Ulu has a screening process that you believe mitigates bias. Can you tell us a little bit about that?
It's called ‘decision risk analysis,’ and comes from drug research and oil and gas exploration decision trees. We felt it was an appropriate decision framework because VC also has these long lead times between investment and return, sometimes as long as 7-12 years.
There are some characteristics of that process that are very similar to seed-stage investing, because most companies are going to take 12 years to actually come to fruition. They may go public or be acquired between five and 10 years. But many times, you may hold until they find their place in the public market. In fact, the longer we hold an investment, the more likely that company is going to be a success.
We look at at similar things as other VCs: we meet with the team and we try and get a sense of the market. But where we differ is we then quantify our views: we put a size and a probability on a large market, a medium market, and a small market. We do the same with the strength of the team, the financial position, and other factors. Essentially we turn the opportunity into a detailed, quantified permutation tree. Then we try to see which of those characteristics actually have the most impact on the bottom line, which for us is probability-weighted multiple on invested capital. This helps us focus our due diligence on the things that matter.
This process, even if it’s not perfect, is much better than trying to make this decision in our heads, which is what I think what a lot of investors do. It also provides us with data, so as our companies survive and thrive, we can look back and see how close we were, and we can improve our investment process going forward.
When you break things down and you compare apples to apples, you get rid of cognitive bias.
Do you think this influences your pipeline? Do you think that after you’ve made 20 or 30 deals, more underrepresented founders will come to Ulu Ventures, thinking “I'm just going to go to them because I have a better shot there”?
Firstly, if you have a diverse investor group, diverse people are going to come to you. Right now there's only 6 percent women in all of venture, so simply having a female partner will draw attention.
Secondly, if you end up having a successful group of companies, people are more likely to come to you. Period. That's the kind of the happy effect of success: it becomes a self-fulfilling prophecy. People align themselves with those they believe are the best.
Are there any founders you're not seeing that you would like to see?
We are focused on enterprise. Because we don't focus on consumer, we probably tend to see fewer women. I would love to see more women, and in particular women of color, in enterprise.
Do limited partners (LPs) care about diversity?
People like to see diversity, but process matters to them. They want to feel there's a fair process, and that it wouldn’t have adverse selection bias by eliminating categories of people from consideration that have been typically been associated with success.
That said, LPs are happy to see the outcomes, and they're surprised to see that we're a top decile forming fund. That's not what people believe would happen if you have a more diverse portfolio. So they they like the fact that our process does seem to create diversity but our process also seems to create positive financial outcomes.
What advice would you have for underrepresented founders?
Risk taking is an essential part of developing a strong financial foundation. I started taking financial risks before a lot of my peers and certainly before a lot of other women and minorities might have. Having an investment mentality and investing in yourself is one of the most important things that you can do if you’re able. It’s putting a bet on yourself, which makes it easier to convince others to join you.
I think tech is such an amazing opportunity for women and minorities because there are very few opportunities people have in careers to own a part of a company. And if you treat that as an ownership stake, that you yourself are adding value to through your work and your knowledge of the company and its strategy and how you can actually influence that, it can be a tremendous opportunity to increase that value you’re holding, and help other people with wealth. I believe people can use their economic power to actually create social change, and I think we do that when we invest in women, when we invest in minorities, and when we invest in diverse people. We have a greater ability to find and serve needs in the world that would otherwise be ignored--not out of malice, but because if you don’t have that affinity, you just don’t see it.
If you're not ready to make that leap and start a company yet, how would you recommend investing in yourself?
It's great to go work at a startup, even if you can’t be a founder just yet. You get broader experience in a startup environment, because when companies grow that quickly, it accelerates your learning. A growth environment is where you are going to get the depth of management experience that I think will best prepare you to be a founder.