Venture Capitalists' Implicit Biases Cannot be Challenged in Court

Venture Capitalists' Implicit Biases Cannot be Challenged in Court

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Jul. 27 2020, Published 1:21 p.m. ET

It’s no secret that Black entrepreneurs get far less venture capital funding on average, but it has become apparent that discrimination in this space is completely federally legal. According to The Seattle Times, venture capitalists in the U.S spent $130 billion last year investing in countless startups. Black entrepreneurs only receive about 1 percent of that. 

The issue here lies in the fact that venture capitalists, who are majorly white males, do not have to follow any rules around discrimination. Any legal protections born out of the civil rights movement cannot be applied because of past court decisions that have overruled past legislation. According to The Seattle Times, back in March the Supreme Court further weakened an old anti-discrimination law requiring plaintiffs to fully prove that the defendants’ decisions were racially based. In the world of venture capitalism, this becomes exceedingly more difficult.

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“You almost need a smoking gun, an email that says, ‘I have discriminated against you and I’m not investing with you because of your race,”Kristin Johnson, a professor at Tulane University Law School, told The Seattle Times. “It’s created a situation where we are no longer looking to the courts for justice.” 

This world of exclusivity has widely affected the success rates of Black-owned startups. If these investors don’t like you as a person, there is little chance they will invest. Historically, it seems as though venture capitalists favor white males. These biases have a lot of effect over the success of startups. If a company can’t get funds in the beginning, they’ll have a hard time securing them in the future. Whereas startups who get a lot of funding early on are more open to bigger and better opportunities for marketing, recruiting and future fundraising.

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Countless Black entrepreneurs have shared stories of microagressions, discrimination and racism making it clear why Black entrepreneurs only get 1 percent of venture capital funding. Many of those CEOS and founders spoke with The Seattle Times, however, they chose to remain anonymous. Multiple entrepreneurs said they had been mistaken for delivery workers when they would arrive at scheduled pitch meetings. One Black tech startup founder said a venture capitalist asked them to “tone down the Black.”

An unfortunate, common tactic among Black entrepreneurs has been to bring along a white friend to pitch meetings. One woman said she once brought a white friend to a meeting despite said friend not being affiliated with the company at all. The tactic actually worked and she earned an investment offer. 

There is a clear implicit bias held by the majority of venture capitalists. When you look at the makeup of those in senior level investment positions, you’ll see a lack of diversity that makes these biases only more apparent. In a 2018 survey of the top 102 venture capital firms, researchers found that of the 713 senior level executives, only seven were Black men and zero were Black women.

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Unfortunately, discrimination laws have yet to catch up to the elitist world of venture capital. Under current legislation, these entrepreneurs cannot file discrimination lawsuits without having concrete evidence they were racially discriminated against. 

Back in 2016, Byron Allen, founder of Entertainment Studios, sued Comcast and Charter after they refused to carry his channels. Allen said that a Charter executive had yelled racist comments at a group protesting the aforementioned decision. He sued Comcast in 2015 because an executive told him they didn’t want to create anymore “Bob Johnsons,” referring to the founder of Black Entertainment Television. He sued under the Civil Rights Act of 1866, which gives equal rights to write and enforce contracts. The court ruled in favor of Comcast because he could not concretely prove there was racial bias. 

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Erwin Chemerinsky, a lawyer for the National Association of African American-Owned Media, told The Seattle Times that Allen’s court ruling means that entrepreneurs now have fewer discrimination protections and leaves far too many loopholes for venture capitalists. 

“Imagine a venture capitalist says: ‘We don’t invest in that area of the economy, and besides, I don’t want to invest in an African American-owned business… That would not be enough to state a claim for discrimination in contracting,” he said. 

“The law unfortunately has not caught up to the fact that a lot of these decisions might be based on implicit biases – not overtly racial conduct,” Menaka Fernando, lawyer at Outten & Golden, told The Seattle Times. Many lawyers and politicians believe there ought to be stronger civil rights laws to meet the civil rights challenges that face society today. “The legal obligations would prompt an organization to develop essentially a compliance framework,” said Johnson.

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