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The VC Fund Closing Equity Gaps — and Making Money
A conversation with Kapor Capital’s founders on what drives them and their investment choices.
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Much of the business world has bought into the idea of stakeholder capitalism. But Freada Kapor Klein and Mitch Kapor say that doing some good by doing well isn’t enough when the business impact still creates negative effects and broader disparities overall. Freada, with a background in social justice and empirical research, and Mitch, an entrepreneur and investor who got his start making early spreadsheet software, strive to invest in ventures that close the distance between those with wealth and privilege and those without. The founders explain their metrics and decision-making process at Kapor Capital. The profitable firm explicitly invests in tech startups serving low-income and underrepresented communities. Freada and Mitch wrote the book Closing the Equity Gap: Creating Wealth and Fostering Justice in Startup Investing.
CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
Doing well by doing good is now a popular idea in the U.S. economy as well as other parts of the world. That phrase, it can hide a lot of complexity because a company might make a product to solve a gender inequity problem, but that product could also contribute to global warming.
When we think about impact investing and the kinds of companies people want to be funding, today’s guests say it’s not just about thinking about who is better off, but also who is worse off. The companies that are truly going to create the future, they say, don’t make those gaps bigger, but smaller.
Freada Kapor Klein and Mitch Kapor are investors and founders of Kapor Capital which invests exclusively in impact startups, and they wrote the book Closing the Equity Gap: Creating Wealth and Fostering Justice in Startup Investing. Welcome.
FREADA KAPOR: Delighted to be here.
MITCH KAPOR: Thank you for having us.
CURT NICKISCH: Mitch, if I can start with you. You were an entrepreneur, and you founded Lotus, a software company that was the killer app of its day. IBM bought Lotus. It was a unicorn before there were unicorns. You later became a venture capitalist yourself. What was it that made you want to make a different kind of venture firm?
MITCH KAPOR: Well, after Lotus, and after Freada and I got together, she started nudging me because she knew well my personal values and said, “What about doing the investing in ways that are really in accord with what’s important to you?” I immediately thought at first, “Oh, God, that means I’ll miss all the hot deals.”
But Freada can be very persuasive. And the more I thought about it, the more I realized that this was something that was worthy of a serious experiment, and so Kapor Capital was founded around the idea that you could invest in companies that make the world a better place, specifically by closing these big gaps of access and opportunity, and also make money. So that’s what we’ve been doing for a dozen years, and I think the experiment has worked out pretty well.
CURT NICKISCH: I mean, was that first instinct that you couldn’t actually do all the great deals and be consistent with your values? Did that just seem obvious to you that that wasn’t possible at the time?
MITCH KAPOR: Well, what I can say is that is the conventional wisdom in the entire investing world, that if you do anything other than try to maximize your financial outcomes, you’re going to be giving up returns. It’s concessionary, and frankly, I had never given it a long, hard look. The more I thought about it and the more we tried an alternative approach, the more I realized that that’s just mythology. It’s not correct. The two of doing well and doing good are not fundamentally opposed.
But rather than trying to convince anybody by some argument of that, we decided to build an investment firm whose results exemplified what happens when you do that, and our results were top quartile, in the top 25% of all venture funds.
CURT NICKISCH: Freada, Mitch just said that you knew his values and made this suggestion. Can I ask a little bit more about where that came from? It seems more than just a random light suggestion to a spouse?
FREADA KAPOR: So Mitch and I met when I was aggressively recruited by Lotus, and my job description was to make Lotus the most progressive employer in the U.S. That was 1984. I had just finished my PhD with a large quantitative dissertation on sexual harassment in 1984.
There had never been a job description like that to my knowledge before 1984. Quite sadly, there has never been a job description like that since 1984. So I understood from working closely with him and the management team at Lotus, I understood how important those values were and how important it was to Mitch to create a workplace that was truly welcoming to everyone, to people who had been excluded, who’d been bullied as kids as Mitch was, to who were excluded because of random demographic characteristics or personality. So I knew that to be fundamental to who he was, so I thought, “Well, let’s take those values and more embed them in investing.”
CURT NICKISCH: By that time, you two had married. This was after both of you had left Lotus. What are you looking for then if you’re not looking at the strict financial bottom line?
MITCH KAPOR: Well, we are, of course, looking at the perspective bottom line, but that is hardly the only thing that is of the top rank of importance. I mean, one way to think about this is when we look at a business, one of the important questions we ask is, “If this business succeeds, who is going to be better off, and who is going to be worse off? Who is it serving?”
And if the business, for instance, is… let’s say it’s an EdTech business, there’s a world of difference between, a company that is doing online tutoring at $300 an hour to help competitive parents get their kids into a top-ranked school, and a business that is bringing extremely low cost, like $9 a month, tutoring to kids in Title 1 schools that serve low-income communities; that is using AI, in fact, to leverage what they do to spread the reach of it.
Because in the case of that company, this is an actual company called Numerade that we’ve invested in, when it becomes successful, what it is doing is it is helping lift up kids whose families are at the bottom of the economic ladder and is closing the gap in terms of their educational achievement and their life prospects.
Whereas the first company is simply allowing the affluent to have more purchased advantage. So we would clearly not invest in that, but we might. Well, we did, in this case, invest in the company that is closing that gap of access and educational opportunity. Now, there’s no cookbook that says how you do this, but we have learned over the years to look at education. One way, to look at finance to say, “Well, does this company serve people with low credit scores or no credit rating? Does it help them on the first rung of the ladder?”
FREADA KAPOR: We do that in other sectors as well. So there are disparities in outcomes if you look at healthcare just as the ones Mitch described in education or in financial services. So, sector by sector, there are haves and have-nots, there are gaps, there are disparities, and so we look very carefully and very rigorously when a business is pitching us about how effectively it might close those gaps.
CURT NICKISCH: Yeah. What do you look for in those pitch meetings? What kind of metrics or language are you looking for? I mean, it seems like the stereotypical slide from a pitch deck is the hockey stick, right? Yeah. What’s the slide that you’re looking for when you listen to one?
FREADA KAPOR: Well, hockey sticks are good, but we want to know who’s being served. We also look very carefully at what is it that propels the founder. Is their lived experience in the content of the business? If this is an EdTech gap-closing business, where did the founder go to school? How did they experience exclusion, and how do they therefore have an insight into the problem and a roadmap for the solution so that how we approach talent, especially in founders and founding teams, is also quite different from traditional venture capital.
CURT NICKISCH: Yeah, I wanted to ask about distance traveled as a metric that you explain in the book. Talk a little bit more about this metric of distance traveled in a founder, and what you look for, and why you value it differently?
FREADA KAPOR: Well, it turns out that distance traveled is a better predictor of a founder’s resilience, their passion, their ability to go through all the hurdles that startups go through and to get on the other side. Where I discovered and came up with this notion of distance traveled is when I was a co-founder of a scholarship program at the University of California Berkeley, and we put that scholarship program in place right after the state of California outlawed affirmative action in public institutions.
So that was back in the ’90s. So we actually have a lot of track record as we face the Supreme Court decision more recently that affects all colleges, but what I realized in interviewing scholars for this program, they’d already gotten into UC Berkeley race-blind, but what we looked at is what do they want to do with their lives?
We also looked at what hurdles had they overcome, and that turned out to be, again, an incredible predictor of character. It was a predictor of who was going to finish, and some of these kids… There’s this one young person who’s not so young anymore. He was in our first class. He started life being given up and left on a curb at age 10 months. This gentleman is now an MD-MBA running a very large community health center. So we look for that kind of grit, resilience, commitment, passion, vision in our founders that we saw in our scholars.
CURT NICKISCH: Do you have meetings with founders where they have wonderful ideas, and stories, and motivations, and a need that they want to address, but there isn’t a clear business model that you can bet on?
MITCH KAPOR: Yes. All the time. Actually, in a way, that’s a very common situation, particularly if the founder hasn’t done a startup before, doesn’t come from a culture or a background that is entrepreneurial. The vision will be great, the mission will be one where they’re really dedicated, but the means of accomplishing it isn’t one that they grasp yet, so they don’t have a model.
That’s where good accelerator programs, and incubator programs, and other resources can really help people in that situation make a transition into the startup ecosystem and have a higher chance of succeeding.
FREADA KAPOR: But I would also add, and sometimes we counsel entrepreneurs who are pitching us. Some businesses and business models are much better fit to remain a small business, to go get small business loans, or to get debt financing, or to do something that doesn’t anticipate the hockey stick growth that venture capital returns require.
Previously, founders were often insulted with it because venture capital somehow became the top of the heap, the mark of success. I think given the downturn or those who take the long view and see the cycles of venture capital realize that even a very successful venture-capital-backed company, at the end of the day, the founder owns 10%, not 90% of their company. So we try to help them think through what are their personal goals about ownership, about wealth, about how long they want to stay in this business, and help them choose the right kind of financial structure that matches the kind of business they’re really passionate about building.
CURT NICKISCH: Have you ever worked with a founder who maybe lost some of the convictions or just willingness to stick to those initial values, somebody who started putting more emphasis on returns, financial returns, and maybe just put less emphasis over time on closing gaps?
MITCH KAPOR: Early on, it was the case that sometimes when a company hit a speed bump, and they always hit a speed bump sooner or later, we had founders that were turning away from impact. That led us to do two things. One is we like to look pretty deeply into their background and their character, understand what motivates them, their lived experience and distance traveled because that can help us predict their persistence and their resilience.
But we also put in place something called the Founder’s Commitment. We’re the first venture firm to do that, and it says that we will not invest in someone, except in the situation where they commit to building a diverse workforce and an inclusive culture. Now, we don’t set quotas for them or anything like that. We help them achieve goals that make sense in terms of their own business, but we do have accountability around it. And in some cases where people have made that commitment, and then just ignored it or headed in a different direction, we have chosen not to reinvest in a later round because they haven’t held up their end of the bargain.
CURT NICKISCH: What is one of your favorite success stories that gives you that sense of gratitude and accomplishment when you think about it being a company that you backed and helped nurture?
FREADA KAPOR: We have so many inspiring stories of our founders, but one in particular is a woman by the name of Phaedra Ellis-Lamkins, and her company is called Promise Pay. Phaedra started life. She had a single mom who was a waitress who worked very hard, and still, that led to Phaedra being eligible for free lunch as are many public school children. But at Phaedra’s public school, she had to stand in a separate line from the children who came to school with lunch money, and she found that to be a deeply scarring and humiliating experience as probably was the feeling of many children, but it stayed with her, and it propelled her to start a business where treating low-income working families with dignity and respect is built into the core DNA of that culture.
So what the business does is it helps people who are behind on paying water bills, utility bills, and many people fell behind during COVID. It helps them repay their bills, get their credit scores in good standing. It also very importantly provides cities and states with revenue that they never expected to get back. So some of the first experiments or pilots for Promise were in places like Louisville, Kentucky, Los Angeles County.
What they found by letting people use a very simple mobile app from their phone set the day they wanted to pay, connect it to when they got their paycheck, set the amount that they were able to pay, no interest, no fees, and they had about 95% of people starting to repay their bills. It was remarkable.
And people call the Promise customer support line all the time. Phaedra shares, with their permission, shares their stories, shares tapes of the phone calls where they’re just calling, and sobbing, and thanking Promise for helping them get back on their feet. This is a company that has $100 million pipeline of business, is profitable, and is growing.
CURT NICKISCH: Where do some of your companies go from here? Because part of the way funds work and the way rounds work is that investors will see return on their investment because the company will raise money from an IPO or another series of venture capital financing. So I just wonder, as a company like Promise Pay grows and maybe scales across the country or into other countries and needs financing to do that, how does the handoff work? Is the rest of the startup and venture ecosystem able to help these companies scale?
MITCH KAPOR: Well, I think you’ve put your finger on a significant issue which is as companies need to raise downstream capital, the question is, how well-aligned are those investors with the companies themselves?
There are some firms like Generation Investment Management which, full-disclosure, we have been involved with for a very long time as investors and advisors, but they have, in one of their funds, several billion dollars of capital that has gone to later stage companies including a number of hours and Generation which was started by David Blood and Al Gore, and has really pioneered sustainable capitalism is really committed to being aligned with founders on Impact.
So, for me, the question is, how rapidly will there be more of the generation investment managements of the world so that founders through the entire capital raising cycle can be working with investors who really support them? There’s a long way to go, but there is progress.
FREADA KAPOR: We do have several companies that have had successful exits, have been acquired very happily, and some of those founders have gone on to do other things. Some of those founders stay with the acquiring company. So we are usually in the pre-seed and seed stages. We try to take our pro rata at least into the Series A, sometimes into the Series B, but then we help our founders find who’s going to be the best next stage for them. We’re like kindergarten and elementary school, and we help them pick their middle school, and hopefully their high school and beyond, but many of our founders stay very involved with us even after their exits.
CURT NICKISCH: What message do you have for other venture capital firms? I mean, when you get calls from colleagues in the same field, counterparts at other places – xwhat do they ask about? What do you tell them?
MITCH KAPOR: So, sometimes… and this has happened. We have a company that is out raising another round. We’re already investors. They’ve done well. They’re raising a Series A. It’s a hot deal and competitive, and some venture capitalist wins the deal, and they go into the deal sometimes because they think it’s going to be a great business, but they come to understand by getting to know that founder that maybe the view that they had of who’s a successful founder and what’s the path to success is different than what they thought because most of our founders have not gone to Harvard Business School. Some have. They’ve come from non-traditional backgrounds. They have distance traveled.
So, in those situations, it opens up the possibility of a great discussion that we have with those investors about helping them reconceive their business, helping them think differently about who they are looking for and what kind of background they have, and it winds up broadening the scope of what they would consider to be an interesting deal because now they’ve landed a good one, and it is changing their view. So we love to have those conversations.
CURT NICKISCH: Recalling this idea of distance traveled here for a moment. Freada, you came from a background of nonprofit work, social justice. Mitch, you started in technology, this early work with spreadsheets, and then you did a lot of work later for internet freedom, founding chair of the Mozilla Foundation. What do those different backgrounds contribute to your strengths in your work now?
MITCH KAPOR: Well, the interesting thing is, to me, while Freada has always been an activist and social justice person going back to middle school, she’s also highly valued business as a means of accomplishing change in the world if you could get business to do it the right way. Conversely, I’ve always been a math and tech kind of guy, but my values are very idealistic and wanting the world to be a better place, but particularly around giving absolutely everybody an opportunity to show what they can do.
So I think we complimented each other and supplied, in some sense, a part that was sought after and missing in ourselves, each of us, so that together we have a synergy of one plus one equals three. So I feel fortunate and blessed in this. I really do.
CURT NICKISCH: You are both capitalists, right? You’re both venture capitalists, and you… Just talking there now, you’re talking about the power of business to really create change, and it is a time now where shareholder preferences, where investor preferences are taking more of a front seat role for many, many different firms, and funds, and financing mechanisms. What would you like to see in the investing space? How would you like to see it change in the next 5 or 10 years?
FREADA KAPOR: I think the whole investing space needs to hold up a mirror and take a look at long-held and unchallenged assumptions, and rethink those because we’ve already shown with our experience, and I’m trained as a researcher, so data matters a lot to me. So I think between our track record and lots of the other research out there, showing that certain kinds of impact, certain kinds of diversity actually increase returns. So I would ask those large investment firms to rethink all of their values about who does the founder look like, where do they find a founder, what does a good business look like, why one should focus on more than financial returns. So I think there are a host of things that the investment community can do better and can learn from what we’ve done and what many others have done.
MITCH KAPOR: This is an opportunity now because of stakeholder pressure for institutions, particularly large foundations and university endowments to really tear down the wall that has traditionally separated the mission and program side from the investing side of their operations, get beyond rhetoric, and really infuse the entire investing strategy as they put money in these multi-billion or multi-tens-of-billions-of-dollar endowments, that it should reflect the values of their institution, and that’s going to require a lot of institutional change because that’s not how the money managers in the endowments have been compensated typically, but I think it is just such a worthy challenge in the universities and foundations to really step up to invest in line with their values and their mission.
CURT NICKISCH: Well, Mitch and Freada, thanks so much for coming on the show to talk about your startup investing and the impact that it’s having.
FREADA KAPOR: Our pleasure. Thank you for the opportunity.
MITCH KAPOR: Yes, thank you so much.
CURT NICKISCH: That’s Freada Kapor Klein and Mitch Kapor. They founded Kapor Capital and wrote the new book, Closing the Equity Gap: Creating Wealth and Fostering Justice in Startup Investing.
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This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Our audio product manager is Ian Fox, and Hannah Bates is our audio production assistant. Thanks for listening to the HBR IdeaCast. We’ll be back with a new episode on Tuesday. I’m Curt Nickisch.