On a recent sunny afternoon in Atlanta, Arian Simone stood outside a federal courthouse, with civil rights activist Al Sharpton by her side, to declare a small victory. That day, a federal judge struck down an effort by a conservative group that is determined to stop all attempts at affirmative action — including grants given to Black female entrepreneurs by the Fearless Fund, a venture capital firm co-founded by two Black women, Simone and Ayana Parsons.
A defiant Simone was jubilant that day. “We have deployed over $26 million to women of color, and we will continue to deploy millions of dollars to women of color,” she promised at a press conference following the judge’s ruling.
The Fearless Fund is a minnow in the VC world of more than $200 billion in assets, less than 0.05 percent of which goes to startups founded by Black women. Nevertheless, the American Alliance for Equal Rights, headed by anti-affirmative-action activist Edward Blum, sued the Fearless Fund in August. It claimed the fund’s grant program geared toward Black women violated a section of the Civil Rights Act of 1866 that “protects the equal right of all persons … to make and enforce contracts without respect to race” and asked for a preliminary injunction to stop the group from handing out any more money while the case proceeds. U.S. District Judge Thomas Thrash denied the injunction, saying the lawsuit was unlikely to be successful.
Simone’s joy, however, was short-lived. A few days later, two Trump appointees on a three-judge appeals panel reinstated the injunction, siding with the AAER and Blum, who has gained notoriety — and influence — since his group knocked down affirmative action in higher education by winning its case against Harvard University and the University of North Carolina at the U.S. Supreme Court. Since then, Blum has vowed to dismantle affirmative action just about everywhere else — including in the business world. (He also sued two law firms using arguments similar to those made in the Fearless Fund case. The cases were dropped after the law firms opened up their fellowships to everyone.) And while the latest decision in the Fearless Fund case is expected to be reviewed by the full appeals court, no matter what happens there, the case is likely to make it all the way to the Supreme Court.
If Blum’s group were to win the battle, Fearless Fund’s attorneys and supporters say, the ruling would turn civil rights law upside down. As the firm’s lawyers state in their response to the complaint, “Plaintiff seeks to distort the purpose and text of this seminal civil rights statute to use it against Black people — the same people the Reconstruction Congress sought to protect.”
The prospect has the investment community on edge. Given the high court’s recent ruling striking down affirmative action, “antennas are up, rightly so,” says Frederick V. Bryant II, a partner with law firm Foley & Lardner LLP.
“It feels like an explicit attempt to disenfranchise certain people from realizing the American dream,” says entrepreneur Sheila Marmon, founder of Mirror Digital, a multicultural media network. She says her yearlong effort to raise angel financing more than a decade ago was “challenging” as a Black woman despite her Princeton degree and Harvard MBA, as well as a career that included a stint at Morgan Stanley. “I followed the path that I was told is the path to success. And when I became an entrepreneur, it was a really rude awakening in terms of the lack of support I got.”
With the stakes so high, the Fearless Fund case is forcing venture capitalists and allocators alike to rethink or reshape their efforts at increasing diversity, including among the companies they invest in, the managers they hire, and their own organizations, without backing down on the commitment to diversity, equity, and inclusion. DEI has become the shorthand acronym for all efforts to even the playing field for women and minorities, who are woefully underrepresented in the investment world. These days, managers, pension funds, and endowments are working to make their diversity efforts stand up to legal and other scrutiny.
“Those of us who believe in DEI have to be more intentional, have to be just as vocal, have to be courageous and understanding that this is a point in time where we need to make a stand or it’s going to be harder for the generations that come after us,” says Angela Miller-May, chief investment officer of the $52 billion Illinois Municipal Retirement Fund.
While not a new concept, DEI gained prominence following the murder of George Floyd in the summer of 2020 and the widespread protests that followed. A slew of initiatives aimed at helping bridge the racial inequality gap followed — among them a surge in VC investment in Black entrepreneurs. Black-founded startups received a record $5.1 billion of venture capital in 2021, according to Crunchbase, but the surge quickly ended when VC funding fell across the board the next year. In 2022, Black entrepreneurs received 50 percent less than the prior year. Such startups saw their share of the VC market drop from 1.5 percent in 2021 to only 1.1 percent last year, Crunchbase says.
“It’s hard when you have the system that you have,” explains Miller-May. “You’re fighting a system that’s so ingrained. You just have to be smart. You have to be strategic. You have to figure out how you can implement things that are long-lasting.”
Before joining the Illinois Municipal Retirement Fund, Miller-May worked for more than a decade at the Chicago Teachers’ Pension Fund, which invested 47 percent of its assets with managers who were minorities, women, or persons with a disability. In the two years at her new job, Miller-May has already boosted the percentage of those managers to 26 percent from 21 percent.
“We are committed to this, and it makes sense to us because this is not our money. This money belongs to teachers, police, municipal workers, firemen, and they come in all kinds and colors and ethnicities, and we want to represent them all,” she says. “We want the people that are investing their money to represent them. And it is a diverse group of stakeholders that we are investing for. This movement against DEI doesn’t sway us from how we invest the money because we know it’s fair and consistent across our stakeholders.”
And she notes that “diverse managers hire more diverse professionals. So we are also creating a pipeline, and we challenge our majority-owned managers to hire diverse professionals because it’s a sustainable circle that consistently drives diversity.”
But the effort is treacherous to maneuver. One of the biggest priorities in doing her job, she says, is to “change the narrative. We have so much negative information coming at us.”
That negative information includes the argument from critics that “diverse managers don’t perform” or that they are hard to find, Miller-May says. “We have to match that negative information with positive affirmations that diverse managers not only match the performance of non-diverse managers but exceed it in returns.”
A 2020 Bloomberg analysis of its hedge fund database helps confirm her statement. It found that “hedge funds either controlled or managed by a minority or female leader had a return of about 6.6 percent over the past three years, compared to about 3.9 percent for their peers.” Additionally, the Harvard Business Review found that VC firms that hired 10 percent more female partners had on average 9.7 percent more profitable exits and 1.5 percent higher annual returns.
While Illinois requires that pension funds invest in a certain percentage of diverse mangers, there are other reasons for doing so. In addition to boosting returns, diverse managers can lower a portfolio’s overall risk. Miller-May says her fund uses minority managers “to complement our majority-owned managers or larger managers in down and up markets. And for us, it creates less variations in our portfolio returns. If you have a large manager that can’t write smaller checks to middle-market or smaller companies, you need that manager that focuses on the middle market. You need that manager that focuses on small businesses. And that is how we utilize diverse managers, because normally, they are smaller. We help them to grow.”
Because some of these managers are too small for the pension fund to invest in directly, it has created ways to invest indirectly. “We have a fund of funds, we have separately managed accounts, we have manager of managers, and we invest in those entities, who then invest in those smaller underlying funds,” Miller-May says. “We get to monitor them and see how they perform. And at any given time, when we have an opportunity in our portfolio, we can simply pull them out and give them a larger direct mandate at the board’s approval.”
The commitment to DEI, she says, is “part of our fiduciary duties. If you’re focused on performance and returns, you should be focusing on having differentiated thought, having managers that invest your money in different areas, that are nimble, that have different solutions and opportunities.”
Barring a pension fund from seeking diversity would hurt that effort, she says. “If there is a pathway where I know that I can perform and I’m constrained from using it,” she says, “that’s a problem.”
The Fearless Fund initially offered the grant program solely to Black women, but the program was amended following the lawsuit, and the fund’s website now says grant applications are available to all women of color. Whether that will provide more legal protection is unknown.
The tiny VC firm has a heavyweight legal team — led by Alphonso David, former president of the Human Rights Campaign; Brooke Cluse, a lawyer for prominent civil rights attorney Ben Crump’s firm; and a team from Gibson, Dunn & Crutcher LLP. One of the defense’s arguments is that since the grants are essentially charitable donations, the Fearless Fund’s decisions on whom to give money are a form of freedom of expression, which the attorneys argue trumps any anti-discrimination mandate. (The Clinton-appointed district court judge agreed with that assessment, but two Trump-appointed appellate judges did not.)
Blum didn’t go after the venture investing side of the Fearless Fund’s business, and there may be a good reason why — at least for now. “In America, private money is private. And if you have a business-judgment decision that you think is good for your company, you have the right to make that decision,” says Foley & Lardner’s Bryant. “They didn’t go after the profit entity that could clearly, easily say, ‘Business judgment. Get out of my pocket.’”
Still, he says, “impact investors, foundations, scholarships — anyone with a focus on DEI — need to have heightened awareness because these are parties seeking to create new law.”
“We are seeing people that are afraid,” says Carlos Rangel, chief investment officer of the W.K. Kellogg Foundation, who has a long career of fostering racial equity in the investment world. “What’s definitely true is that the terrain is shifting. And so we believe we may have to rewrite our maps, but we still are following the compass of going in the same direction because we believe that makes business sense.”
Bryant says that a heightened awareness of the potential legal minefields ahead should lead people to be “proactive in how you structure, evaluate which opportunities that you pursue, and document how your initiative helps further your mission and your purpose, things that maybe were previously taken for granted.”
Bryant tells clients to describe their public materials “in the best light for legal compliance, and that could come down to the nuanced use of word choices.” For example, instead of saying “‘only X,’ say ‘primarily X,’” he says.
“Don’t technically exclude anyone,” advises Bryant. “And maybe you require applicants to identify how they qualify for your program, and let them do that. You can put out there what you’re primarily focused on and ask for self-verification of furthering the mission.”
David Glasgow, executive director of the Meltzer Center for Diversity, Inclusion, and Belonging at NYU School of Law, and his colleague Kenji Yoshino recently put out a list of suggestions for companies to follow.
These include talking about “concerns” instead of “cohorts”; mentioning “narratives,” not “numbers”; and using words like “universal” instead of “unique” and “debiasing” instead of “diversity.”
For example, they suggest expanding programs targeted at particular demographic cohorts to include people of any identity who are concerned about the topic — like opening a DEI initiative to people of any identity who care about DEI, not just underrepresented cohorts. They also advise deemphasizing the goal of achieving specific demographic outcomes and focusing more on the goal of leveling the playing field. “Even a court that embraces ‘colorblindness’ cannot object to a program that seeks to remove bias from hiring and promotion decisions,” the professors say.
They also advise companies to “focus less on strict numerical metrics and targets and more on inviting candidates to share hardships or other narrative aspects of their background.” Finally, they suggest that companies “focus less on unique programs aimed at addressing each demographic group’s concerns one by one, and lean into frameworks that emphasize that a culture of diversity, inclusion, and belonging benefits everyone, including members of majority or dominant groups.”
The term “DEI” may even have to go, in the same way Blackrock CEO Larry Fink has decided to quit using the politically controversial term “ESG.”
Blum, however, recently told The Wall Street Journal that efforts to craft programs that target disadvantaged entrepreneurs without explicit mention of race could still be subject to litigation if they mostly benefit certain groups. (He did not return a request for comment.)
Focusing on returns should help blunt Blum’s argument, says the Kellogg Foundation’s Rangel: “If you have business reasons and an ability to document the rationale and the outcomes of these actions, then I think that this is very difficult to attack.”
One specific suggestion for allocators is to target new, small, and emerging managers. “Most of the time, those are going to be your minority- and women-owned managers,” says Miller-May. While the lawsuit hasn’t affected her efforts in Illinois, she says, pension funds in several states are already constrained by anti-DEI or anti-affirmative action laws. “It definitely makes their jobs harder than it has to be,” she says. “They want to continue to invest in women-owned firms, in African-American- and Latino-owned firms, in minority-owned firms.”
“They understand that it is better for the bottom line, it’s better for their stakeholders,” she says.
To avoid political (or legal) backlash, Miller-May says, these allocators “tend to talk about strategies of how they can do that without saying ‘DEI,’ without saying they’re investing in diversity or minority managers or women-owned funds.”
That hasn’t stopped the largest U.S. pension fund, CalPERS, which created a new position of chief diversity, equity, and inclusion officer in 2020 and hired its former compliance chief, Marlene Timberlake D’Adamo, for the job. “We are a state organization and we respect the law, and we feel like we can operate within the law,” she tells Institutional Investor.
“We don’t have targets,” explains D’Adamo. “We don’t say, ‘We’re going to have X number of this or X number of that.” Instead, she says, “one of the foundations of the work that we’re doing is that it is aggressively inclusive. And for me, that inclusion is the thing that if you want to say what I hang my hat on in terms of how we do what we do.” (She purposefully tells men they are included too.)
To be more inclusive, as she puts it, CalPERS is actively developing “affiliations with organizations that maybe we didn’t have partnerships or relationships with before. We’re looking in every corner, every crevice.” As a result, she says, “we’re finding great managers, good results.”
D’Adamo doesn’t use the words “women,” “minority,” or “Black,” but she does say that “diverse teams perform better.”
As chief DEI officer, she says “my role — and really my responsibility — is to look out for everybody. It is not to look out for one subset or another of people, because there’s lots of different people in the world and in our organization. And so for us, if we are being inclusive — and I take that word very seriously — then we’re going to find as much of the folks that we need to do the work that we do, and we have a high bar in terms of what we need to get to.”
D’Adamo points to a $1 billion commitment made in January to help entrepreneurs in the investment industry as well as an emerging manager program as two initiatives that help fulfill these goals. CalPERS also sponsored a conference in June called “Catalyst: California’s Diverse Investment Manager Forum” that drew 500 attendees from across the investment spectrum. The event brought together institutional investors and other global allocators to meet and engage with diverse investor entrepreneurs. “We did matchmaking where we paired managers with asset owners in the hope and in the idea of building those relationships,” she says.
Like CalPERS, the Michigan-based Kellogg Foundation doesn’t have targets, according to Rangel. But he says the foundation took the stance of being anti-racist in 2007. “We went back and reviewed all of our policies and procedures in every aspect to make sure that we lived up to that aspiration,” he says. For example, when the Kellogg Foundation looks at its investment portfolio, it checks how often its search procedures or vendors engage with firms that are majority owned by diverse or underrepresented groups. That has helped it boost diversity. He says that about 36 percent of the Kellogg Foundation’s $2.5 billion in U.S. assets are managed by diverse firms. The diverse managers, he says, have provided benchmark-beating returns for the portfolio.
Says attorney Bryant: “I don’t think people are trying to run away from doing this type of work. But they want to understand the best way to do it, and the best way to continue to do it. So, I think it will lead to some additional compliance.”
“There’s going to be just a heightened kind of internal administration to decrease your risk,” he says. “This is America. You could be sued for anything at any time.” But the work continues.
The group has partnered with a number of important Black executives, like Darren Walker, president of the Ford Foundation; Valerie Jarrett, CEO of the Obama Foundation; and former Secretary of State Condoleezza Rice, now director of the Hoover Institution.
In just two years since launching the initiative, Goldman has deployed more than $2.1 billion in investment capital and more than $23 million in philanthropic capital to 137 organizations, companies, and projects across the country, according to the firm.
“Goldman Sachs’ One Million Black Women is an important investment initiative that is driving economic empowerment and inclusive growth,” says a spokesman. “We are proud to have invested over $2.1 billion in a range of projects and programs across the country.”
Goldman would not discuss the Fearless Fund lawsuit. But an individual familiar with One Million Black Women says Goldman’s program is “different from what’s being challenged and has been designed to comply with the law.” The firm doesn’t anticipate any changes in its overall approach even if the lawsuit is successful, according to this person.
And Goldman isn’t the only big institution investing specifically in Black women. In fact, while the Fearless Fund is a small Atlanta VC firm, its limited partners include Bank of America, JPMorgan Chase & Co., Mastercard, and PayPal Holdings. (JPMorgan and Mastercard declined to comment. Bank of America and PayPal did not return requests for comment.)
In addition, more than 70 VC funds have signed a letter of support for the Fearless Fund. (One notable signatory was Albert Wenger of Union Square Ventures. But most of the names on the list were not big, well-known VC firms, all of which are run by white men.)
“Over $288 billion of venture capital was deployed in 2022, with an estimated 0.41 percent share invested in Black women founders,” the letter states. “This approach to twist efforts to counter the impacts of racial and gender discrimination as harmful to women of color is not only transparent, unoriginal, and unconvincing, but it also unjustly targets Black women while threatening the civil rights of all women. … We will fight and we will persist in doing this important work; anything to the contrary only perpetuates this attack and creates undue influence over our decision-making.”
Kimberley Nixon, one of the organizers of the open letter and founder of Open Venture Capital, a Los Angeles-based VC firm, says the letter has led to a handful of conversations with organizations, including potential limited partners, who have asked what more they can do.
Shila Nieves Burney, founder of the Zane Venture Fund and another of the letter’s organizers, said the potential investors Nixon mentioned are “ultra-high-net-worth individuals” who told her, “‘We have more money than Edward Blum. Yes, he can spend all of his money trying to do these cases, but what if we all support you?’” She says the group — which is composed primarily of white men (and one white woman) — next month will be announcing an initiative that will invest in VC funds run by Black women.
“We’re not looking for hugs or well wishes,” says Nixon. “We need capital.”
Nixon acknowledges that the lawsuit “does drive fear into the ecosystem” but says that fund managers, allocators, and others must go on the offensive. “I think what will be next is Diversity 2.0,” she says, adding that it is likely to focus on the economically and socially disadvantaged groups because those “do not have a color.”
Although Nixon is a Black female venture capitalist, she says “there’s literally not a single slide in my pitch deck about a diversity-based initiative.” The firm invests in startups from seed to Series A, primarily in the healthcare, well-being, food and beverage, and consumer-tech sectors.
Some argue that the intense publicity surrounding the Fearless Fund (Simone has appeared on CBS Mornings, and the case has received widespread media coverage) could turn out to be a positive.
“If you’re asking me if it’s going to have a chilling effect on investing in women or people of color, it’s hard to go lower,” says Liz Luckett, managing partner of The Social Entrepreneurs’ Fund and a co-founder of Maycomb Capital.
That’s why Burney said she decided to “double down” when she first learned of the Fearless Fund lawsuit. “White men invest in other white men,” she says. “It goes back to some of the biases in the investor community.” (She says her fund invests in women, Black and Latinx people, and other underrepresented minorities, as well as veterans and the LGBTQ community.)
“Looking at the total funding received (across stages) for the highest-funded start-ups at the time of exit reveals that the average start-up of a white male founder received over $210 million in total funding, while the average start-up of an underrepresented founder received a mere 43 percent of that — $91.1 million,” says McKinsey & Co.
Mirror Digital’s Marmon calls those statistics evidence of a “market inefficiency.” She recalls that after she was turned down by angel investors in the Los Angeles area, where she is located, a young white man who “copied” her business model was able to raise a significant amount of funding from the same people who had turned her down. And she says this man did not have the same level of education and professional experience that she had. (Marmon eventually raised $300,000 from her Princeton and Harvard MBA friends, which enabled her to get off the ground. She has since funded herself.)
The grants that are the focus of the Fearless Fund lawsuit involve even smaller numbers. “It’s a tiny source of capital for Black women,” says Luckett. “It’s like me walking down the street to somebody selling baseball hats on the street and telling them, ‘You’re interfering with Yankee Stadium selling their hats. Stop doing that.’”
“The only thing this lawsuit does is help their cause,” she says. “It raised the incredible inequality of entrepreneurship funding to a national scale.”
Will it end up helping Black women raise capital? “That would be the ultimate goal,” says Nixon. “The ultimate win.”
