HFSC Fintech Diversity Hearing

House Financial Services Subcommitttee on Task Force on Financial Technology

Combatting Tech Bro Culture: Understanding Obstacles to Investments in Diverse-Owned Fintechs

Thursday, June 30, 2022

Topline

  • Most of the discussion focused on industry diversity trends.
  • Members and witnesses provided recommendations, including public diversity reporting and score cards, the Improving Capital Allocation for Newcomers (ICAN) Act, the Developing and Empowering Our Aspiring Leaders Act, the SEED Act, tax incentives for servicing diverse Fintechs, regulatory engagement, lowering the regulatory burden on start-ups, and lowering fund minimums.

Witnesses

Opening Statements

Chairman Stephen F. Lynch (D-Mass.)

In his opening statement, Lynch discussed lack of diversity in venture capital (VC) firm leadership and in the start-ups in which they invest. He then touted the successful performance of women and diverse owned VC firms and recommended reporting requirements or a Securities and Exchange Commission (SEC) scorecard as solutions to address the old boy’s fintech culture.

Ranking Member Warren Davidson (R-Ohio)

In his opening statement, Davidson criticized the consolidation of VC funding and touted Republican efforts to enhance capital formation, including Improving Capital Allocation for Newcomers (ICAN) Act, the Developing and Empowering Our Aspiring Leaders Act, the SEED Act, and bills to deal with the accredited investor Rule.

Representative Maxine Waters (D-Calif.)

In her opening statement, Waters touted the performance of women and minority owned firms.

Testimony

Jenny Abramson, Founder & Managing Partner, Rethink Impact

In her testimony, Abramson discussed the lack of investments in diverse-owned fintech companies, missed financial and societal opportunities resulting from the lack of investments in diverse-owned fintech companies, and how the financial sector can reverse the lack of investments in diverse-owned fintech companies. She concluded by saying we must diversify who controls investment dollars because it impacts which entrepreneurs get funded.

Sallie Krawcheck, CEO and Co-Founder, Ellevest

In her testimony, Krawcheck discussed where things stand today regarding women raising fintech venture funding.

Marceau Michel, Founder, Black Founders Matter

In his testimony, Michel stated that classist Tech Bro culture has weakened our economy and limited the solutions that diverse founders are creating, adding that discrimination based on socioeconomics and network is what has allowed this to prevail. He concluded by saying change must be mandated. 

Abbey Wemimo, Co-Founder and Co-CEO, Esusu

In her testimony, Wemimo offered three thoughts on why investment obstacles persist in diverse-owned Fintechs: 1) investors tend to co-invest in people they know and are comfortable with; 2) due to implicit or unconscious bias, many seasoned investors do not consider people of color to be successful entrepreneurs; and 3) investors may struggle to relate to the problems that entrepreneurs of color and immigrants seek to solve. Wemimo recommended asking institutions to implement three solutions: 1) create tax incentives for established banks and the main credit bureaus to work with or adopt technologies or services developed by minority-owned fintech startups; 2) create tax incentives for established venture capitalists to place more investment bets on minority and immigrant fintech entrepreneurs; and 3) instruct federal agencies tasked with regulating the financial services sector to engage more proactively with minority-owned fintech startups so that founders can share their perspectives on compliance challenges and the ways in which the needs of marginalized communities are sometimes overlooked or misunderstood by regulators. 

Maryam Haque, Executive Director, Venture Forward

In her testimony, Haque discussed the state of diversity, equity, and inclusion in venture capital and stated that the industry has seen some progress and is working to improve itself. She concluded by saying the health of the U.S. startup industry and the opportunity for even greater success and impact are dependent on today’s industry leaders advancing a more diverse, equitable, and inclusive ecosystem.

Question & Answer

Recommendations

Lynch asked about implementing public diversity scorecards for firms. Krawcheck said transparency is positive and that diversity scorecard information could be useful for managed funds. Wemimo said accountability for diversity in leadership is important and that reporting to the SEC would be helpful. Abramson recommended scorecards at the fund level and the limited partner level.

Rep. Bryan Steil (R-Wis.) said the Committee should be looking for ways to limit the regulatory burden on early-stage companies.

Rep. Al Lawson (D-Fla.) asked how to balance the need to protect low-income investors from risky investments with the need to lower the bar to entry into the VC space. Wemimo said the right disclosures and investor education are necessary. Abramson said funds can lower their minimums and that funds can give investors an opportunity to take part in certain investment vehicles aligned with their broader investment portfolio. Krawcheck said the focus should be getting women investors into interest bearing investments before trying to get them into riskier investments.

Industry Trends

Davidson asked about industry initiatives to address diversity. Haque said touted Venture Forward’s VC University program and mentorship and scholarship programs. Waters asked how high growth potential minority owned businesses connect to venture capital. Michel discussed benchmarking and the gap in benchmarking between white male and black women venture capitalists.

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