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Decoding the secret language of VCs

John Henry, a founder of color, had to break through multiple barriers to succeed as an entrepreneur. Now an investor, he shares the inside scoop on getting funded.

Decoding the secret language of VCs
[Photo: Rawpixel/iStock]

Venture investing in the U.S. hit a record high of $130.9 billion in 2018. And stories of twentysomethings raising millions of dollars from growth-hungry VCs continue to flood our feeds. This distorts the much more nuanced and elusive process of raising venture dollars. So it’s no surprise that ambitious founders continue to seek out funding for their nascent startups. Yet .05% of all entrepreneurs and even fewer founders of color actually secure venture capital.

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From the outside looking in, getting investor funding looks simple. My own meek attempt at raising venture capital was unsuccessful. Although I managed to bootstrap and ultimately sell my on-demand dry cleaning business, it’s taken me years to crack the code of successful investments.

As a Dominican-American who grew up in Section 8 housing, dropped out of college, and had no formal business education, I nevertheless managed to break in to venture capital. I’m currently a partner at Harlem Capital, a seed-stage venture capital firm that invests in women and underrepresented founders, where one of our goals is to be more transparent and inclusive.

These experiences on both sides of the table taught me there is more than meets the eye when it comes to why investors pass on funding your business. One way to get a step closer to funding your business is to decode the secret language of VCs. Here are some of the things I’ve learned.

This is why VCs tend to fund “safe” entrepreneurs

Venture capital, by nature, is an earlier-stage investment. Therefore, VCs don’t have years of highly detailed financial analyses on which to base their investment decisions. This leaves quite a bit of room for investors’ interpretations of what and who will make a successful business.

These intangibles are where the secret code of venture capital begins. This includes, but isn’t limited to, the way you present yourself and your business that gives traditional investors a measure of comfort in you as an entrepreneur and your ability to execute your plan.

That comfort is born out of the context of its cultural norms. Venture capital is a relatively new asset class that gained steam around the 1970s and for the most part was concentrated at the epicenter of technological innovation: Silicon Valley.

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After the first funds emerged and backed the initial wave of tech entrepreneurs, liquidity was created when those entrepreneurs successfully sold their businesses. This created the first wave of repeat VC-backed founders, many of whom went on to become the next wave of VCs themselves.

As the New York Times reports, this created an intertwined history and a homogenous circle of participants. Repeat founders and investors from a handful of universities and zip codes, with a similar way of thinking and expressing themselves, all but entirely controlled the flow of venture capital for decades.

They relied on pattern matching for successful outcomes and invested in entrepreneurs who looked and felt familiar. These subconscious biases, reinforced and compounded over 50 years, would go on to yield the current market reality that the vast majority of all venture capital makes its way to white males from certain schools.

According to Digital Undivided’s Project Diane, since 2009, black-women-led startups have raised $289 million in venture and angel funding, which is just .0006% of the $424.7 billion in total tech venture funding raised in that time. Overall, just 5.6% makes its way to minority-led startups, according to a recent report from DiversityVC and Rate My Investor.

Why your background matters

Background may not determine whether or not you get funding, but it is, unfortunately, much of what VCs look for but never talk about. What school did you go to? How did you grow up? What firms did you work at? Where did you intern? What extracurricular activities did you do while at school?

The answers don’t check boxes of explicitly stated investment criteria. Rather, they are attempts to mitigate some of the risks in an already very risky investment decision by validating well known and highly respected markers. “Harvard? Ah yes, I went there and know it breeds winners.” “Goldman? Great. Alex came from there and went on to do very well, so she might, too.”

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I understand this logic and tendency to outsource validation to established institutions. But it can be very dangerous, as this behavior paves the way for unprecedented amounts of socioeconomic exclusion in venture capital. Each year, hundreds, if not thousands, of qualified founders from nontraditional backgrounds are unsuccessful in raising venture capital, likely due more to this lack of common background than their ability to operate and grow their businesses. According to BCG, women-led companies generate 1.1x the revenue of their male counterparts but only raise 40% as much capital.

If you’re looking to raise capital but don’t have an Ivy League background, at the very least be conscious of how big a role background plays in most VCs’ decision-making. By simply being aware of this and finding subtle ways to speak on it, you will create more relatability, which ultimately grows into trust and confidence from investors in your self-awareness as an entrepreneur and ability to navigate shark-infested waters.

Learn the vernacular

In any industry, but especially in finance, the specific words you use are an immediate tell as to your level of knowledge and experience. Any slip on your understanding of participating preferreds, convertible notes, and follow-on assumptions and you’re setting yourself back six months. But that’s just terminology. If you haven’t done your homework, you have no business entering the arena anyway.

What I’ve found even more astounding—and what’s less spoken of—is how much nontechnical vernacular is constantly being assessed as well. Phrases like: Raising your “comfort level” and “getting you there” are native to finance and used regularly to dog-whistle fellow insiders. Even pronouncing the word “finance” itself is a tell. If you say “FI-nance” you’re an outsider. Say “fih-NANCE” and you’re one step closer to being invited out to schmooze in the Hamptons.

The importance of confidence

This is a tricky one to unpack. At first glance, this is a “Duh, John. Of course, you have to be confident.” But careful inquiry and exploration reveal a more nuanced role for confidence in raising venture capital.

When you begin learning about VC and fundraising generally, you quickly deduce that it comes down to one thing: the pitch.  It is a finite, relatively quick, and easy-to-measure task. Did you close the deal or not? One precise moment that determines it all. And it can be sexy, at least according to popular reality shows like ABC’s Shark Tank.

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I, and countless others I’m sure, resolved to speak in big, bold, audacious terms. Turn up the dial on my financial projections to display hundreds of millions in Year Five from -$37,000 in Year One. Downplay my competitors as morons, display zero vulnerability, and share my vision to revolutionize my industry as they know it.

Flop.

We assume bravado is required to raise capital and run a business. Understandably so, as the average woman and minority entrepreneur will have had to overcome the statistical odds to get to the same table as their white male counterparts.

Yet interestingly, I’ve found that the opposite and counterintuitive approach to confidence works better. There is a certain amount of softness and vulnerability that breeds trust instead of diminishing it. You come across as more believable and self-aware when you acknowledge threats to your business, shortcomings in reaching your goals, and the weaknesses in your business that keep you up at night. Confidence then is not a hardened and impossibly dominant energy. It is a firm but tender, almost wistful blend of optimism mixed with humility and awareness.

You will develop your own understanding of how to navigate this landscape on this journey of raising capital. It is a flawed system, like any other, but an asset class that is growing increasingly important in determining the public companies of the future. And just as venture capital isn’t going away anytime soon, outsiders must continue to try to break in and get a piece of the action.

John Henry is a Dominican-American entrepreneur, investor, and partner at Harlem Capital, a diversity-focused venture capital firm on a mission to change the face of entrepreneurship. Voted to Forbes’s 30 Under 30 and Adweek’s Creative 100 lists, he also hosts the business TV show Hustle on VICELAND, executive produced by Alicia Keys and Marcus Samuelsson. Tweet him here

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