how
important it is to have people inside your firm who have to
make these decisions. And if they don't have people who are
making decisions that are inclusive, and are particularly
interested in diversity because they don't know anything about
the cultures, anything about interaction, they have never been
in Black communities, they have never seen young Black
businesses that work very hard to be successful, how do you
overcome that?
Mr. Michel. I know my way of overcoming that was starting
my own fund, because I was the founder who was experiencing
this. I am a first-generation American. My parents immigrated
here from Haiti, and I come from a culture of figuring out how
to liberate myself. I was a founder who started my own company,
and got an incredible amount of traction, but I was being given
the runaround by venture capitalists. I was taking meetings,
and those goalposts kept getting pushed out, and that is why I
started Black Founders Matter, to call out the elephant in the
room. I believe that it is important for funds to have
representation within, because that is how you get authentic
connection to the actual communities, because it is also hard
as a Black founder to be able to trust.
Chairwoman Waters. So you think that what Mr. Lynch is
saying in terms of how we take a look at first to ask, how many
people of color do you have in your firm in leadership--
Mr. Michel. Yes.
Chairwoman Waters. --in addition to how many companies or
startups have you funded? We are going to try and do everything
that we can. We thank you for being here today and the others
who are giving us some ideas about what we can do. We are going
to work very hard to open up these opportunities. And thank
you, Mr. Lynch, for allowing me time today to interact with you
on this most important subject. Thank you.
Chairman Lynch. Thank you so much, Madam Chairwoman. Thank
you for spending time with us. I really appreciate your
leadership.
The Chair now recognizes the distinguished gentleman from
Wisconsin, Mr. Steil, for 5 minutes for his questions. Welcome.
Mr. Steil. Thank you very much, Mr. Chairman. I appreciate
you holding today's hearing.
Ms. Haque, we have talked a lot about different ways
diversity is impacting us in the financial services sector. I
think one area that we haven't touched on is geographic
diversity. We continue to really see VC funds building up in
San Francisco, New York, and Boston. I am here in Wisconsin. We
are in a remote hearing. I am at home. And I recommend that
everybody come to Wisconsin in the summer. It does not get
better than summer in Wisconsin. I see some smiles, as some of
you guys are probably dealing with the heat and an actual
garbage fire in D.C. today, but I want to dive in on geographic
diversity. Ms. Haque, if I read your resume correctly, you are
from the great State of Mississippi. Is that accurate?
Ms. Haque. I am. Yes, I was there for the first 18 years of
my life.
Mr. Steil. Spectacular. Do you meet a lot of people in the
broader VC space from Mississippi and similar States?
Ms. Haque. I would say in my 15 years in the venture
capital industry, I have met one venture fund manager in the
State of Mississippi. And I think that speaks to why I am very
passionate about this topic, which is the fact that I didn't
get exposed to venture capital until I moved to San Francisco
15 years ago. And I do think that is what our program, like VC
University, is trying to address is to just make it more
accessible to understand that venture capital is a viable
career opportunity as an investor or as an entrepreneur, to
just demystify that. One specific program related to this that
we have seen a lot of interest and success with is VC
University Live, where we have actually partnered with
universities across the country--the University of Michigan,
Tulane, SMU, and UNC-Chapel Hill--to hold these types of
educational workshops, bring together the local ecosystem,
shine a spotlight, and then just provide more education on
really the nuts and bolts of VC and how it works.
I do think that what we have seen from a positive aspect of
the pandemic has been a bit more dispersion of talent across
the country. But I think it is really important to think about
how are you opening up local capital that is not just the seed
or the earlier-stage capital, but really those later-stage,
local capital that may be helpful for companies along their
growth cycles.
Mr. Steil. I appreciate that, Ms. Haque, because I totally
agree. I think when we look at what happened with the Volcker
Rule, the impact of that consolidating capital into some of our
largest cities, particularly San Francisco, New York, and
Boston, I think it is to the detriment of some of our smaller
communities, whether or not that is in the State of
Mississippi, where you spent the first 18 years of your life,
or in the great State of Wisconsin. I think it is something
that we have to explore. You commented nicely about the impact
that you can have in relationships with schools.
I want to shift gears slightly in my remaining time to
thinking about the way that early-stage investors are playing
an active role in their portfolio companies, different than
more late-stage, possibly passive investors in the way that
these investors can really actively mentor in these early-stage
investments. How do you see the importance of that early-stage
mentorship in the entrepreneurial ecosystem?
Ms. Haque. At the really earliest stages, a founder pretty
much could have just an idea, and so the investors are really
working with founders from day one to help provide strategic
and operational guidance. They are connecting entrepreneurs
with customers, other potential investors, taking board seats,
hiring employees, et cetera. And so, they are really helping
and working actively with that fund manager to help build this
business from the ground up, and the investor is going to see
no upside from that investment until the company is successful.
And I do think that there is a lot of this active
management that has been really core to the venture business
model, and venture investors have multiple founders in their
portfolio. So, it is not that they are just dedicating their
time to one founder, but it could be dozens, and venture firms
are typically small. The median size of a venture firm in this
country is six employees, and so it is a matter of time
management. But I think there is just a lot of alignment of
interest for those investors to see the founders be successful.
Mr. Steil. Absolutely. In my remaining time, I would flag
that I think one of the things we should be looking at as a
committee is ways to limit the regulatory burden in some of our
early-stage companies. When we think about these emerging
growth companies with amazing potential, often, great
entrepreneurs are stepping up. It is really a point in time
where we could look to be encouraging more entrepreneurs to be
entering this space if we look at the regulatory burden that
the Federal Government is often placing on many of these
companies.
Cognizant of the time, Mr. Chairman, I will yield back.
Chairman Lynch. Thank you, Mr. Steil. The Chair now
recognizes the distinguished gentleman from Florida, Mr.
Lawson, for 5 minutes for his questions. Welcome.
Mr. Lawson. Good afternoon to everyone, and I would like to
welcome all of the panel. This has been a great discussion. And
my question is going to be sent out really for the whole panel
because from what I have heard this morning, you all are very
interested in where we stand.
The Federal security regulation restricts the type of
investors that can gain access to private investment
opportunity, including certainly venture capital investments.
And accordingly, what it requires for an accredited investor is
that the investor must have particularly high income, a whole
wealth of at least a million dollars beyond the value of their
primary residence. Only around 10 percent of the households in
the U.S. will meet this threshold. How do we balance the need
to protect prospective low-income investors from risky
investment with the high bar to enter the CV space? And this is
for the whole panel.
Mr. Abbey. I am happy to go first. Thanks a lot for that
question, Congressman Lawson. When we think about getting
everyone involved, I do strongly believe there is a balance. We
need to have the right disclosures to make sure folks know what
they are getting themselves into. Venture capitalist investment
is extremely risky, but also has high returns. So, making sure
we have those edge language and we are incredibly clear about
the kind of investments in the vehicle would be helpful. And
getting folks involved, limiting things like accredited
investors, creating more opportunities, and letting more people
engage from an investment standpoint is encouraging. But we
need to just be very, very balanced in our approach because we
are one of the rare cases where we became a billion-dollar
business. Most times when you invest in this vehicle, you can
lose everything. We just want to have a balanced approach where
we are educating potential investors, accredited or not
accredited, about what they are getting themselves into.
Mr. Michel. I would like to add to that. I think this is
also a question of scale, because if we are talking about the
general population and their ability to be able to invest in
ventures like this, it is quite risky. But it is about what
level of exposure makes sense based on where someone is
financially, right? We have seen a lot of efforts in recent
years for crowdfunding, where communities are able to come
together and put together--put in $500, put in $1,000, put in
what is reasonable.
Usually, the general population is excluded because venture
funds are so large and the barrier for entry is so high in
terms of having to put in a check for $50,000, $100,000, up to
millions of dollars. But having opportunities where people who
don't have as much to be able to put into funds at that scale
are able to still be able to participate in the returns, that
can come from investing in venture capital. So, I think that
there is an opportunity when it comes to being able to just
scale what that amount is so that people aren't exposed and
don't lose a lot of money, because you can lose money in this
space.
Ms. Abramson. Congressman?
Mr. Lynch. Go ahead.
Ms. Abramson. I will just quickly add that, yes, we can ask
funds to lower their minimums that are required to be part of
the funds, which is something we did at Rethink Impact to allow
investors from 39 States, 67 percent being women, to invest.
That was a big thing. And the second thing is there are
companies like Ellevest--you heard from Sallie Krawcheck
today--who give investors an opportunity to take part in this
type of investment vehicle and in a broad type of vehicle that
can be safer and be better aligned to their broader investment
portfolio and to what they can actually do, but lowering the
risk as well. I think the other piece is to not think
exclusively about individual venture funds, but buckets of
investment.
Ms. Krawcheck. And I will chime in. I think you may be
trying to run, when we may be trying to crawl a little bit.
When I think of women investors today, the majority of their
money remains in cash, which was bad enough when it was earning
zero percent, and now with inflation, means they are going
backwards. And so, we are focused in the first instance on how
do we make sure they are taking their money and investing it to
earn the returns before they get into the higher-risk venture
type of investing.
Mr. Lawson. My time is running out. Those were some great
answers. I am still concerned, as I yield back, about the
million dollars beyond the value of their residence, because
residence carries a lot of value today, and we can talk about
that another time. I yield back, Mr. Chairman.
Chairman Lynch. I thank the gentleman. At this point, I
would like to just ask my friend and colleague, Mr. Davidson
from Ohio, if he has any closing remarks as we conclude this
hearing. Thank you.
Mr. Davidson. Thanks, Mr. Chairman, and thanks to our
witnesses, and I am just appreciative that, frankly, we have a
diverse group of people here. You have all been successful. I
think the strength of America is we have been able to attract
people from around the world. I think we should celebrate the
fact that in a normal year, we bring about a million new
Americans into our country legally every year.
We certainly have many challenges, but I look forward to
working with my colleagues to solve them, and I hope that we
can do that in this space by providing some regulatory clarity.
We are seeing real challenges for even keeping the capital and
keeping the ideas inside the United States of America, because
we haven't provided regulatory clarity for a large portion of
this market. And I hope we can do that--crawl, walk, run, but
let's start moving, and I just appreciate collaborating with
you, Mr. Chairman. Thanks again for holding the hearing, and
thanks for the witnesses, and I yield back.
Chairman Lynch. I thank the gentleman. Thanks for your kind
words. This is a very timely hearing. We see what is happening
in the VC space. There has been a certain retrenchment because
of the economy. So, it makes us doubly concerned that founders
of color and women founders--we don't want to see the situation
grow even worse for them in a tight economy. So, we are very,
very appreciative of the perspectives that have been provided
by the witnesses here today. I am very happy with the questions
that were asked as well. They were very evocative and brought a
lot of good thoughts here that I think might result in
legislation at some point, and I would like to thank our
witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
That concludes our hearing. Thank you all, and enjoy the
day.
Mr. Abbey. Thank you.
Ms. Abramson. Thank you so much for having us.
Mr. Michel. Thank you. This was an honor.
Ms. Haque. Thank you.
Chairman Lynch. Thank you.
[Whereupon, at 1:14 p.m., the hearing was adjourned.]
A P P E N D I X
June 30, 2022
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