Episode Transcript
Speaker 0 00:00:00 Hello everyone, and thank you for joining. We are kicking off our special Women's Day and Women's History Month podcast series where we celebrate women and their hunger for innovation and explore the impact of diversity. And with us to help us celebrate is Katherine Finney, author, investor, and entrepreneur. Katherine was named by Ink Magazine as one of the most influential women in tech. She's founder and c e o of Digital Undivided, a social enterprise leading women of color through the startup pipeline from idea to exit. So today we're gonna be discussing transparency around women focused capital funding, so-called pink washing, governance and ownership and capital raising for women of color entrepreneurs. So to start us off, I read this really cool statistic that 53% of American startups have at least one woman in an executive position. And I think that's a good segue into pink washing. Catherine, what is it and how can we look out for it?
Speaker 1 00:01:01 Well, I think, you know, when I think of pink washing, I think of this idea of companies being penalized for having women involved in leadership. Um, and I think one of the things that we have to start to explore is what is the impact of having gender diversity in companies and how does that contribute to the company's bottom line positively? And I think there's a lot of statistics in research on that. Um, at digital and divided, we tend not to focus on those sort of terms. We tend to focus on the economic opportunity, the business opportunity for investors as well as partners and corporate partners in particular to gain from these relationships. Um, but really it's about companies and organizations being penalized for having women involved. Hmm.
Speaker 0 00:01:55 Well, while we're talking about penalizing companies for their governance and their structure, let's talk about why we should care about governance and ownership structures around funds. What's, what should be top of mind for us?
Speaker 1 00:02:09 Well, there's a lot of research that's been done lately to look at success of funds and funds that have women as general partners, women who are in sort of the higher upper echelons of the, uh, fund structures tend to bring in diverse opportunities for the funds. Um, a lot of people invest in what they know, right? And so if all your gps, your general partners, all your limited partners are male, then your fund is going to most likely invest in males. Um, it's also been interesting, there's some research that's been done, um, um, first round has looked at this. Um, Astia Capital, which is an angel group, has also looked at this, the impact of having, um, wives and daughters, um, very close relationships with them in getting male investors to invest in women-led either companies or companies that are targeting women-led markets. So having diversity expands the deal flow, it expands the deal pool, the potential places in which deals can come from. And it's very hard to see if you're not a part of diverse communities yourself or have diverse networks yourselves. So it becomes really, really important.
Speaker 0 00:03:25 Hmm. So networks as well as personal re very close personal relationships can impact the fun makeup
Speaker 1 00:03:33 Well, yeah. Ah, um, it expands opportunities. So for example, if you're pulling, um, one of the entry level positions in a fund is an associate right? First entry level job into, um, a VC fund. If you are only pulling from Stanford, you're only gonna get a certain type of person. You're not going to get a very diverse pool because Stanford isn't as diverse. However, if you expand your network and you look for associates at places like Howard, um, Spelman mm-hmm. <affirmative>, um, even diverse, predominantly white institutions like a Rutgers University, you're going to have an expanded diverse pool in which to hire from mm-hmm. <affirmative>. But what happens again is these sort of closed networks that I went to Stanford or I created my company and all my investors came from Stanford and came from my network. So I'm only gonna look at Stanford because that's easy for me, and that's what I know. Um, and it's re it's basically this sort of self-fulfilling prophecy of only one type of investor because we're only pulling from one type of network. Mm
Speaker 0 00:04:34 Mm That definitely makes the case for expanding and broadening our networks. And I wanna talk a bit about transparency. So can transparency around these women focused capital, um, funds, can they help create wealth for entrepreneurs as well as investors? And how can we see more of the wealth creation with entrepreneurs and not just wealth creation for investors?
Speaker 1 00:04:56 I think what has happened is the amount raised has become sort of the benchmark in the startup world. Um, you're judged on, I raised $10 million, not based upon I have 10 million in revenue. And as a result for a lot of entrepreneurs, they're going for the raise, not for the revenue. And the more you raise, the more or less equity that you're going to have, right? And so the less control that you're gonna have versus if you are able to increase your revenue to the point where you don't need to take very much investment or delay the amount of investment you take, or when you take investment, you're gonna retain a higher percentage ownership of your company and you'll have more control. And at the end of the day, you'll have more wealth. I think what a lot of people don't realize, and I'm a very early seed stage, I mean before Steve, like investor, I don't think what a lot of entrepreneurs realize is that an investor becomes your boss.
Speaker 1 00:05:54 You, you are really bringing on a boss and they're gonna want a return and they're gonna be pushing you to get a return. And we've seen that happen with a number of top companies. Girl Boss is one of them, um, where this amazing entrepreneur had built this incredible company that had, um, that was a really part of the zeitgeist and everyone wanted to have clothes from and stuff like that. And she was being pushed heavily from her investors to scale and get bigger, um, and to do things that was probably not exactly aligned with what she wanted to do. And as a result, it kind of drove the company into the ground, WeWork as another example of being forced to grow and scale and to go into other areas in order to show that there's this like growth, that hockey stick sort of growth, um, and as a result got too big, got too unruly, and wasn't able to really get the revenues to equal the growth. And so I think for entrepreneurs is really important to understand what it means when you take money, when you take investment, and what the expectations are from the investor. And that is growth.
Speaker 0 00:07:02 Hmm. That's amazing. And you mentioned one point about being a Pree investor. Yeah. And we were talking earlier about the numbers from Project Diane. Yeah. Um, your research, and I'd like for you to expound upon what is considered normal in terms of entrepreneurs and the funds that they can bring in. What's considered normal for one group would be considered, um, subpar for another group, or what's considered outstanding for one group would be considered subpar for another group of investors. Let's talk about that. Yeah.
Speaker 1 00:07:29 One of the interesting things we saw from Project Diane 2018, and we have our project Diane 2020 coming up to share, we're really super excited. Um, we've also expanded the research capacity at digital and divided. We have a new, um, director of research, Dr. Lucie o Gigi Turley, who's come in and we're really excited about what she's doing and expanding our research and having us look at things differently. But one of the things that we learned from Project Diane 2018 is that the baseline is different depending on who you are. Mm-hmm. <affirmative>. And, and it goes back to the network, it goes back to access to capital just in general from the communities that you come from. So if you are an African American woman, um, the average raise was about $42,000. Most of that money came from personal resources, refinancing mortgages, uh, 401k, um, things like that. However, if you are a white male, and we found that, um, on average failed companies, failed startups, led mostly by white men, um, raised an average 1.4 million,
Speaker 0 00:08:36 1.4 million,
Speaker 1 00:08:37 1.4 million. But that's where failed company raised that mm-hmm. <affirmative>. So we're not even getting enough resources to fail properly mm-hmm. <affirmative>. Um, but if you, if that's what the baseline is for companies that are not doing well, um, it's really difficult. There's not really an equal playing field. Um, companies that are led by diverse and, and the numbers are similar for Latinas and other women, um, as well, you're not getting enough to really give yourself that, that good start. Um, you're having to pull resources from many different places and it's usually small, small amounts of money. So you're not getting that access. Our networks don't have that sort of, um, wealth to be able to invest. Startups are incredibly risky. So you need to have a network that has risky capital that they can deploy. And if you don't have a network that can lose 50, a hundred thousand 250, it's gonna be really difficult for you to get that capital you need, particularly at the level of your white male colleagues.
Speaker 1 00:09:43 And so what we're seeing is, and we've had a lot of discussions with partners and funds of like, how do we get capital to diverse communities in a way that the capital will serve as a catalyst? And it's a complicated, um, question. There's a lot of answers out there. There's a lot of funds, micro funds in particular funds under 10 million that have been created that are sort of giving us early access. There's some larger funds, Harlem Capital, and they're 40 million. Um, plexi Capital Low Tony, who was at Google Venture. So there's some, we see some movement, but it's, it's not enough. Um, because we don't have the networks and we don't come from communities that have historical wealth. We don't come from communities that can lose 50 K a hundred k
Speaker 0 00:10:30 Mm-hmm. <affirmative>. So what's the secret sauce? What does that look like? Mm-hmm. <affirmative>, I'm going up to someone outside of my network, outside of, um, to your point, someone you know, who I have not engaged in the past to ask them for this startup funding. What, what does that conversation look like?
Speaker 1 00:10:46 You know, it depends on who you're, you're talking to. <laugh>, sometimes that conversation can be very complex because at the root of this, we're talking about money and really who deserves money, whose ideas deserve to be grown and scaled? Um, what ideas are valuable? These are all things that, that are deeply rooted within our own personal beliefs. Um, and they're difficult questions. And it's a difficult thing to sell what you're doing to someone who, whether they know it or not, may have biases about the value of your idea. Um, and so what I usually say to people is, in particular founders in in our, our big incubator or at Digital Nevada, and I'd say, look, there are about 20 investors who have actively invested in women of color, and we all know them. It's only about 20 go to them first. And the reason why you wanna go to them first is that as an entrepreneur, you don't have time to do a course on race relations or gender relations for someone.
Speaker 1 00:11:52 You just don't. Your, your focus is building your company and growing and scaling and getting to market, generating revenue. So while you're in that process, you, you can't waste time trying to get someone to believe in your idea, who for whatever irrational reason is just not going to get there. That's a waste of time for you. Mm-hmm. <affirmative>. So focus on those who already get it. And as you build your company and you build your infrastructure, if you have time, take those people who already get it and have them come with you when you have to do that. So you're not putting this position as entrepreneurs. Um, one of the interesting things we learned from a founder, um, who actually has been quite successful, she's raised over 10 million. And she was talking about how she would go into meetings, you know, and with most VCs, you get an hour, that's it.
Speaker 1 00:12:39 You don't get 62 minutes, you get 60 minutes. And the first 45 minutes of that meeting was spent explaining how she got in the room because they were so surprised that she was there. And only 15 minutes was spent like talking about her company. And then the feedback she got afterwards was like, all she did was talk about herself. That was the feedback, right? She's like, I don't wanna talk about me. I wanna talk about my company. You wanted to talk about me because you were so fascinated I got in this room and I'm penalized for your own biases. Right. And it's so interesting. So, so it's deeper than that and it's always constantly shifting discussion back to your business. But as a woman of color, you know that you're going to spin at least a good 20 minutes explaining yourself and who you are and your background and who your family is. And all these things have nothing to really do with your business. But for the, to get over that mark to get to the discussion about your business, you'll have to actually do that. Mm-hmm. <affirmative>. Wow.
Speaker 0 00:13:47 So, so you're sharing with us that what to do. Yeah. You know, how to approach folks who already get it, um, how to include them in your journey. Could you take us through some of the, and have
Speaker 1 00:13:58 Them be your advocate
Speaker 0 00:13:59 And have them be your advocate? Yeah. Okay. With their network, I'm supposing
Speaker 1 00:14:02 With their network, but also when you have new opportunities, um, many who are already investing clearly understand the challenges and have seen firsthand the challenges of women and women of color companies. So they are very aware of it. And many early investors in this space are very open to being advocates and being used to sort of help you get over that hump, make it so that you don't have to spend 45 minutes on that and they're willing to help you with that.
Speaker 0 00:14:31 Wow. Okay. So have your advocates aligned? Yes. And ready to go. Also interested in the red flag. So what should entrepreneurs look out for? One of the things that you mentioned earlier was the focus on raising the funds as opposed to a revenue, um, focus. So what should entrepreneurs look out for as a red flag
Speaker 1 00:14:48 From entrepreneurs or from other entrepreneurs or from from investors for
Speaker 0 00:14:51 Entrepreneurs, whether it be red flags that investors might give off that they don't recognize. What would you say?
Speaker 1 00:14:57 Well, one of the things I would say is one, look for investors who be aware of investors who don't ask questions about your business model, about like what it is that you're doing. Be aware of investors who haven't actually invested before. Cause investment is kind of hot, like saying that your investors are hot sort of thing. Um, be a be weary of people who are asking for advisory shares without investing in your company. That's one thing that we've seen a lot of. Um, and when you do give advisory shares, make sure that you have a relationship where that person has actually contributed something significant to your company. Um, understanding what you give, um, understanding what a cap table is, really understanding what a cap table is. And, um, the investor Bradfield, who's sort of well known, Foundry Capital, um, big supporter and founder of Techstars, has a great series on like cap tables and investments.
Speaker 1 00:15:57 It's like very wonky, but you should read it if you're getting in this space. Understand what that is, understand what is normal percentages to give to an investor. Understand how VCs make money. This is one of the things that, um, we've seen with entrepreneurs is not understanding how a VC makes money. Um, what is two 20, you know, it's, it's 2% management fees each year and 20% of the carry after everyone's paid back, right? Mm-hmm. <affirmative>. So you, once you understand that, you understand why a VC doesn't get excited when you say, I'm gonna make a million dollars, versus when you say, I'm gonna make a hundred million, right? But those are things to really understand the business that you're in, understand the business that the investors in. How are they going to get their money back because they want their money back? And how are you going to get it to them?
Speaker 1 00:16:51 And I think all those are really important. A lot of entrepreneurs skip that and don't understand that and, and often find themselves either, um, their cap tables, which is, you know, the, where your investors are at or lopsided. So you might only own 20% of your company, um, and you gave someone 70% of your company for a hundred thousand dollars. Cause you didn't understand what was a good cap table, what was investing percentages, all those sort of things. So know the space you're in. Mm-hmm. <affirmative> also look at comparable companies, even if they're further ahead, even if they're much larger down the road. But see, how did they get started? Who, who invested in them? Um, if you can find out like what was some of their early term sheets and term sheets are the sheets you get when an investor decides they wanna invest in you.
Speaker 1 00:17:39 Um, many will actually share them with you if you ask, especially if they know that you're in the space. Um, they might not give it to you, but you might say, come to the office and I'll show you some early term sheets. If you can do that, always take that opportunity because it helps you get familiar with where you're at. What is the standard in terms of what you should be looking for, um, and what's the standard relationship? Also, always interview people who have received investment from the investor. Always do that. Not all money is good money and some money is really expensive. And so there's some investors where you're like, I just, you know, I don't wanna deal with them <laugh>, right? Great that you wanna invest, but man, if I had to talk to you, because you're, you're married to that investor for the length of your company, they're your boss. They're your boss. You, as soon as you sign that term sheet, they are like your boss. You are married to them. And so if you don't have a good feeling, you don't have a good relationship. If they're not entrepreneurial friendly, then it's not going to be good for you. So the money is great, but, but it's not just the money, right? Yeah. Yeah.
Speaker 0 00:18:52 Wow. Now let's flip that. What should investors look for if they're the top three? If there are top three things that you would say and investors would be, would definitely need to look for what those be.
Speaker 1 00:19:02 One, clearly communicating how they're gonna get your money back, even if it's not like definitive, you know, 10 slides on that this, they have an idea what the exit is. Um, that's a big one, that they see an exit, um, and they can communicate it. A clear business model. Like what, how are you gonna make money? Like <laugh>? You know? And you would think these are really simple things, but you would be amazed about how many entrepreneurs have not thought how they're gonna make money. They thought of the idea, but not how are you gonna make money. Um, and then the third thing is an entrepreneur who's really interested in feedback and who loves you asking questions. Um, to me, anytime anyone asks a lot of questions that tells me that they're involved and they're interested, um, and they wanna know more and they're engaged, right? And so an entrepreneur who's interested in you asking questions, particularly when your questions are about things like business model or have you thought about this? You know, very, um, questions that are clearly about the business. That is something that to me is always a good thing to see if they're excited about it or they're excited about giving you answers. So I would say those three things are probably the biggest.
Speaker 0 00:20:17 Wow. Catherine, I can see why they call you the fairy godmother of startups. <laugh>, that is wonderful information. Thank you so much for joining us.
Speaker 1 00:20:25 Thank you. It was great.
Speaker 0 00:20:28 We'd love to hear your thoughts about this special Women's Day and Women's History Month episode. You can be part of the discussion and share your story. Just email me, r reach out on social media with hashtag RS podcast. Get the opportunity to share your story about career entrepreneurship, r as an investor.
