What Happens When Capitalists Follow Their Conscience
In his book Lab Rats: How Silicon Valley Made Work Miserable for the Rest of Us, author Dan Lyons argues that workplace practices and business models championed by empathy-impaired tech titans have shattered the social contract between companies and their employees. But it doesn’t have to be that way, as he illustrates in this chapter about Mitch Kapor and Freada Kapor Klein, who run an investment firm to fuel companies with a positive social impact. Lyons will be speaking this week at From Day One’s conference in Boston.
Kapor Capital is based in Oakland. That one fact says a lot about what makes this venture capital firm different from all of the top VC investors in Silicon Valley. Most of the VC powerhouses have their headquarters 45 miles away, on a two-mile stretch of Sand Hill Road in Menlo Park, Calif. They are nestled into sleepy, leafy little office parks, clustered right next to one another, in dead-quiet, understated Northern California buildings. To visit them, you drive way up in the hills above Stanford University, where the parking lots are filled with Teslas, birds chirp in the eucalyptus trees, and skinny Spandex-clad techies zip around on exotic carbon-fiber racing bikes that cost more than what some people pay for a car.
By contrast, to visit Kapor Capital, you drive across the Bay Bridge from San Francisco, drop down off the highway, and drive through a vast homeless camp under a freeway overpass on Martin Luther King Jr. Way, past buildings decorated with graffiti art and pawn shops, bail bond services, and payday lenders. Oakland sits across the bay from San Francisco, but they’re remarkably different places. Oakland is a gritty, working-class city. It’s also an African-American city. For a long time, black people were the biggest ethnic group in Oakland, and while demographics have shifted recently, African Americans still represent about a quarter of the population.
By setting up shop here in Oakland, Mitch Kapor and Freada Kapor Klein, the husband-and-wife team behind Kapor Capital, were sending a message—they were not part of that other world. Unlike those big venture capital firms over on Sand Hill Road, the Kapors are not trying to make as much money as possible by any means necessary. Instead, they have a social mission. Some call it impact investing. Or diversity-focused investing. Or mission-driven versus money-driven investing. The Kapors call their model “gap-closing investing,” meaning they will invest only in companies that are “serving low-income communities and/or communities of color to close gaps of access, opportunity, or outcome,” Freada says.
The Kapors moved from San Francisco to Oakland in 2012 and bought a vacant building in Oakland’s Uptown neighborhood. In 2016 the one-time Pacific Telephone and Telegraph switching station opened as the Kapor Center for Social Impact, a nonprofit organization whose goal is to help underrepresented people of color get education in STEM (science, technology, engineering, and mathematics) and make careers in the tech industry. The Kapors make the center available to other organizations for conferences and workshops. The offices of Kapor Capital are housed inside the Kapor Center, along with another Kapor organization, the Level Playing Field Institute, a nonprofit that runs a summer math-and-science program for minority students.
In addition to making a statement about their priorities, the Kapors’ move to Oakland has turned out to be a pretty smart investment. Oakland is on the rebound. New businesses are popping up—little coffee shops, brewpubs, farmers’ markets, and trendy restaurants catering to young professionals. Once considered one of the most dangerous cities in America, Oakland now makes the Forbes list of America’s Coolest Cities, with Uptown, the neighborhood where the Kapor Center is located, finding itself on the Forbes list of America’s Best Hipster Neighborhoods.
“Here in Oakland we have a different story than in San Francisco,” Mitch says. It’s a Thursday evening in the summer. We’re eating takeout sushi in the Kapor Capital offices, while Dudley, the Kapors’ big Goldendoodle, sprawls out in the corner. “We have community engagement, and start-up weekends, and First Friday programs for Oakland entrepreneurs, where we get people together and talk about how you start a company.”
Mitch is 68 years old with a shock of white hair and sometimes a white beard to match. He’s a one-time meditation instructor who became a software entrepreneur and got rich, almost by accident. Freada, 67, is a small woman with curly black hair and intense dark eyes. She grew up in Biloxi, Miss., and once saw her older brother, age seven, get beaten up for being Jewish. You get the sense that she’s been fighting ever since. In the early 1970s Frieda was a student activist and rape crisis counselor at UC-Berkeley. After graduation she founded an organization to combat sexual harassment in the workplace, wrote articles for a newsletter called Feminist Alliance Against Rape, and got a PhD in social policy and research from Brandeis.
As Freada told an interviewer in 2018: “Diversity is all that’s ever mattered to me, for all the decades of my professional life.”
THE RISE OF “IMPACT INVESTING”
In a way what’s happening to Oakland is a metaphor for what the Kapors are hoping to do with the tech industry. Over the past ten or 20 years the industry has gone off the rails. The smash-and-grab, get-rich-quick, screw-the-workers business model has become deeply entrenched. That model has created a dysfunctional workplace culture where women are excluded or harassed, where “bros hire bros,” where employees are treated poorly, and where people of color are unwelcome.
The industry’s lack of diversity is not just unfair, but it’s also bad business. Research by consulting firm McKinsey in 2015 found that companies in the top quartile for gender and racial diversity were 35% more likely to produce higher-than-average financial returns. More diverse companies are better able to recruit top talent and have higher employee satisfaction, McKinsey claims. Whether diversity makes people happier remains a subject of debate.
Certainly, people who previously were excluded and now can get jobs are happier. But a 2014 MIT study suggests that diverse workplaces have more friction than workplaces with homogeneous cultures. Sara Ellison, the MIT economist who led the study, used the analogy of a baseball team made up entirely of catchers. They wouldn’t win many games, but they would probably get along great. In other words: diversity might not make everyone happy, but happiness in and of itself may not be the right goal.
For decades the Kapors have been trying to boost the diversity of the tech industry. They’ve launched educational programs to teach girls and underprivileged kids how to write code, for example. But things haven’t gotten better; if anything, the industry seems to be moving backward. In 2012 the Kapors came up with the idea of yoking investment dollars to social change. This is not a new concept. Socially progressive mutual funds have been around for a long time.
What’s different is that the Kapors are doing this with venture capital. Investing seed money means getting involved early and shaping a company’s culture, sometimes from day one. By making early-stage investments the Kapors can buy themselves a seat at the table. It’s not uncommon for venture capitalists to help start-ups assemble management teams and decide which executives to hire.
The Kapors believe “impact investing” might accomplish things that nonprofits and philanthropic organizations cannot. “The world runs on business,” Mitch says. “We need to change working conditions. We need to create more good work where people are treated well. Philanthropy is not going to solve that problem.”
The Kapors are part of a mission-driven movement that is springing up at the edges of Silicon Valley and has been starting to get traction. Company founders and company funders alike are pushing back against the rich-get-richer business model that traditional venture-capital firms have created over the past 20 years. That model has produced start-ups with toxic cultures, it has led to widening income inequality, and it has excluded women and people of color. A new generation of start-up founders are committing to building healthy and diverse corporate cultures, and they are supported by a handful of small venture-capital firms that share their values.
Dan Lyons, author of Lab Rats: How Silicon Valley Made Work Miserable for the Rest of Us
Kapor Capital doesn’t require that a company have a founder who is a woman or a person of color. They focus instead on the product or service the company creates. It has to be one that they consider “gap-closing” rather than “gap-widening.” Here’s a hypothetical example. A company that sells a really expensive service that helps rich kids do a little better on their SATs would be gap-widening; a service that helps poor immigrant kids get access to a good education would be gap-closing.
Traditional venture capitalists don’t care about this. If anything, they prefer start-ups that sell stuff to rich people, for obvious reasons. That’s why the tech industry has been producing so many “mommy start-ups,” meaning companies started by young guys who want services to do things their moms used to do for them—like do their laundry (Washio, Cleanly, Rinse, FlyCleaners, Prim, Mulberrys) and bring them food (DoorDash, Instacart, Blue Apron, Maple, Sprig, Plated, and at least 60 others have been funded since 2011). There are start-ups that sell $500 “collectible” sneakers and one that uses robots to make pizza.
TECH’S BIG DIVERSITY PROBLEM
I saw the tech industry’s diversity problems firsthand when I was a fiftysomething guy struggling to fit in at a start-up where almost everyone was half my age. I’ve often been asked to talk about age bias and the plight of older workers, and I’m happy to do it—but bias based on race and gender is far worse—and all three are related.
One young woman I interviewed was is the only black student in her computer-science class and was ignored by her white male colleagues. Another person I spoke with, an African- American guy, thought he did great in a phone interview, only to show up for the in-person interview and see the startled look in the young white guy’s eyes. “It was like, ‘Oh, I didn’t know you were—um, sorry, I didn’t know you were so tall.’” A friend I’ll call Alex, an Ivy League graduate with 20 years of tech experience, shows up to pitch his start-up to VCs and can tell by their expressions that they’re not going to fund him. Is it because he’s black? Or because he’s in his 50s? He can’t be sure.
Every year, Apple, Google, and Facebook publish diversity reports, and every year they say the same thing: sorry, we still haven’t made much progress. The numbers are appalling. In some tech companies, black workers represent only 2% of the employee population; Latinos fare only slightly better. Only one-third of workers are female. There are fewer women working in Silicon Valley today than in the 1980s. In leadership ranks the imbalance is worse—management teams and boards of directors are loaded with white men. Somehow, over the past twenty years, Silicon Valley has gone backward.
It’s even worse in the venture capital industry, where 1% of investment team members are black, and Latinos make up just over 2%, according to The Information, a Silicon Valley publica- tion. Women represent only 15% of decision-making roles. VCs claim that they make decisions based entirely on the strength of the company’s ideas, and without any regard for race or gender. But can you guess where the members of the White Man Club tend to put their money? “I can be tricked by anyone who looks like Mark Zuckerberg” is how Paul Graham, the founder of Y Combinator, a top Silicon Valley start-up incubator, once famously put it. Graham later claimed he was joking, but a glance through the roster of Y Combinator portfolio companies turns up an awful lot of nerdy young Zuckerberg clones.
I’ve heard various theories for how things got so bad in Silicon Valley. One is that venture capitalists and tech companies are lazy about recruiting. Instead of casting a wide net, they hire kids out of Stanford and Berkeley, where black and Latino students are underrepresented. There’s the good-guy theory, which is when one guy tells another guy that a third guy is a “good guy,” meaning he’s one of us, go ahead and hire him. Another theory is that techies really believe that diversity would hurt their performance. The men who run VC firms and tech companies pay lip service to diversity, but deep down they believe that their current arrangement—hiring young men, mostly white, and building “bro” cultures—actually delivers the best results.
Meanwhile the guys who run Silicon Valley came up with an excuse: we want to hire more women and people of color; we just can’t find any qualified candidates. I reached out to Mary Campbell, the president of Spelman College, a historically black college for women in Atlanta, Georgia, and asked her about this claim. Campbell explained that there’s more to improving diversity than just recruiting. For one thing, Spelman’s graduates in STEM fields are already in high demand, and they all find good jobs—just not in Silicon Valley. They’re working at Boeing and in biotech companies, rather than the “bro culture” tech companies.
The bigger issue, Campbell said, is retaining black employees. Black graduates who go to Silicon Valley often feel unwanted or out of place, so they leave. To hang on to those people, Silicon Valley needs to become a place where those young people feel welcome. “It’s about having a community, having a local church you can go to, having the chance to meet a spouse,” Campbell says.
How can it be that these “innovative” tech companies in Silicon Valley seem like some of the most backward organizations in the world? This is basically segregation, only instead of taking place at the University of Alabama in 1963, it’s happening in California in 2018.
The consequences aren’t just moral failings—they’re financial. Freada Kapor has consulted with most big tech companies and produced voluminous research. Contrary to the prevailing opinion among bro-CEOs, Kapor argues that diversity produces better returns. A 2017 study by the Kapor Center estimated that employee turnover related to cultural issues was costing the tech industry $16 billion a year. Yet not much progress has been made, she concedes. “Google spent $289 million on diversity over the course of two years, and you show me what changed,” she says.
Mitch cites a lack of interest on the part of CEOs as part of the problem. Without that push from the top, nothing happens. “It’s just not a top priority for Mark Zuckerberg,” Mitch says. “He has a lot of other stuff going on. It’s not really important to him. That’s my conclusion. If this were important at the CEO level, then you would see companies taking more dramatic action.” Also, these companies are making loads of money. “They’re doing swell. So it’s a case of, if it ain’t broke don’t fix it,” Kapor says.
In recent years the Kapors started to dial back on trying to fix big tech companies. They believe they can have more impact by working with new start-ups. “We’re focusing on young companies,” Mitch says. “I think it’s more likely that a new generation of companies can do better. If you bake in a commitment to diversity and inclusion right from the start, it will still be part of the company when you get large.”
BREAKING THE CODE OF SILENCE
The Kapors have been activists, in one way or another, since the early 1970s, when Mitch was at Yale and Freada was at UC- Berkeley. They might have become just another kooky old hippie couple living in the Bay Area except that in the early 1980s Mitch became fantastically rich. This happened almost by accident. After graduation in 1971 he spent a decade bouncing around. He taught Transcendental Meditation. He worked as a DJ. In 1978 he bought an Apple II computer and taught himself to write programs, which landed him a job at VisiCorp, a tiny software developer near Boston.
In 1982, Mitch founded Lotus Development, named after the lotus position used in meditation, to sell a software program called Lotus 1-2-3, a spreadsheet that ran on the recently introduced IBM personal computer. Kapor expected Lotus would generate $1 million in sales in its first year. Instead, sales topped $53 million, making Lotus one of the biggest software companies in the world. Within a decade annual sales would approach $1 billion. The company went public. Eventually it was acquired by IBM for $3.5 billion. Mitch the meditation instructor became Mitch the multimillionaire.
Lotus became known for worker-friendly culture, with a goal to become the most progressive company in the U.S. Mitch told the venture capitalist who funded the company, “There are some things that are as important as making money and one is how I treat people.”
The company offered a generous pension and 401(k) plan. Lotus also provided a sabbatical program and on-site day care. It was one of the first big companies to offer benefits for same-sex partners, and it stuck to its guns even when big institutional investors dumped their shares in protest. Managers went through rigorous diversity training. “We had lots of female executives. There was incredible social awareness,” recalls John Landry, a former chief technology officer.
Carrie Griffen spent 17 years at Lotus, from 1983 to 2000, in a variety of communications and management roles. “We were happy at Lotus, not only because the company cared about its employees, but because the leadership fostered the right culture,” she says. “People work hard when they’re happy, and inspired, and when they are part of an honorable culture. That’s the Lotus I remember.” Lotus is also where Mitch and Freada met; she joined the company in 1984 as the head of employee relations, after completing her PhD at Brandeis, though they did not become romantically involved until later, in the 1990s. Mitch left Lotus in 1986, because he didn’t like running a big company, and frankly, he wasn’t very good at it. Freada left in 1987 and created a consultancy offering training on workplace bias. But the progressive culture they set in motion continued.
After Lotus, Mitch went back to bouncing around. He developed a program called Agenda, which Lotus distributed. He moved to San Francisco and co-founded the Electronic Frontier Foundation, a digital rights organization that defends civil liberties, sort of a version of the ACLU for cyberspace.
Mitch began investing in start-ups and had a sharp eye for picking winners. He put seed money into Dropcam, which was acquired by Google, and Twilio, which went public and now has a market value of nearly $4 billion. At that point, Mitch was just investing as an individual, but in 2009 he and Freada formed Kapor Capital. One of the first bets they made was on Uber. In October 2010, Kapor and 28 other Silicon Valley techies threw together $1.5 million in a seed round for the ride-sharing company, reportedly at a valuation of $4 million. By 2017, Uber’s valuation had skyrocketed to $70 billion. The early investors had made a killing. A stake that cost $20,000 in the seed round had ballooned in value to $40 million, by some estimates. (The Kapors won’t say how much they invested in Uber or what their stake is worth today. They also point out that they made the investment in Uber before they committed to social impact investing.)
The big win on Uber came with baggage. Uber had built a toxic culture that was the antithesis of everything the Kapors stood for. There was no diversity. Women were treated horribly. So while the investment added to the Kapors’ bank account it also became a blot on their reputation. In February 2017 Uber was engulfed in scandal after Susan Fowler, a former engineer at the company, published an essay on Medium describing sexual harassment that had driven her to leave the company. Soon other women from Uber came forward with similar stories about an abusive workplace. Uber tried to put out the fire by creating a team to investigate the complaints, led by Eric Holder, the former U.S. attorney.
Still, the Kapors were fed up. They published an open letter saying that carrying out an investigation wasn’t going to be enough. They revealed that for years they had been working behind the scenes to get Uber to fix its “culture plagued by disrespect, exclusionary cliques, lack of diversity, and tolerance for bullying and harassment of every form.” Freada had given a talk at Uber and consulted with some of its executives. At this point, Uber needed a massive over-haul, and the company should “hold Uber leadership accountable, since all other mechanisms have failed,” they wrote.
In essence the Kapors were calling for Uber’s board to fire the company’s founder and CEO, Travis Kalanick. Some fellow investors considered the move a betrayal. In Silicon Valley there’s an unspoken rule that investors should never do anything to hurt the valuation of the company, including criticizing management in public. In their open letter the Kapors said the code of silence needed to change. “As investors, we certainly want to see Uber succeed, but success must be measured in more than just financial terms,” they wrote.
Other venture capitalists were quick to criticize the Kapors. “We broke the code by speaking,” Freada says. “We were supposed to give them our advice, but quietly. But we were frustrated. We had spent many hours with them, trying to counsel them. And they were not listening. We had been unable to influence them. We felt we had to hold them accountable. Uber’s culture was toxic.”
A few months after the Kapors published their open letter, Uber’s board pushed Kalanick out as CEO. Six months after that, when investment firm SoftBank bought a chunk of Uber, the company’s valuation had dropped by about $20 billion. You can’t blame the Kapors for all of that. Uber had many bigger problems than their open letter. But the incident had been a defining moment. It showed that the Kapors would not be afraid to speak up, even if it could hurt them financially. If any companies were scared away, they were probably not companies that Kapor would want to fund anyway, Mitch says.
“SAVING CAPITALISM FROM ITSELF”
Nine years after its inception, Kapor Capital remains a relatively tiny firm, with only six investment partners in addition to the Kapors. Three are women. Three are Hispanic and three are black. One partner is Benjamin Jealous, the former president of the NAACP, who joined in 2013. “Entrepreneurs from diverse backgrounds look at our team page, and they can find someone who looks like them, and they think, ‘Hey, these people might have a sense of who I am,’” Mitch says. More than half of the companies they’ve invested in have been led by a founder who is a woman or a person of color.
Unlike most venture capital firms, which get money from pension funds and college endowments, the Kapors invest only their own money. And since 2012, Kapor Capital has invested only in companies that they consider to be “gap-closing” and that they believe can have social impact at a very large scale. That radically reduces the number of deals they look at, and it means ruling out promising opportunities in areas like self-driving cars, virtual reality goggles, and robots that make pizza.
What’s more, an investment from Kapor Capital comes with strings attached. Companies must abide by a set of principles that Kapor calls the Founders’ Commitment. That includes setting goals on diversity and inclusion, and producing a D&I progress report every quarter. Companies must invest in training on how to mitigate bias, give employees opportunities to do volunteer work, and participate in D&I workshops hosted by Kapor Capital.
The result of the Kapors’ efforts is a new generation of companies that have healthier, more inclusive workplace cultures and are making products and services that are “gap-closing.” LendUp provides credit cards and small short-term loans to people with low credit scores, who might otherwise rely on predatory payday lenders. Pigeonly, founded by an ex-convict, helps inmates stay in touch with family and friends while they are incarcerated, sending photos and making low-cost phone calls. Thrive Market is a members-only online grocer that charges 25% less than traditional supermarkets and offers free memberships to veter- ans, public school teachers, and low-income families. HealthSherpa helps people find affordable health insurance plans. Genius Plaza provides a bilingual curriculum for kids in low-income schools. The company now serves 2 million children in the U.S. and Latin America, and is growing rapidly.
The Kapors are betting that gap-closing investments can deliver a good return to venture capitalists. They plan to publish a report on their fund performance in 2022, when the fund hits the ten-year mark. While it can take a while for startups to deliver returns, “we have many gap-closing companies across multiple sectors which are doing very well,” Freada says.
In addition to investing, the Kapors are active philanthropists. Freada founded and chairs a nonprofit, SMASH, which offers a summer math and science program for minority students. In 2015 she co-founded a “diversity war room” called Project Include, which offers startup CEOs a set of principles even more comprehensive than the ones in the Kapor Capital Founders’ Commitment.
Diversity-focused investment firms and start-up incubators are springing up around Silicon Valley. Outfits like NewME, Base Ventures, Cross Culture Ventures, Backstage Capital, and Precursor Ventures are run by people of color and lean toward investing in companies run by women and people of color. XFactor Ventures is a women-run firm that invests only in companies with at least one female co-founder. Social Capital, a VC firm with more than $1 bil- lion under management, has taken a stand on diversity: “I want the firm to look like what the world looks like. That means hiring and backing minorities and women,” says its founder, Chamath Palihapitiya, a former Facebook executive.
To be sure, even if you pooled all of the resources of the diversity-focused venture capital firms and advocacy groups, they would still be tiny compared to the $70 billion that venture capital firms invest each year in the US. But the diversity team seems to be punching above their weight and creating a kind of movement.
The stakes have never been higher. A few decades ago, the tech industry did not exert much influence on the overall economy. Today, technology is transforming every company. “Every business is a tech business,” Mitch says. The world’s five biggest companies, in terms of market valuation, are tech companies. That’s why the Kapors and others in the movement are feeling so urgent. They’re racing to fix the tech industry before its dysfunction spreads. As Mitch likes to say, “We’re trying to save capitalism from itself.” He’s only half joking.
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Dan Lyons is an author, screenwriter, and journalist. He is the author of two books about workplace culture in the digital age. His most recent book is Lab Rats: Tech Gurus, Junk Science and Management Fads—My Quest to Make Work Less Miserable. His previous book was Disrupted: My Misadventure in the Startup Bubble, which became a New York Times bestseller. Dan was also a writer on HBO’s hit comedy series Silicon Valley.
Excerpted from “Lab Rats: Tech Gurus, Junk Science and Management Fads—My Quest to Make Work Less Miserable,” by Dan Lyons. Copyright ©2018 by Dan Lyons. Reprinted with permission from Hachette Books, a division of Hachette Brook Group, Inc.
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September 16, 2019
