Ep 48 – Redesigning VC for Women

 

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Summary:

What important aspect of your startup has an outsize impact on your fundraising outcomes?

Why is it so hard to change vc investment patterns in women-founded startups?

What do founders often miss about the investor side of startup funding?

In this episode, Julie Castro Abrams, managing partner at How Women Invest, started an ambitious project that addressed the triple whammy of low corporate board representation, lopsided investor participation, and of course, abysmal VC funding to women founders.

Listen to her sharp insights on:

• Why product focused startups find it harder to get funded than software or tech startups
• What happens when women start making the investment decisions
• What critical aspects women founders must nail prior to fundraising

and much more.

Episode Highlights

1. How entrepreneurship activates personal power for women
2. Challenges of pitching women-focused startups to male investors
3. Why legal mandates are critical to advancing women’s economic enablement
4. The myth that holds investors back from investing in women-founded startups
5. The hidden risk women founders face when raising capital
6. The hidden economic power women already have, and how they can use it to drive change
7. What founders must master about the VC funding model
8. What makes startups attractive to investors
9. What makes you a fundable founder, according to VC’s
10. What funders want founders to know about exits
11. What founders should look for in their VC firm

Links and Resources:

How Women Invest: Venture capital firm investing exclusively in women-founded firms that Julie founded

How Women Lead: Community of women leaders that Julie co-founded

Interview Transcript

Shubha Chakravarthy: Hello Julie, welcome to Invisible Ink! We are so excited to have you here.

Julie Castro Abrams: I am so thrilled to be here with you.

Shubha Chakravarthy: Great. You had a pretty interesting journey to where you are today.

What got you interested in the startup finance world and how did you end up starting how women invest?

Julie Castro Abrams: I actually came to this through an interesting pathway. I started my career really thinking about solving for issues of poverty and injustice and inequity for women.

So, one of the things I really realized is owning your own company is one of the most powerful ways for you to own your power and to have people respect you. I worked with low-income women to start their own businesses and did micro loans for them for 11 years.

I ran a type of a bank, and it was amazing to see when women would be death or domestic violence survivors, says, “I’m the CEO of this company.” Everybody changes how they react to her.

Her own self-definition gets reinforced, and it changes everything. So, when I was doing “Labor of Love”, that nonprofit, one of the things I realized is that there was a big problem.

Once somebody was ready to scale, there is no money available in venture. Only 2% of all companies founded, of all venture funds actually go to companies founded by women. So, the numbers are really quite anaemic.

I started to research it and think, “Why?” Well, these are private institutions that are making venture investment decisions and they are almost all run by men and venture capital is a trust and pattern recognition business more than anything.

So, you trust people who look like you, who you understand.

I’ll give you an example. I cannot tell you how many men who run venture firms that I’ve talked to, when they get a medical device for women or something that is designed for women, if they even look at it at all, they’ll say, “Oh, let me ask my wife or my daughter.”

That’s not a reason to fund something! The fact that we don’t have enough women making decisions in venture and making financial decisions over all in the United States actually means that we are leaving huge market opportunity for job growth and economic growth for the country on the table.

In fact, Morgan Stanley did a research study and they found that we were leaving $4.4 trillion of potential earnings for us as investors, for you and me and everybody on this call.

We are not making that money that we could be making as a country, and we are also not getting the products and solutions. One of the companies that we are investing in is a menopause solution. There is so much shelf space for menopause solutions because they are so underfunded.

It is a big opportunity, and we are fueling somebody that is going to take advantage of that opportunity.

Shubha Chakravarthy: That is pretty interesting. Tell us a little bit more about How Women Invest, what is unique about it and what is the model?

Julie Castro Abrams: Well, because I want to solve for this fact, that only 2% of all venture funding goes to companies founded by women, male female teams actually get more funding, I think it was 17% the last time I looked.

So, we said, “We are only going to fund companies with women founders and no male co-founders.” So, for us that is the most important filter.

We started with one fund. We have got a second fund up and running.

I’ll start raising my third fund soon. We are on a mission to be assertive about our growth and to really make a change.

Shubha Chakravarthy: You mentioned a really interesting point about the mixed gender founding teams and the sole women founded teams. What caused you to make that distinction?

Julie Castro Abrams: Well, one is that women are told, “If you don’t have a male co-founder, you can’t get venture funding.” It is actually true.

Well, it is not true completely, but it is much harder. So, we are trying to address that inequity where no woman should ever hear that. We want to actually have it feel like the opposite for people.

Shubha Chakravarthy: One of the things that you talked about, and I was looking at your website and reading up all this amazing stuff that you have in all of your sites about how women lead, how women invest, and you place a lot of importance on gender lens investing.

There are a lot of different definitions out there. There is an impact movement talking about gender lens investing.

How do you, from your perspective, define genderless lens investing and how does that play out in how you do your work with how women invest?

Julie Castro Abrams: I mean, literally it is what I just said. We are purists. We only invest in companies that are founded and led by women. So, that is our lens, and we have a couple other things that we focus on.

One is that 50% of our portfolio companies are women of color. So, our deal flow is 50% non-white women, which is, fantastic because in the United States, if you think the numbers for women are bad, the women of color get way less.

Of course, everybody has equal skills and hard work and the whole thing. That means we can get the cream of the crop, like the people who are the most badass, amazing leaders. We can fund them. Now, this doesn’t solve the whole market problem.

So, we are on a mission to get more women investing in venture. In fact, I have a goal to get 10,000 women to say that they are going to invest in venture capital.

We also want to fund and support women run venture firms that are struggling to get both funding and to scale and really connect them all.

Shubha Chakravarthy: Yes, I saw a great feature by one of the professors from Chicago Booth on that precise point and I am so glad to hear that you guys are addressing that. You have had a lot of experience in this whole field, so I want to talk about the broader funding issues that women face.

There are lots of problems, but if you look at the funding side, you mentioned earlier, this point about, “If I don’t understand the product, then I’m not going to fund it” or “If somebody in my family says yes or no, that is going to be the deciding factor.”

Is that the biggest funding issue or are there bigger issues that you see that are causing this capital access problem?

Julie Castro Abrams: Well, capital access for women is not just venture capital. Venture capital is the tiniest sliver. So, if you are talking about all across the board, women aren’t getting loans to start their own businesses. There are so many different products and tools out there in the marketplace that women aren’t getting access to. There are structural issues for that.

One of the things is credit analysis. How are we deciding, who is credit worthy? What are the real indications because just using a credit score is not proven to be an equalizer in this country.

Shubha Chakravarthy: Is it just bias, do you think, or if you had to pinpoint it to one thing, what is your instinct about that?

Julie Castro Abrams: Well, what I know is that all of our current financial structures were designed by and for men. If you think about it in 1988, there was a law that was passed, and it was a big deal.

It was HR 5050 in the United States, and it said that women could take out commercial loans without getting their husband’s signature. That’s not that long ago. Commercial loan application processes haven’t changed at all, really?

So, if you think about it, every system is designed really by and for white men. What we have said all along is, “Hey, women, you need to fit in these structures”, when in fact men have unequal advantage and opportunities and the lens of how you look at something a man does is different than how you look at what a woman does.

Women are more capital efficient, and performance driven.  We return more for our investors.

But what we do in venture is that we look at male-female teams or pitches. We want the big, audacious, bombastic pitch. That doesn’t lead to success.

That doesn’t mean financial returns, but that is the bad pattern that we have of how we decide who we are going to invest in. So, people will say to women, “You are not thinking big enough. You are not pitching in an exciting enough way.”

Then on the other hand, we will ask them, and there is good documentation of this that women are asked questions about how they are going to prevent risk.

Men are asked questions about how big this can get. So, women are told that “You have to be like men”, but then they are not. There is no same measuring stick all along though. The process is broken.

But when you get women who are deciding in venture, they invest in women equal to the applications they are getting from women. It is not necessarily good for men either, that we are only reinforcing the bombastic behavior.

We have seen the disaster of that in the markets, right? This is a crisis of leadership. It hurts people and it is not good for investors, and we need to change how we think about success and leadership and what we reinforce.

I don’t know how to get men who have been successful in their own minds, in how they have built their venture investing career or otherwise, their decision-making criteria.

I don’t know how to get them to change because we can’t regulate it because it is a private market. What I know is that we need more women investing and making decisions in venture.

So, let’s say that you are listening to this podcast, and you aren’t going to go start a venture firm. You could take your retirement funds, a reasonable 5% or 10% of your invested assets, right?

Your retirement funds are a donor advised fund or cash you want to put to work. You can invest any of that in a venture fund. Most people don’t know that.

When you invest, all you have to do is ask good questions, like how many women CEOs are in your portfolio. If enough of us ask those questions, people will start to change their behavior.

The other thing you can do is decide that you are going to invest in venture funds with women decision makers and partners or focus specifically on women, which there are about 300 women run venture firms right now in the country.

Most of them are brand new and they are in the last 5 to 10 years.

Shubha Chakravarthy: You bring up a really important point. Earlier you mentioned that women run more capital efficient businesses, they have been forced to, so that makes sense. You also mentioned, and I’ve seen the research that shows that returns from women run and women founded businesses are better.

If you kind of connect the dots, venture firms are fiduciaries. They owe the duty to allocate capital to what makes the most money on the one hand and it almost feels like they are violating their fiduciary duty by engaging in this behavior.

What explains the paradox in your mind, and how do LPs not see that? Or what is the disconnect that I’m missing there?

Julie Castro Abrams: Two analogies. One is, there was a point in time when orchestras in the United States were all men. Then there came a point, there is a story about how someone’s cousin or some family member was going to audition.

They did a blind audition and the person that they chose ended up being a woman, not the cousin, but actually a woman.

They were like, “Wait, they weren’t trying to only pick men.” Our bias is so deep. Their ears played a trick on them. They thought the men sounded better.

Now that blind auditions are ubiquitous, everybody uses blind auditions. I don’t know what the data is today, but over 50% of all orchestra people in orchestras are women because of blind auditions.

So, you cannot regulate the private venture funds necessarily.

What I would like to see is some public institutions that are major venture investors, like pension funds and endowments and foundations who have a responsibility of both fiduciary responsibilities, but also the people who act, whose money they are actually investing.

They are largely women and people of color. So, what I would like to see is them holding them accountable for it.

One other example of when we were able to regulate something was in 2010, about 10% of all public company board members were women and 90% men.

We had had disaster after disaster as a result of group think, where people who were all like each other on a board. I’m on your board and you are on my board. Yes, that is fun, but it’s not good fiduciary responsibility.

So, what happened? The data started coming out and we started to realize that with diverse boards, product recalls happen three times faster, less people could die because you have different people in the group saying, “How are we going to handle this?”

And we don’t all defer in group think to that one person.

Let’s say, today after the asset management firms like BlackRock and State Street and Fidelity took a stand and said, “This is not good for our companies because we end up dealing with a financial fallout when there is a crisis.” They started requiring public company boards that they invest in to have at least two women on their boards.

That started a big change, and then we put legislation in place in California where the majority of all of the new IPOs are coming from in this country.

We started to say, “You have to have three women on your board if you are a public company and have six or more board members in California.”

So, today 32% of all public company board members are women. Now we know that that protects companies. They have better returns and they handle crises better.

It had to be forced because literally I heard men saying this all the time, “Are they just going to put secretaries on the board?” They really didn’t think women were qualified.

Furthermore, they had a belief, it is not bad that someone thought this, but it is just wrong. They thought you had to be a CEO or a CFO to be on a public company board.

Now, today, 10 years later, when we have, gone through a transformation, one of the things we are finding is that you actually need to have some people who are operators who are younger.

Otherwise, you don’t know what is happening with tech. You are not on the cutting edge. Somebody who was a CEO 12 years ago and is only serving on corporate boards today, you can have one of them on a board, but you shouldn’t have your whole board be that person.

You need diversity on your board. Diversity up games everybody.

So, if we use those orchestras and corporate governance as examples, we need a disruption in venture. It is not good for financial returns and it is not good for the economy.

Shubha Chakravarthy: Very instructive. I didn’t know the story about the corporate boards. You talked a lot about the funding side. That makes a lot of sense.

I want to turn the lens slightly into the demand side. You clearly have a lot of interaction with women entrepreneurs and founders. Have you seen any repeating themes or issues that might be causing the problem of access from our demand side, i.e., from the entrepreneur side?

Julie Castro Abrams: Well, it is not the entrepreneurs that are the problem. What is kind of interesting is that when I first started this venture fund, I talked to some people, including some women VCs, and they said, “Oh, there are not enough women creating high growth venture backable companies or high-tech companies. They are all creating skincare companies.”

Nothing wrong with skincare. I use skincare product.

That said, when I had seen enough, I was like, “Well that doesn’t make any sense.” That is baloney because I had been investing privately myself. Now we saw 500 deals last year about 58% were non-white founders and these women have AI companies that are literally creating a personality avatar so that you can be in two places at once.

We have got serious financial tools and we invested in a company that is trying to put power grid investing and created a hedge fund so that we can predict the cycles and we can be sharing energy in different markets.

I’m solving for a critical, technical, super financial, and all these PhDs that I get to see are super fun. So, what I want you to know is women are starting the right companies.

What happens is that they have to pitch more. It is distracting from them running their companies. 85% of women pitching report sexual harassment when they are pitching their companies.

What ends up happening is that women say, “This is ridiculous. I’m going to just bootstrap it. I’m going to grow a slow growth company because the cost is too high.”

The likelihood that they even get any funding is so low. So, I think the market has a problem and it has nothing to do with the women. We need a new day where more of us are investing and deciding in venture.

Shubha Chakravarthy: That is a scary and sad statistic. I hadn’t heard the 85%. So, thank you for shining the light on that.

Julie Castro Abrams: Shubha, my friend, Senator Hannah-Beth Jackson in California had to literally author legislation in order for us to make it illegal to sexually harass someone when they are seeking venture funding just like in a job.

We had to pass a law to say that that is not okay.

Shubha Chakravarthy: Clearly that has to change. I love how you talked about this value of diversity, and I know that one of the unique aspects of your model is that you are also seeking to bring in more women into the investor fold, and that is kind of bringing that change more upstream.

Can you talk a little bit about what prompted that and what are the biggest learnings that you have gained through bringing more of these women?

What have you seen? What have you learned from that process?

Julie Castro Abrams: I’ve learned so much. It has been fantastic. Here are a couple things. I have a network at How Women Lead of top executive women like you. So, we have 17,000 women who are engaged on a regular basis, and I got 155,000 people following what we are doing.

So, we got a big audience and the vast majority of them are in the C-suite in a company or on boards, they are superpower players.

So, when they invest with us, and this could be with anybody, but when you invest in venture, people have seen me as the general council, but now that I say I’m a venture investor, all of a sudden they are like, “Oh, will you go on my board?” So, one thing I’m realizing is that it is a big power play.

The other thing that I’m realizing is that we just put it out to our network and said, “If you are an accredited investor, which is not an extraordinarily high bar, you have to make $200,000 a year for the last two years, or $300(000) as a family or have a million dollars in your retirement account, outside of your home.”

So, right there, there is a leveling of who could invest.

Of the women who have invested with us, 85% have never invested before and of those 85% within one year 30% are now investing in another venture fund, in up to three additional venture funds.

So, one of the things we know is women need to be invited in. People are telling me, “No one ever invited me to invest in venture before I’ve been hanging out with all these VCs. I’m making 2 million bucks a year. I had an exit.”

We were with some significant resources. There are a bunch of white guys who are quite bombastic, and ego filled, is unfortunately what we usually see in venture, not everybody, and therefore when you have this opportunity to invite women in and demystify it, and our minimum investment is just $25,000 and you can spread it over four years, so it’s just $6,250 a year.

That is pretty darn accessible for most women, especially if you are thinking about using a retirement account or a trust or something. So, it is an easy on-ramp, even if someone has a lot of money.

You don’t want to be irresponsible and make a mistake, so if you make a mistake on $6,250, it is not the end of the world for most people that are involved with us.

I just think it is an easier decision for them and once they do it with us and they feel confident, they see the companies are selling and being successful.

Shubha Chakravarthy: I think that is a natural segue to the actual investment process itself.

From a founder perspective, just overall, from what you have seen and what you have experienced, what guidance would you give to a founder in terms of how they pick a potential VC?

We will focus on VCs for this conversation. How should they think about VCs and what are the factors they should consider, and how should they evaluate and screen out VCs that might not be a good fit or good use of their 10?

Julie Castro Abrams: Well, first and foremost, I would say you need to know what a VC is looking for. Sometimes I get companies and men and women all do the same thing.

So, it is not a gender issue, but with some frequency, someone will contact me, and it is not really a venture backable company, and you need to understand how venture works.

I raise money from people. I have a responsibility to make investments that will return money to those people, but there are some layers of fees and stuff.

So, I have to see when I make an investment, because there is risk and somebody could go out of business, right? You can count on that.

I need to be able to see a “10 times return” profile and I need to believe that in five to seven years they will make that exit or have some kind of an event where I could make that money so I can return it to our fund, which is a 10-year fund, which is normal.

I have had people come and approach us before and they act like they hate VCs and it’s like, “Well, why are you coming here for funding then?” You have to understand the model.

I can’t help the fact that I have to return money to my investors. That is the job. So, first, you need to know the economics of what I’m looking for.

So, if you answer the questions for me before I do, and I don’t have to teach you, we are way ahead.

The other thing is venture capital generally is looking for somebody who has an innovation that they can get IP, they can protect their intellectual property and that is different enough in the market.

Nobody else will copy it and no one else has done it. It is not usual that we would invest in something that is exactly the same as everything else out in the market.

There could be a couple other players who broke the ceiling and started opening the door but we are usually looking for somebody who is unique in the market, so we know that people are going to want it, that there is great technology infrastructure that is going to help it scale.

There are some exceptions, but most VCs are looking for something that has got a strong technology that will help it scale.

Product businesses are harder to give venture capital funding for because it is harder for us to see the scaling without huge amounts of capital investments.

Then there are metrics for every industry. So, if you go look at who else has been in a space that is related to yours, what are the metrics that people look at to measure them and what are the exits that they have had and what are the multiples of those exits that make sense?

I know this is getting pretty technical, but if you prepare well and you know how to put together what we call a data room, because I need me to be able to see your org chart and your cap table and your financial projections and those kinds of things.

If you know how to set it all up, you are way ahead, and I’ll have more confidence that you are a good CEO.

The other thing is, as a leader, venture capitalists are looking for people that they think are good leaders that will pivot when things get challenging, good leaders that we believe are going to be coachable.

I’ve had some people that we have talked to before, they are protecting themselves so much. They come across as quite prickly and times are tough. How am I going to coach this person?

Or, if I invest in your company, I have partial ownership and we have to be partners. If I don’t think you are going to be honest or authentic with me about what is really going on, it is going to be much harder for me to be able to be a good partner for you.

Shubha Chakravarthy: Excellent. I love a lot of the checklist because it is easy to say, “Okay, I have this right. Do I not have this?” Couple of points I just want to double click on, in that discussion.

One is, you mentioned exits, you mentioned multiples. For those of us who are not as familiar, can you just talk briefly about what would be a good exit, like a win for you from a VC standpoint? Then, what a good multiple would be and how would I find that as a founder?

Julie Castro Abrams: Let’s start with, “What is an exit?”

An exit could be you selling the company. An exit could be that you have an IPO, a public offering or an exit could be what we call a recapitalization.

It could be a private equity firm or somebody coming in and saying, “We are going to buy up all the interest of the current investors and they are going to get a certain kind of return.”

Those are examples of how you think about what an exit would look like. It is some event where I get my money back and then I make money. A 10 times return is what I’m looking for. I won’t invest in something when I can only see a three times return. If I get three times return then I am doing okay for my investors, but somebody is going to go out of business.

So, I have to be able to see a 10 times return. People talk about the unicorns, like the 100x or 1000x. If I could actually see that this company is going to really scale fast and I get to be a supportive champion along the way, then that is fantastic. I think that is how you want to think about it.

You asked earlier, what should people be looking at when they are looking at a venture firm.

You want somebody whom you trust. You will have to raise more money. You will have challenging moments, and something is going to happen with your co-founder. You should just plan to expect that.

Do you feel like you can call up that VC and say, “Hey, Julie, like this thing is happening. What’s your advice?” Or “I think we need to raise more money.”

You need to make sure you feel like they are going to be a safe person who is not going to make you do a lot of extra work. They are not going to abandon you or call their money.

There are all kinds of things that can happen that could be quite aggressive. You want to just make sure that they have a good track record and that you believe that they are going to be a good partner for you.

A lot of people will say that they bring a bunch of resources to the table for you. I actually take that very seriously and I do that. I helped one of our portfolio companies get a $10 million contract. I helped another get her largest enterprise client because I have a big network.

Now, what is interesting is that I can do that for all of my portfolio companies, but they are not all ready for me to help them, and they don’t all have the capacity to be able to follow up well and to close the deal immediately.

But that said, you want a venture firm that actually does what they promised and has a track record of doing that.

Shubha Chakravarthy: I imagine that one of the ways you do that is you talk to other founders who have been funded by these venture capitalists, so that is clearly tangible proof that they are going to follow through.

To what extent do you recommend, especially for the case of women founders, who may be getting funded by other men, how do you gauge trust and how do you gauge that?

For example, this guy is not going to sexually harass me or is not going to dismiss me as somebody who is not a serious player. There are a lot of these biases you talked about.

How would I as a founder protect myself and the value of my firm that I’m building in that case?

Julie Castro Abrams: Well, first and foremost ask other women founders, “Where have you gotten money and who was a good player?” But that said if you are a grownup, like you and I, you usually meet someone quite a few times before they invest in your company.

In my case, it is usually about four meetings. You should be able to tell if I’m going to sexually harass you or talk down to you during those four meetings.

So, if you are a wise, mature person and you are not desperate, which unfortunately we all get desperate. We are trying to raise money on a timeline and gets a lot of No’s.

It is just keeping your eyes open and obviously you can ask around and get references and stuff as well.

Shubha Chakravarthy: Then one other question I want to drill down on in terms of the exit. I know on your website you have a clear 5-to-7-year path to exit, and it sounds like that’s pretty normal.

What does that mean to a founder in terms of the strategy they pursue? If you are very clear that it is a five-to-seven-year exit, what kind of milestones should they expect to have hit by then? How does that typically impact the strategy they will follow in building that firm?

Julie Castro Abrams: We do seed investing in our second fund. You are not going to have an IPO within five to seven years. Usually it could happen, so you need to understand that venture funds have a life.

I raise money from people, and I tell them, “In 10 years, you are going to get your money back, plus all the earnings.” So, it is my job to make sure I can see that if I invest in year one, I might have a longer runway, but if I invest in year three, we are going to go fast.

So, it usually means that you are going to sell the company to somebody. Now, there are a lot of times when somebody builds a company, and they fall so in love with their mission and their team and building a great culture that they do not want to sell that company.

They want to have that company for 30 years. It is not always a venture backable company if you want to have a company for a very long time.

Now, most companies sell. Some of them end up going to a public offering, and that is a little bit of an exception. So, I don’t think we need to kind of get too caught up in that.

You have to be a true believer in your product, but you also have to have maybe just somebody who is your partner in helping you really say “Yes” and “What if”, or “Let’s come up with some scenario planning.” I need to believe that you get it.

One company we invested in and had a really hard time with a whole bunch of things that were out of her control. They had Covid related stuff, and she got scared and she started cutting and cutting.

I was like, “Okay, you can’t cut to success. You will not meet my venture return objectives by cutting. So, it’s time for you to get some therapy. Go out into nature and let’s think about going big again. I know it is scary, but this is what is required.”

Shubha Chakravarthy: From listening to you, it sounds like the two big goalposts are, you have got the window, the horizon of five to seven years and as a founder, you have got to keep that really front and center.

Then the other goalpost is that you have got some size or value milestone that you have to hit that maximizes the chance that you are going to get acquired for some target number, which is broadly based on a multiple for that industry.

Am I getting it right?

Julie Castro Abrams: Yes, exactly. For example, with some industries they will have numbers that you can look at as industry standard, that if you fall below that number, you should have a certain number of customers that have multi-year contracts or that you should show a track record that the majority of the people reapply.

If you lose a lot of clients, that is a problem.

Every industry is different. So, you can’t say one size fits all but generally you need to know what the indicators are. This is a healthy, successful company that hit the market well and people trust it.

I’ll give you a simple example. If you have a product company and I go on Amazon, and you are on Amazon and you have a one-star rating, that is a bad sign, right? Before you go to a VC, you better make sure you clean up all those things.

Shubha Chakravarthy: Okay. Then moving a little bit in the funding and fundraising scene right now, the market is pretty bad, right? Even macroeconomically, you see inflation is pretty high, but more narrowly to the funding side, we see funding has just dried up now.

When you found a company the timing is right for you. There is proper demand or whatever the case might be.

Question is, as a founder you have to ride these waves of good and bad funding markets. What advice would you give for them as they are starting out to ride these waves of good and bad funding markets?

Julie Castro Abrams: What is so interesting is that everything has a good side and a bad side. So, before this most recent dip, we are in 2023 right now but in 2022, the stock market crashed, and inflation started to happen significantly.

Before that, what we call the valuations of companies were too high.

So, usually you’ll say that your annual revenue is this amount. Therefore, we could multiply at times X and that is sort of what your company is worth. People were getting ridiculous and saying, “Oh, it is worth a hundred million dollars.”

You are like, “That doesn’t make any sense.” But there was so much money in the venture system that people were investing in those companies, and you couldn’t really get in as an investor if you wanted to make sure that you thought that looked reasonable.

So, this is a market correction that has been happening in the last year, and valuations are being tempered. I think that is not a bad thing. It is actually good for the venture investors who have capital to invest.

So, I just think markets go up and down and it all depends. There is historical proof that during an economic downturn and that is where a lot of people got a massive set of layoffs in the last couple months, right?

Everybody is laying somebody off, Amazon, Google, everybody. That means you got all these brilliant people who might have had a business idea for 10 years and finally have the time to do it, and they are going to start the next Airbnb because Airbnb started in 2008 or 2009, when that economic downturn happened.

So, there is an explosion of innovation that can happen in this kind of a market as well. But those companies usually are going to start coming to venture funding, not the day they get laid off, but there is a little bit of a lag.

So, we are going to see this year. Last year I was not seeing innovation. I was seeing the same company over and over. It was kind of interesting because I’ve been in this game long enough, but now I’m seeing a lot of cool, innovative, and really good companies starting in January.

Shubha Chakravarthy: It is certainly great for the investor because your deal flow just started to look super attractive and evaluations look great, so that is good.

But even on the founder side, even though it is a tougher environment to get funding, what it is telling me is to the extent you are innovative, to the extent that you are truly building a game changing company.

It shouldn’t dramatically change things, and I assume that I’m adding on a corollary, which is that if you then have cash to ride it out until the valuations are more equitable or feel fair to you and to the investor is actually a good thing.

Julie Castro Abrams: I mean, a venture fund like mine, we raised money and then we invested over the next three years.

So, venture funds didn’t run out of money in the crisis. I mean, some of them weren’t able to raise their next fund, but there is still plenty of money out there to raise.

Shubha Chakravarthy: It is very interesting. But I love the perspective that you gave about it.

Now I want to narrow the focus a little bit and talk about women founders of color. You mentioned that half of your portfolio comes to non-white women, which, you know, is a particular focus for me in this podcast.

What are you seeing in terms of additional issues they face? What have you seen work well for a woman of color who is listening to this to improve her chances of building an investible company and actually getting investment in it?

Julie Castro Abrams: Well, if there is a lot of bias for women, you just layer on, somebody who has an accent, somebody who people have, beliefs around somebody like.

I’m a white woman, but I’m married to a Mexican and our 30-year-old daughter is freaking amazing. She is a classically trained violinist with a conservatory degree, a performance degree.

Is that a young woman? Well, she’s not wild and crazy. She doesn’t have purple hair and she doesn’t have tattoos.

She is a conservative classical violinist, and she is working in one of the largest tech companies in the world. Some old white guy comes up to her and says, “You are the hot-headed Latina.”

What is so weird is she looks exactly like me. She calls me up and she’s like, “Mom, this creepy old guy said this thing to me. Why would he say that?”

Because I’m hot-headed and she’s not, let’s be clear.

He was supplanting his ridiculous bias on her. So, if he is going to invest in somebody’s venture backable company, do you really think he is going to invest in her company if he thinks she’s a hot-headed Latina?

He doesn’t know anything about her, but he decided. So, what her job would have to be then is to convince him otherwise, which is ridiculous.

So, I guess I would just say if you were a woman of color, find women of color investors. They are not going to have that bias about you. Less of a bias, let’s say, because we all have biases still.

It is harder to pitch to the guys and I think you have got to get your fundamentals super tight. One who is going to give you any room to make a mistake on your financial models or anything else, and what we know is, women of color return a lot of money to their investors because they have to be the best of the best.

So, I wish I had a good solution, but this is what I want to say. Tell every woman of color, “Friends, we have got to start investing in venture. Even if it is modest, we have got to start playing in this game or none of us are getting funded.”

I think my call to action today is to tell everybody and get them involved.

Shubha Chakravarthy: One other little thing on that, which I think I know the answer but I’ll ask you anyway, have you seen any blind spots or any potential self-defeating issues on the part of women of color?

Julie Castro Abrams: No, I mean, this is the thing. Women of color are not monolithic. Immigrant women by definition are more risk taking and have a courageous underpinning, they have some perspectives that are unique that make them fantastic founders.

Immigrant women sometimes feel less than or they feel discomfort because they might not know all the systems in the United States or feel like they are at a deficit in terms of language or something.

But American women of color, someone who is multi-generational, can actually have a lot of internalized oppression of some sort. I have it as a woman in the United States, and if you are a woman of color in the United States, and like my daughter, those microaggressions add up.

I would just say that if there is any way you can go to therapy or get an executive coach and get over that, you’ll be better off because we all have self-fulfilling prophecies.

I’ve had someone say to me before, a black woman said to me, “There is no way I’m going to give venture funding, but I’m going to try anyway.”

I understand where it is coming from, but we have got to do that inside work, so at least we don’t become one of the barriers.

Shubha Chakravarthy: Are there resources to any women founders, women of color, other minority women in terms of learning more about this?

Julie Castro Abrams: Well, I was going to say, capital access looks like a lot of things. So, there are resources out there for revenue-based financing where you can get an investment that is essentially a type of a loan and that you have to pay back off your top line revenue in a reasonable amount of time that might be right for you.

If you have a big customer that you are trying to close, but you need money to be able to fulfill that customer’s purchase order, for lack of a better word, you can actually go to that company and say, “Hey, would you either give me a loan against this purchase order or prepay it so I can start to scale?”

A lot of them will do that. We also have a couple of new crowdfunding type of resources out there. Now, crowdfunding is not easy and so this is not a panacea, but there are new tools out there that I think are good alternatives and might help you not have to experience the pain in this game.

That said, in the last five to 10 years, but really five years, we’ve had an explosion of women and people of color-run venture firms. They are trying to fund you and researching them and finding them and going to them is always a good idea.

Now, they could be great investors or bad investors just like everybody else, but at least you can count on them not having some of the same biases. They might have other ones, but I wish I could say it is a new day and everyone wants to fund you, but that is not my experience yet.

Shubha Chakravarthy: No. We want to be real, and we want to be constructive. So, you are spot on with that. It is funny. I’m just going to ask you one thing on that.

I read research recently that said that if you are a woman founder who is funded by a woman VC it is going to be harder for you to get subsequent rounds of funding because of this implicit bias.

Julie Castro Abrams: Listen, the methodology, it wasn’t very robust. So, we all saw that article and people decided to believe it. I’m not sure that that’s the right thing for all of us, but let’s just assume there is some validity to that, which I’m sure there is.

I think we just need to change it because what does that suggest? You shouldn’t go to the women. You should keep beating your head against the wall with the men.

I don’t think that makes sense. It is all part of this whole broken bias structure. So, I’m going to go back to my same broken record. Go tell every woman that you know to start investing in venture. Just get them playing in the sandbox.

Shubha Chakravarthy: So lastly, you have just been extraordinarily authentic and helpful with everything you shared.

If there is one principle that you would offer the founders to take away and to guide their startups to success, however they define it, what would that one guiding principle be?

Julie Castro Abrams: I would just say balance between working hard, and then taking enough of a break to have perspective. We have all had those days and we have all met those people who are just spinning and spinning.

You have to have times when you are not spinning so that you can be strategic, you can get out of the weeds, you can think about the other person’s perspective.

If you’re going to come to me as a venture investor and you don’t know anything about me and what I’m investing in, if you haven’t done your homework, if you show up in a panic late or other ways not prepared, those are really bad signals.

So, just get rest and balance and perspective because it is a hard game. You are told “No” a lot and you need to be ready for that. You can’t just keep perspective and hang in there.

The world is not fair. I’m sorry, it just isn’t. So, we are working on it. It is not quite there yet. But we are trying to make it better.

Shubha Chakravarthy: Fantastic. Thank you for a really amazing conversation. I’m sure I have taken a lot of value from it and I’m sure many more do. I love the story about your daughter.

I learned a lot from your story about the corporate boards. There are just so many more little nuggets in there that I know many will appreciate. So, thank you so much. It has been a pleasure.

Julie Castro Abrams: Thank you my dear. It was fun to spend time with you today.