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Illumen Capital’s Dodson has a plan to make investments more diverse


  • The investment and venture capital industries have provided few opportunities to entrepreneurs or investors who are women or people of color.
  • Daryn Dodson has a theory about how to change the industry and make it more inclusive.
  • Dodson has formed an investment company called Illumen Capital that backs venture and other investment funds; as part of its investments, Illumen gets fund managers to sign agreements to work with it to promote diversity.
  • The firm also works with its own investors to help them understand implicit bias and how past discrimination has led to current disparities in wealth and opportunities.
  • Dodson’s contention is that his fund and others that follow his recommendations by emphasizing diversity will post outsized returns and spur the rest of the industry to follow their path.
  • Visit Business Insider’s homepage for more stories.

The investment industry in general, and the venture capital wing of it in particular, have a poor track record when it comes to diversity.

Daryn Dodson has a theory about how to change that, and in the process provide more opportunities to women and people of color to be fund managers, CEOs, and founders of venture-backed startups. To put his theory into practice, Dodson formed his own investment firm, Illumen Capital. But instead of having Illumen directly back or buy companies, Dodson has designed the firm to serve as a fund-of-funds, investing in private equity and venture capital funds as a limited partner.

His thesis is that by working with those funds, and with the investors who have backed Illumen, Dodson can help bring systemic change to the industry.

“I think this is quite new, and it is quite different,” Dodson, Illumen’s founder and managing partner, told Business Insider in an interview earlier this month. “We’re looking at a structural problem,” he continued. “Creating a structural solution is essential.”

Illumen, which started making investments a little more than a year ago, is putting between $5 million and $15 million into each fund it backs. As part of each investment, the fund managers sign a side agreement with Illumen committing themselves to working with Dodson’s firm to address and reduce implicit bias in their investments. Illumen works with fund managers to find and back minority and female CEOs and board members for portfolio companies, and hire and retain employees from such under-represented groups.

With the amount of assets it has on hand, Illumen can have a much broader impact by investing in other funds rather than directly backing companies, Dodson said. Rather than trying to influence a dozen or so companies itself, it can indirectly promote diversity in many times that number, because each of the funds it’s backing — it has invested in seven so far — is putting money into 10 to 50 startups. Dodson didn’t disclose the total size of his fund.

“The systemic leverage point is at the [fund] manager level,” he said.

Dodson has experience influencing industries

Dodson has a long history of trying to positively influence industries. In his first job out of college, he was a lobbyist for the Self-Help Federal Credit Union’s Center for Responsible Lending. While there, he helped collect data that showed that Black and Hispanic homeowners were being charged substantially higher rates for loans than their white neighbors with similar risk profiles. That work led to the passage of laws in 18 states that bar such predatory loans, he said. 

Following that, he served as a consultant for Calvert Investment Management, one of the largest asset managers that focuses on socially responsible investing, managing a portfolio of dozens of funds.

“The idea of influencing an entire industry is part of the way that I was trained,” he said.

But the idea of reforming the industry has taken on an added urgency in the wake of the alleged killing of George Floyd by a Minneapolis police officer. Floyd’s death sparked national protests and ongoing discussions about addressing systemic racism, not only in police forces but in all aspects of society.

Among those areas is the investment industry. The problem Dodson is seeking to address there is multilayered, multifaceted, and years in the making. Investment managers collectively oversee more than $70 trillion in assets globally, according to Boston Consulting Group. But less than 5% of that amount was managed by women- or minority-owned firms, according to a report sponsored by the Knight Foundation.

In the venture capital industry, more than two-thirds of all firms don’t even have a single female partner, and African-Americans and Latinos each made up just 3% of all partners, according to the National Venture Capital Association and Deloitte in a report last year.

To put those numbers in perspective, women represent more than half of the US population, African Americans more than 13%, and Latinos 18%.

If global assets were spread out more equitably, at least $35 trillion would be managed by women or people of color, Dodson said.

The lack of diversity is leading to underperformance

But the lack of diversity is important not only for equity reasons, Dodson said. It’s also important because it’s leading to significant underperformance.

blm protest

Nationwide protests over the killing of George Floyd have called attention to systemic racism throughout American society and institutions.

John Lamparski/SOPA Images/LightRocket via Getty Images

The Knight study indicates women and minority fund managers often outperform their white male counterparts. Meanwhile, a peer-reviewed study Dodson himself helped direct found that asset managers tend to rate white investors more highly than Black ones even when they had the same strong performance records. The study suggests that asset managers are systematically undervaluing and underestimating Black investors solely because of their skin color.

Because they haven’t addressed this bias, the managers of pension funds, foundations, sovereign wealth funds, and university endowments who are the main backers of the private equity, venture, hedge, and real-estate funds are violating their fiduciary duties, Dodson said.

“What we’re on right now is a precipice of $35 trillion in under-managed, underestimated assets,” he said. “By systematically not selecting top performing black managers and managers of color within their investment processes,” he continued, “they’re depleting the future earnings of their respective pools of capital.”

And there’s at least one more follow-on effect. Because of their own related implicit biases, those largely white fund managers aren’t investing in companies run by women or people of color. In the venture industry, for example, only  9% of venture-backed founders are female, just 1.8% are Latino, and a paltry 1% are Black, according to a study released last year by RateMyInvestor and Diversity VC.

That lack of investment can perpetuate existing disparities in wealth. It can also sustain racial and gender biases in everything from healthcare to education, in the way products and services are designed, and who they serve, Dodson said. Many of the people who have money invested in pensions haven’t taken a close look at exactly who is managing their money or how it’s being managed, he said.

They haven’t “added up the fact that 97.8% of that money is managed by white men and asked critical questions about how that leads to pensions underperforming and reinforcing some of the very systemic racism that they experience in almost all facets of their life,” Dodson said. He continued: “They’re facing the results of their asset managers not working to reduce their own biases every day.”

Dodson is hoping to influence his own investors

Dodson sees an even bigger opportunity to influence the financial system in a direction toward diversity than just by backing other investment funds. That’s why Illumen is also focusing on its own limited partners, which collectively manage more than $1 trillion in assets.

Ilumen has cofounded an organization called Impact Experiences that offers education sessions and experiences for asset managers. It has offered a training session on implicit bias for such investors, and has taken some on field trips to places such as Montgomery, Alabama, to help them see the connections between racial discrimination and terrorism under segregation and the systemic racial disparities in the financial system today.

“If we shift the mindset of a trillion dollar asset allocator 10%, then we’ve chipped away at the $35 trillion problem,” he said. “That’s the way we create influence,” he continued, “is we enable our LPs to go on a journey with us.”

The track record of implicit bias training is mixed at best. Such sessions can help raise awareness of unconscious attitudes towards women and people of color. But studies indicate that traditional training courses have done little to promote diversity in hiring. And the spread of racial bias training among police forces seems to have done little to change policing practices that treat people of color differently than white people.

What Illumen is doing is different than regular diversity training

Dodson is aware of such shortcomings. He himself used to lead diversity training sessions. He argues that what Illumen is doing is different.

The problem with traditional diversity training is that it is short term, he said. Companies or organizations offer a one-day or several-hour training session. Diversity consultants offer recommendations on how to reduce bias and promote inclusion. But after that, there’s often little follow-up, and typically those leading or promoting the training have no way to put the recommendations in place or monitor their implementation, Dodson said.

By contrast, by the very nature of Illumen’s structure as an investment fund, it’s going to be working with both its limited partners and the fund managers it’s investing in for up to 10 years. And it plans to keep close tabs on its fund managers’ progress toward meeting diversity goals, he said.

“This is long-term stuff. Because these systems were built over hundreds of years, it takes time,” Dodson said. The best diversity training programs might last six months, he continued. “I have 10 years to do it.”

And the quality of diversity training sessions can vary widely, he said. Illumen is consciously focused on rooting its approach in the best social science out there, including the study he helped direct.

“Having evidence-based approach is a really important aspect to our model,” he said.

His method may not work, he acknowledged. But if it does, it could make a huge impact, not only on the funds and firms Illumen is investing in or on its backers, but on the wider investing world. If the fund and those following its recommendations post outsized returns, other investors will be pressured to follow its strategy.

“We’ll see if we are able to do it, but … the key question and central question is, ‘What is it worth if we do?,'” Dodson said. “And that is a massive amount of undervalued capital based on the problem we’re trying solve.”

Got a tip about diversity in the tech industry? Contact Troy Wolverton via email at [email protected], message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

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