Kapor Capital founding partners Mitch Kaplan and Freada Kapor Klein want to set the record straight: Backing startups fronted by entrepreneurs of color, women and others seeking to close systemic social gaps makes financial sense. Full stop.
It’s a thesis they prove convincingly in their new book published this week, "Closing the Equity Gap: Creating Wealth and Fostering Justice in Startup Investment." And it’s one they put into practice Day One at the firm they founded in 2011, which focuses on pre-seed and early-stage funding. In early 2022, Kapor and Kapor Klein stepped aside, naming Uriridiakoghene “Ulili” Onovakpuri, one of the few Black women in venture capital, and Brian Dixon, a former intern and one of the youngest Black men to lead a fund, as managing partners. Onovakpuri and Dixon subsequently closed the largest fund in the firm’s history — a $126 million pool featuring Kapor Capital’s first outside investors — and they’re in the process of raising another.
"I think investors first and foremost are our target audience, and that would include angels, venture capitalists, chief investment officers for foundations and for universities," said Freada Kapor Klein when I interviewed her and Mitch Kapor about the book in February. "We really want to convey that the conventional wisdom that says investing for impact or investing for diversity is concessionary, that that's just wrong conventional wisdom."
Since its inception, Kapor Capital has invested in more than 170 startups — 62 percent of the founders identify as people of color and/or women, far higher than is typical. Its internal rate of return over the past decade is 29 percent, in the top quartile of similar-sized funds. One high-profile success story is BlocPower, which has raised more than $250 million for its mission of decarbonizing buildings in low-income communities.
I spoke with Kapor and Kapor Klein about the importance of cultivating diverse talent within the investment community, the flawed idea that impact investing doesn’t make money, and what’s next now that the two have stepped back from active management. This interview, conducted before the collapse was edited for clarity and length. You can listen to selected excerpts on this podcast.
Heather Clancy: I love your investment thesis. You mention four rules in the book: close gaps of access to information or goods and services; expand economic opportunity in the workplace and the marketplace; produce significant financial returns; and build a diverse team and inclusive company culture. What have been your most successful strategies for finding and nurturing entrepreneurs that fit those criteria?
Mitch Kapor: Literally the most important thing, single thing, is having a diverse investment team itself, because then entrepreneurs, if they come from diverse backgrounds, are going to see someone who looks like them on the team, and it helps them imagine, "Oh, these people could really take an interest in who I am."
Clancy: How hard is it to find diverse investors?
Freada Kapor Klein: Not at all if you know where to look. In addition to having a diverse investment team, which we've had forever, we also launched, and I should give our partner Ulili Onovakpuri credit here … a summer associates program in 2011. The first summer associate was Brian Dixon and it's just lovely that it’s now come full circle: Ulili, who started the program, and Brian, who was the first summer associate, are now the co-managing partners of Kapor Capital.
Clancy: For that summer associate program, what universities, colleges, schools, institutes, did you really focus on approaching?
Kapor Klein: Well, more than any particular schools, we went through various networks, and we're particularly looking for people who've been underrepresented in venture capital. We're looking for people who want a first experience and exposure to decide, is this for me or not? And so, when Ulili first designed the program, it was just for Kapor Capital. We would take five or six [interns]. They were usually business school students. Most often they had graduated college. They were working sometimes in finance, mostly in tech, and then they went back to business school, and this is how they spent the summer between their first and second year.
We see a ton of different and competing standards of metrics of how to measure ESG. Some are more precise, some are less. There's just a huge debate about this. Our perspective is it's the core purpose of the business that really matters.
We have now taken that program that Ulili started, moved it over to our foundation, and we will have 25 Kapor fellows this summer. And we will make them available to other VC firms who share our values, share our mission because we want to give all of these folks a great experience.
Clancy: In my world, many large corporations have venture funds focused on some aspect of climate tech. They're also obviously instrumental in buying goods and services from the sorts of startups and entrepreneurs that your organization has been supporting and helping fund. So, what role can large corporations play in supporting this philosophical shift?
Kapor Klein: Well, in particular, the corporate venture capital arm can operate differently. [They should] make a point of looking at businesses such as those in the Kapor Capital portfolio that are explicitly gap closing. They can look at using their VC dollars to solve very difficult social problems while they're also making money. Corporations can also make good on their diversity pledges. After George Floyd was murdered, there was almost $50 billion in pledges made by corporations and other organizations and when it was tracked by the Washington Post and others, 0.5 percent of those dollars were actually spent.
So, that is billions of dollars that could do a lot of good going to fund directly these companies that are run by entrepreneurs whose lived experience gives them the idea for these businesses. It could be put into otherwise underrepresented and underestimated fund managers who are bringing different investment criteria to the table when they are looking for entrepreneurs.
Corporations can also invest their foundation dollars very differently. We often see this dilemma where a corporate foundation or a standalone foundation with a large endowment, separates the chief investment officer from the program officers. So, the program officers might be following up on the mission of alleviating poverty or reducing climate change. That's done with the 5 percent interest out of the endowment. The 95 percent that the chief investment officer is overseeing might be in making its money in things that enhance poverty, that make poverty worse, that make climate change worse. And here we've got this 95 versus 5 percent battle.
We know who's probably going to win that, and there's never a conversation between the chief investment officer and the program officer. So, I think actually starting to hold chief investment officers of foundations and of universities, and especially in this context, corporate foundations, accountable to invest their endowments consistent with their mission.
Clancy: One thing I really appreciated was your commentary about how startups can rethink their own compensation to their staff to attract more people of color. So, tell us about some of the creative approaches you've seen among the funds’ portfolio companies.
Kapor: So, first of all, I think that simply having founders of color who are building businesses that help low-income communities and communities of color, that in and of itself is a great way to attract more people of color. So, that's as a baseline. But on top of that, there are a number of things that companies can do. One thing is to make sure that employees understand the tradeoffs between equity and compensation.
If it is not in your background, where you came from, your community, your family, if there is no investing, no stocks, none of that, and you come into a tech startup and they all have equity-based compensation, you don't know how to think about it. You don't know if it's important. You may really want to optimize for current income, but that is not the wealth building opportunity that having equity is if their company is successful. I think it's incumbent on employers to make sure that all employees get a firm understanding … of how equity works and the trade-offs between equity and compensation.
Similarly, I think one thing that has started to happen, but should happen more universally, is to extend how many years an employee has to exercise their stock options because we are seeing that the startups are actually taking longer to come to maturity. They're held in private hands now 10, 12 years. It's not unusual at all. It can even be 15 years. And employees may put in many years of service and leave, but they shouldn't be forced to decide to come up with the cash to exercise their options right after they leave. Having as long a runway to do that as the companies have themselves is going to be very important and is a kind of a wealth-building tactic.
And then finally, I think having a broader range of 401(k) options in compensation, including letting people put their 401(k)s in funds that have impact themselves, is very important because then people can be, as employees, investing their retirement savings in accord with their own values and hopefully with the values and mission of the company.
Clancy: I read that one other thing to consider would be to have some program to help a new employee pay down loans or have some compensation put towards that. Have you seen companies doing this or is this just a really great idea that we should see more of?
Kapor Klein: Well, not only have we seen companies do it, we do it ourselves. I should add that we have invested in companies that are student loan benefits for enterprise companies — but one of the things that the student loan benefits companies do is [that] they are part financial literacy.
So, they help someone understand the enormous debt burden of paying the minimum every month, and the wonder of compound interest and that you can end up paying 10x the amount of your student loan easily and therefore have to put off things like buying a house or beginning to save for your own kids' education. So, the student loan benefit programs help you set an amount of money that you can afford, but that's more than minimum and that directs some of that extra payment every month to pay down the principal, not just interest.
Kapor: I will say it was surprising and shocking to find that, in general, the middlemen or middle persons who administer student loan repayments have these systems set up to actually make it difficult to pay down your principal. They're really in the business of causing people to have to pay more in interest. So, good employer education and engaging one of these firms that provides good student loan benefits is a kind of a counterweight to these additional, unnecessary and unjust obstacles that are actually being placed in people's way.
Clancy: What metrics should we use to measure progress on closing the equity gap?
Kapor: I think that's an important question because we see a ton of different and competing standards of metrics of how to measure ESG. Some are more precise, some are less. There's just a huge debate about this. Our perspective is it's the core purpose of the business that really matters. Does it close gaps of access or opportunity or outcome for low-income communities and/or communities of color? That is to say, if the business works, who is better off and who is worse off? And does it reduce the gap between the best off and the worst off or does it exacerbate it?
That’s the lens that we use to look at any particular metric, because there are a lot of metrics that just deal with very peripheral phenomena. We wanna know at heart and at root, what is, what outcomes is the business actually promoting? And this is very much, to be honest, a work in progress. There is not a single cross-sector metric that we can point to that answers that. But in our own practice at Kapor Capital, we have found if you go sector by sector, you can begin to develop metrics that go across different companies.
So, for instance, if you're a fintech company, an important question is, are you helping provide credit to those people who don't qualify for credit in the ordinary sense? … If you're doing classroom curricular instructional materials as an edtech [firm], the question is, are you reaching students in Title One schools, which serve low-income communities? Who are you serving? And so, sector by sector, I think we are beginning to build up ways of accurately measuring the core impact on closing these equity gaps.
There is still a great deal of work to do in the whole tech ecosystem to get investors at all stages and phases to invest with a lens on impact and diversity.
Clancy: Rate the success of your own work on closing the equity gap. And is there anything you wish you had done differently?
Kapor Klein: I think we are, and Kapor Capital is, a work in progress. We're certainly proud of what we've accomplished. We think handing the reins to our two younger partners … was a huge step for us personally and for them, and we're hoping that it's a model for the VC community because many people responded by saying — VC does terribly at succession planning, in general. And nobody had ever seen anything like what we did, which is to step away and hand the reins to our two younger partners who went out and raised $126 million, making it one of the largest Black-led VC funds in the country.
So, I think we’ve tried to be empirical in our approach. We've tried to be bold in our approach. We could have been bigger if we had accepted outside money, but we felt that accepting outside money at the beginning when we were still in a hypothesis testing phase, if you will, was rather risky. We did not want to bend to [limited partners’] wishes. We really wanted to go out and see whether we could in fact build a firm, build a portfolio — at the point of our first impact report in 2019, it was more than 100 companies — all of which had a gap-closing thesis, and as a portfolio yielded top quartile financial returns.
Kapor: I would answer a slightly different question. Is there anything we wish we could have done differently? And in fact, it speaks to the fact that as we did this and invested in the seed stage with companies who are beginning to do well, who are beginning to close gaps, what we found is there is a capital gap of finding values aligned capital downstream in the next round and the next round after that, where they're raising larger amounts of money because they've proven out a model and now they're seeking to scale it …
It really requires the entire ecosystem of investors to reorient around these ideas. We wish we could do this all ourselves, but of course that is not realistic or possible.
With Brian and Ulili stepping into the co-managing partner roles, one of the things they've done is to raise a larger fund, not just outside capital, but $126 million, which is more than twice as much as the previous fund. That is, in fact, going to enable them to take the lead in some series A rounds and to do more follow-on capital, which is going to help close that capital gap for the companies. But there is still a great deal of work to do in the whole tech ecosystem to get investors at all stages and phases to invest with a lens on impact and diversity.