Intel forms venture fund to invest in diversity

SAN FRANCISCO — Intel has formed a venture capital fund to invest $125 million in technology companies with diverse founders or executive teams.

It's the latest effort to address a deeply entrenched problem in Silicon Valley: Women and underrepresented minorities have been largely left out of one of one of the world's greatest wealth creation machines.

"There has been a gross lack of attention and neglect," said Lisa Lambert, who is managing the Diversity Equity Fund, which is part of Intel Capital, the company's venture capital arm.

Venture capital firms run mostly by white and Asian men control the spigot of wealth in high tech. Big bets by venture capitalists can help a company mature from the larval stage into the next Facebook or Google. Yet a tiny fraction of startups led by women — and an even tinier fraction of startups led by African Americans, Hispanics and Native Americans — have attracted venture capital dollars.

The culprit for this racial and gender gap in venture capital? Unconscious bias from people in positions of power who hire from their immediate circles rather than casting a wider net, Lambert says.

As a result, patterns have emerged. White and Asian men are more likely to get funded, putting them in an advantageous position both to build successful companies and to have the kind of track record that venture capital firms seek in new partners.

Venture capital "is as homogeneous an industry as an industry can be in the 21st century," said Lambert, one of the few African American female investors in Silicon Valley. "Venture capitalists recruit partners out of their network and source deals out of their network. If you don't have diversity in the venture capital firms, you are very unlikely to get diversity in portfolio companies."

But there are signs of change, albeit slow in coming.

With high-tech companies appealing to an increasingly diverse and global marketplace, historically underrepresented groups are becoming key to future growth in the sector. And venture capitalists have begun to realize they risk losing touch with a majority of consumers and losing out on new ideas.

Comcast Ventures, the cable and entertainment giant's corporate venture arm, started the Catalyst fund in 2011 to invest in minority entrepreneurs who might not otherwise have access to capital.

The $20 million fund, a result of the merger of NBC Universal and Comcast, has made nine investments, most on the East Coast. Now with the addition of veteran technology executive Laurence "Lo" Toney who recently joined the fund in San Francisco, Catalyst is investing in minority entrepreneurs at the seed stage on the West Coast.

"The fact that Intel is also starting a fund further validates the vision Comcast had back in 2011 that there is a need for this type of fund to exist," Toney said.

Leading technology incubator Y Combinator has made a substantial commitment to funding qualified minority and women led startups with an effort spearheaded by veteran Internet entrepreneur Michael Seibel who is African American.

Marlon Nichols, an African American partner with Intel's new diversity fund, is forming an early-stage venture firm Cross Culture VC with Lady Gaga's former manager Troy Carter. Charles Hudson, an African American partner with SoftTech VC, is starting his own firm to invest in startups.

And after years of ignoring the issue, the National Venture Capital Association is owning up to the industry's diversity problem. In December the trade group said it was forming a task force to brainstorm ways to bring aboard more women and minorities.

The real wake-up call for venture capital came with Ellen Pao's unsuccessful gender discrimination lawsuit against her former firm, Kleiner Perkins Caufield & Byers, which put the national spotlight on the lack of diversity among tech financiers.

Kleiner Perkins is one of the storied firms on Sand Hill Road, the wealthy row of influential venture capital firms in Menlo Park, Calif.

Now investors in these firms' funds, known as limited partners, are starting to ask tough questions, putting pressure on venture capital firms to recruit women and minority partners and to invest in more women and minority-led companies, Lambert says.

A report in 2010 by CB Insights found that fewer than 1% of venture capital-backed Internet companies were founded by African Americans.

Babson College survey found that 2.7% of the 6,517 companies that received venture funding from 2011 to 2013 had a female CEO.

"Will the big Sand Hill Road firms get on board? All I can say is that I have been hearing that they are beginning to get on board," Lambert said.

Lambert's new fund, which is part of Intel Capital, the company's venture capital arm, supports a broader pledge Intel made in January to increase diversity. Intel has said it's determined to make its work force better reflect the available talent pool of women and underrepresented minorities in the USA by 2020. And it established a $300 million fund to increase diversity at Intel and in the technology field.

Intel Capital held a press conference at Intel's Santa Clara, Calif., headquarters to announce the diversity fund. But the fund has been up and running for months.

The goal is to seek out more diverse investments. Of the investments made by Intel Capital, 10% are in companies that are women or minority led and 13% of investment partners are women or minorities, Lambert said.

The diversity fund has made four investments and has five investment partners, two of whom are women, two of whom are African Americans and two of whom are Asian Americans.

The criteria for investments: Either a startup's CEO or founder or at least three members of the senior management team must be a female or an underrepresented minority.

That does not necessarily mean that the companies are extremely diverse.

CareCloud was founded by Miami entrepreneur Albert Santalo. But he recently turned over the reins to a white male CEO. Another Latino executive is listed on the leadership team, but of six people who hold top management roles, four are white men and none are women. There are no women on the company's board of directors either.

Venafi, a cybersecurity firm, has three women on its mostly white male 11-person leadership team.

Brit + Co, on the other hand, is run and dominated by women.

Founded by Brit Morin, who aims to become the Martha Stewart of Silicon Valley with a growing do-it-yourself empire targeting Millennials, the San Francisco startup raised $23 million from investors including Intel's diversity fund last month. Lambert joined the board.

And Mark One, maker of Vessyl, a smart cup that tracks what you are drinking with molecular analysis, had three African Americans on its management team.

"It's a really great thing that Intel is making this an issue," said Justin Lee, who founded the San Francisco startup. "It's a really great first step in making tech more diverse and it's a great sign of progress."