Creating a Chilling Effect: Lawsuit Against Fearless Fund Aims to Stifle VC Diversity Efforts

Visible Hands
4 min readAug 9, 2023

--

This case is part of a scare tactic and coordinated strategy that could set a dangerous precedent.

Yasmin Cruz Ferrine is a co-founder and General Partner at Visible Hands VC. She is a Kauffman Fellow, 28th Class. (Photo credit: Porter Gifford Photography)

By Yasmin Cruz Ferrine, Visible Hands Co-Founder & General Partner

Last week, Atlanta-based venture capital firm Fearless Fund was sued by The American Alliance for Equal Rights for “unlawful racial discrimination” against non-Black individuals.

The Alliance, founded by conservative activist Edward Blum, is also behind the recent Supreme Court case that struck down affirmative action in higher education. The complaints filed against Fearless Fund specifically target the fund’s grant program, aimed at investing in Black women business owners.

The claims of racial discrimination create a clear and present threat to the already limited funding available to Black- and women-owned companies in the venture capital (VC) industry. A small percentage of active U.S. VC funds are led or co-led by black women. Based on our research*, these funds combined have yet to cross one billion dollars raised, compared to the combined 33 billion dollars funded in the 1H2023 by Limited Partners (LPs) for U.S. VC funds not led or co-led by black women, which results in a severe imbalance in investment opportunities.

In monetary terms, this lawsuit is the equivalent of The American Alliance for Equal Rights wanting to sue over 35 cents being offered to Black women founders, while the other 99.65 dollars out of every 100 in VC are almost always guaranteed to go into the pocket of the majority.

Suing firms like Fearless Fund does not bring justice to the majority; in fact, it only reinforces existing inequities and imbalances within the venture capital sector. Consider that out of the 28 US-based VC firms led or co-led by Black women, only 3 have reached a scale beyond 100 million dollars.*

According to Pitchbook, in the first half of 2023, the average fund raised in a constricted fundraising environment was 141 million dollars. Meanwhile, the average of the 28 funds led by Black women was 27.8 million dollars.* This dynamic has implications on average check size deployed, inability to lead investments, protection against dilution in successive rounds, and participation in series B+ rounds.

If this lawsuit successfully deters LPs from supporting funds with racial mandates, especially in a further deteriorated fundraising environment, it will be hard for these funds to grow beyond Fund I or Fund II, which replenish sources of capital for entrepreneurs. In VC’s history, there has only ever been one Black female funder currently raising a fourth successive fund. Ultimately, this could have lasting effects on the evolution of the startup ecosystem where inclusion improves innovation.

This should be a rude awakening for those comfortably believing that the economy is the culprit for less and less capital flowing to underrepresented founders. Despite those who think that the pendulum is naturally swinging back to a pre-George Floyd era, where DEI initiatives and prioritizing underrepresented founders often take a backseat, we are now in an environment where any equity alignment is seen as not net-neutral, but a legal liability.

As a fund manager raising with a DEI mandate, when folks ask me about my reaction to this lawsuit, I surprise them when I say I finally feel validated. Over the past seven months, I recognized a shift in mood that is anchored in trepidation beyond the economic malaise. And yet, there remains an urgent need for more investment in venture capital funds led by Black women to provide repeatable sources of capital for entrepreneurs over the long term.

Initiatives that aim to improve access and financial outcomes for historically marginalized communities face a coordinated and expanding crowd of opposition, including Attorney Generals, advocacy groups, and politicians. Now is not the time to retreat, but rather our peers are needed more than ever to continue working towards a more inclusive startup ecosystem. The intention behind this lawsuit is to create a chilling effect and roll back progress. Instead of leaning away from investing much-needed capital, I implore LPs, VCs, corporations, and others to step up.

Visible Hands is proud to stand with Fearless Fund. As an immediate call to action, we encourage you to join us in showing your support by signing their petition and contributing to their legal defense fund.

Visible Hands is a VC firm that funds and empowers underrepresented founders launching high-growth startups. Read more about the firm and the different programs and resources it provides founders here.

*VH produced research, available upon request

--

--

Visible Hands
Visible Hands

Written by Visible Hands

Visible Hands is a VC fund with a 14-week, virtual-first fellowship program that supports overlooked talent in building technology startups.

No responses yet