Command Line Heroes - Arlan Hamilton: The Investor Who's Opening Doors

Episode Date: January 19, 2021

If you think hard work is enough to guarantee success, you haven’t been listening. All season long, we’ve profiled Black inventors who haven’t quite been given their due. Arlan Hamilton is helping reverse that trend by leveling the playing field—and changing the venture capital game.Arlan Hamilton’s story mirrors many we’ve covered this season—overcoming adversity to find success. But she’s also helping redefine what success can look like and, in the process, is helping change the broader tech industry. Janice Omadeke lays out how diversifying the VC community in turn leads to greater diversity among founders receiving funding. Ramona Ortega explains how traditional VC priorities often pass over startups that can be successful. And Scott Myers-Lipton discusses inequality in Silicon Valley (and beyond) and how he’s working to bring about lasting change.If you want to read up on more of our research on Arlan Hamilton, you can check out all our bonus material over at redhat.com/commandlineheroes. Follow along with the episode transcript.If you want to hear more from Arlan, check out her podcast: "Your First Million"." It's about how different people became portfolio companies at Backstage Capital.

Yeah, 2015 was rough. It was the best of hope and that little bit of light that was pulling me forward. But it was tough. And then September of 2015 is when things started to really turn around when I got my first investor. And it gave me that little bit of understanding that, yes, I could accomplish what I had set out to do. That's Arlen Hamilton. She's a hero of mine. Because from that rough moment years ago, she managed to build a future that didn't just lift herself up. It lifted up so many others. Hamilton's a black and gay woman who's used to confronting other people's expectations. Plenty of people have underestimated her, and they've all been wrong. That year,

her roughest year, was also the moment her dream of building a venture capital firm took shape. A venture capital firm that didn't just support the usual Silicon Valley players, but people like her. She wanted to support women and people of color who had brilliant, innovative ideas, but were facing a lot of locked doors. This whole season, we've been featuring inventors who had to overcome major obstacles while they worked to create a brighter tech future. And you may have noticed that every one of our heroes this season is Black. It's not a coincidence. Access to the levers of power is severely limited for Black people. And that's why this time,

for our season finale, we wanted to feature Arlen Hamilton. She's someone who didn't just invent a smart new app or a useful machine. Arlen Hamilton invents opportunity. Through her revolutionary VC firm, Backstage Capital, she's been changing the rules around who gets a seat at the table and who gets a check. I'm Saranya Dbark, and this is Command Line Heroes, an original podcast from Red Hat. Hamilton's VC firm, Backstage Capital, has created opportunities for 130 startups and counting. But I want to begin by understanding what gave her that first opportunity. Who invested in the investor? So I asked her. So you mentioned that end of 2015, you had that glimmer of hope you spoke about and that first investment. Who was that first investor? My very first investor was a woman named Susan Kimberlin. She is an angel investor in the Bay

Area who I had met at a two-week Stanford boot camp for investors that I had found my way into. And we just hit it off right away, really got along. I liked her energy. I liked what she stood for. And we spent several weeks and months getting to know each other. And then in September, she became my first investor in Backstage Capital. Clearly, Susan saw something in you that other investors missed. What do you think she saw? Why did she take a chance? I think it helped that Susan got to know me. She got to see my consistency over time and hear my thoughts about things rather than just maybe a deck or a snippet of what I stood for. She was very mission oriented. So that was a few years ago when mission wasn't as much

part of the VC vernacular as it is now. For Susan and for other people who came along who are impact investors first and foremost, they consider their return on investment happening the moment they write the check as long as it keeps you sustained and lets you go out and see what you can do. Susan Kimberlin cut Hamilton a $25,000 check and that turned out to be an investment in investment itself because Hamilton had a plan to pay that money forward.

She'd seen the statistics. Over 90% of venture capital funding was going to companies led by white men, and only 1% goes to startups funded by people of color. And Hamilton's simple belief was white men don't have 90% of the good ideas. Innovation from other people was being squashed. She thought to herself, well, this is an emergency. You know, we need to break window for emergency here. We are running out of time. And so it always felt really right at the precipice for me. And it always felt very much so like, if not now, when? If not me, who?

That break window moment, the change that Hamilton wanted to bring about, was all about choices. The choices that people with money make when they decide who's worthy, who's a good bet. And we know what kind of people usually get chosen. The Ivy League guy, maybe he's a computer science dropout, definitely white. But who was Hamilton looking to invest in? I look for someone who reminds me of myself. And sometimes that is a white man across the table staring at me. But most times it's a person of color or a woman or an LGBTQ founder who has made something out of nothing, who has gone against all odds to get themselves in a position where they're even having the conversation and usually outperforming their peers if they were to be on

level playing ground. They are impassioned and they are absolutely going after their dreams and their hopes, but they're not unwieldy in their pursuit. So it doesn't matter if they've already accomplished a thing or if they just have that glimmer in their eye, so to speak. They may look like there's some rough edges. It doesn't ping perfect investment on paper, but that's really where you find it's between those lines that you really find the gems. You've called yourself a triple threat before because you're black, you're a woman, and you are gay. Tell me about how navigating Silicon Valley has been as a triple threat. Yeah, when I said triple threat, I actually was saying it as in

I was threatening to people, like not in the Beyonce way. Navigating it, it's not as lonely as it was before. And it feels more like a community of people who are other. And because of my outspokenness and shaking things up and not necessarily doing things the way people want me to on multiple fronts, it does still feel like it is a battle. There are these factions that are like waiting to see me fail, waiting to see backstage fail. So now that you've found success, do you feel like being a triple threat or being threatening has actually become a superpower for you? I've always thought being black, being gay, and being a woman is a superpower. There's never been a time where I was ashamed of any of that. And I think I wear them as a badge of honor and I wear them proudly and have for most of my life, even when it wasn't comfortable. And that's where speaking up for people comes in. That's where now backstage

comes in. I think it's all of our superpowers. I'm very excited about it and I would have it no other way. I would have I would rather live in this body and be who I am and never have another success than to ever change. The work to expand who gets VC funding isn't just about some kind of prize money. It's not just about a payday for a few lucky inventors. Changing who gets venture capital means changing what kind of work actually gets made. It sometimes feels like all innovation comes out of Silicon Valley, and all of Silicon Valley is funded by VC money. But as our conversation continued, I saw that Hamilton wasn't just trying to shake up who gets funded.

She was trying to shake up why people get funded. There are some companies in our portfolio who will go on to be unicorn companies and go in that route. by, if not more, the sustainable companies that are now called zebra companies, where their main goal is to be a sustainable company, to be a company that is revenue positive, that employs a lot of people, that has a good ethics core internally, that is a great place to work, that builds up the economy of their local system, and that serves their customers in the best way possible. And a lot of those companies are going to only, quote unquote, be $100 million companies or only, quote unquote, $10 million companies. And I am just as excited about those, if not more, than everyone going out for the gusto and going for these billion-dollar-plus companies. Because we've seen very recently how many of those billion-dollar companies actually have more air in them than substance.

And it is not impressive to me that you can raise all kinds of money, but the core inside is rotting. While other VC firms chase down unicorns, focusing on big paydays, Hamilton is just as likely to cultivate those sustainable zebras she mentioned, startups that also plan to be big, but are optimizing for profitability. Whereas a unicorn dazzles and chases giant investments,

hoping to be a billion-dollar company, a zebra is quieter but promises real long-term value. It's all part of her larger focus on inclusive venture capitalism that opens the door for a wider range of companies than traditional VCs usually focus on. Companies started by people like Janice Omideke. I remember being in a conversation once with a VC, and I got asked the question of,

well, why can't black and brown professionals just use their network or ask people for help? Like, why don't they just apply for jobs? And I was blown away. I was actually very sad. Janice Omideke is the CEO and founder of a startup called Don't they just apply for jobs? And I was blown away. I was actually very sad. Janice Omideke is the CEO and founder of a startup called The Mentor Method, an enterprise SaaS platform that helps companies retain a diverse workforce. This individual didn't recognize their privilege. They didn't recognize how non-inclusive that question was.

You know, I think we mutually broke up with each other at that time because I don't want somebody on my cap table who doesn't understand the importance and value of having people like me at the table. Later in 2018, Omadecki was pitching at a South by Southwest pitch competition. Arlen Hamilton was one of the judges. Things went better that time.

Arlen was our first venture check. She's able to see that diamond in the rough and be that first check so that you are getting into the rooms that you should have been in a long time ago. If other VCs did that, we would see an increase in the number of Black women-led businesses that are receiving venture funding. We would see a larger number of Black woman-led exits. We would see a larger number of Black woman-led IPOs because that venture capital is the gateway to broadening your network,

being able to build a faster team, improving upon whatever it is you're building, right? In our case, it was an enterprise SaaS platform, but for others, it could be CPG or something else. Arlen doesn't just see these contributions as a way to support people who look like her. She sees it as an ethical obligation. We have all of these privileges, and we also have an incredible bullhorn and a perch from which to speak, not only through our words, but through how we lead and how we influence our portfolio

companies who in turn are some of the biggest companies in the world. I think that because we benefit so much and other VCs especially benefit so much from that, it is absolutely part of the crown, if you will, of having that perch. If you're going to wear the crown, you need to serve the kingdom. If you're going to wear the crown, you need to serve the kingdom. It's not a line you'll hear from many people in the world of venture capital. But what Arlen's work has shown is that serving the kingdom leads to riches that nobody knew were there.

I think what's often missed when we talk about diverse investments is the fact that it's not just equitable and fair to invest in people from different backgrounds. It's also wise, because different people are going to build different technologies. People from different communities are going to see different opportunities. I grew up in a part of the Bay Area where I've seen a lot of inequality. Ramona Ortega is the founder and CEO of My Money, My Future. I see people in my community working really hard and not really reaping the benefits of that hard work.

And I was very early on dedicated to figuring out how do we really change the wealth gap? How do we get people to be really not just surviving, but thriving? Ortega saw an opportunity to build something new. And as a Mexican-American woman, she had a better chance of seeing that need than the white male Stanford grad we were talking about earlier. In Ortega's early career, she spent a lot of time trying to affect policies from within the nonprofit world. Then she went into law to better understand the corporate finance side of things. She ended up working on Wall Street as Dodd-Frank was rolling out.

She worked on some high-profile cases. Madoff and John Corzine and MF Global. And through all that work, Ortega developed a clear picture of how the wealthy of this world build their wealth, how they structure deals and organize their finances. And then she asked herself. What can I do as someone who really deeply cares about closing the racial wealth gap and now has this experience in capital markets and in finance? So I understand both of these elements. What can I do to help people actually achieve financial security and build wealth? When she checked out the world of

fintech, Ortega found that apps were being developed for women and millennials, and that was all great. But she also noticed a major missing piece. It didn't necessarily speak to my whole experience, you know, as a third generation Mexican-American and have, and also very, you know, close and connected to a lot of immigrant communities and working class communities. I didn't necessarily feel like the products and the companies that were out there were specifically talking about things that were happening in my community and nuanced financial behaviors and needs. And so then I said it to myself, if not me, you know, who? Does that phrase ring a bell? I was struck to hear the same sentiment

from Ramona Ortega that I'd heard from Arlen Hamilton. If not now, when? If not me, who? This idea that you are the hero you've been waiting for, it goes to the heart of what a new culture of venture capital could be. It could be empowering. And not just for a startup founder with a great new idea, but for their users too. When Ortega was able to launch My Money, My Future,

her users were better able to build financial security. Simple things like guiding a new parent toward life insurance or encouraging someone who just got a promotion to open that 401k. We know for a fact that we have changed people's lives by getting them to take a financial action that's going to result in their long-term wealth building. Not every VC firm would have seen the value in all this. And that's because they wouldn't have seen the value in Ortega. I think there's an interesting

problem with a lot of the early stage capital. And I'll tell you what I think it is. It's that founders of color, particularly women of color who are receiving, I mean, just pennies on the dollar, right, in terms of startup capital to build their companies. When we go to the seed rounds or the institutional seed rounds, we're often being compared in terms of KPIs, right? These key performance indicators, like how much have you grown? How many users? What's your scalability? All of that. We're being compared to people who've raised a lot more money up front. And so when you're looking at, okay, who am I going to invest in? If I'm an investor, I want to invest in the company that looks like they have the most traction. But who's getting traction? Who's getting that early excitement? It comes

back again to that foot in the door. Those implicit biases that tell us some people are worth taking a chance on and others aren't. A lot of times people of color in tech are meant to feel like they have to have already won to get an investment. Where other folks can be like, I have an idea. I mean, literally, I have just an idea and are getting funded. Or they're super early, don't have a product in market, but people believe in them. What does it take for someone to feel like they believe in someone? And a lot of times that is going to fall into those parameters of like, well, do I trust them? Well, who do you trust? Do you inherently have a bias to trust some people versus others?

I mean, there's so much bias built in to that relationship. Someone walks in, they recognize you, they see themselves in you. I'm like, look, if I'm walking into a room, you've never really seen me. You've never seen me successful. If you're the venture capital guy looking to write a check and you can't think of any Latinx people who IPO'd last year, That changes who you can imagine being a success. And so when they see someone that looks like a Mark Zuckerberg, of course, there's a reference point for that success. And when you look around, I think that's part of that inherent bias is that you just don't know if you're going to be successful. So I've never seen a person that looks like you be successful in this space. What Ortega's describing has created

serious roadblocks as people of color seek out traditional VC capital. And that's why it matters so much when a person like Arlen is at that table. Arlen looks at a person like Ortega, and it's easy for her to imagine a success. My Money, My Future was, in fact, one of the first 100 companies in Arlen's portfolio. Whereas talking about the racial wealth gap had alienated other investors, it drew Arlen in. And you know, Ortega Startup is just one example. I can't help wondering what our larger tech landscape would look like if there were a whole army of backstage capitals. If these C-firms could all see the promise in each person who walks through their door. A couple episodes back, when we explored the life of Roy Clay,

we heard him suggest that the arrival of venture capital was the real beginning of Silicon Valley. That injection of cash decades ago allowed tech pioneers to strike out on their own. But by the same logic, we can ask whether the arrival of black venture capital has created a more diverse Silicon Valley. Yes, you get support for startups like Ramona Ortega's, but what's the bigger picture? Is real systemic change taking place? Back in 2014, tech giants like Apple, Google,

and Facebook started producing diversity reports that showed a huge lack of representation of Black and Latinx people, especially in management. Very few companies have solved this problem. This industry has a long way to go, and that includes the company that makes this podcast, Red Hat. In fact, when San Jose State University's Human Rights Initiative released its first Silicon Valley Pain Index this year, it showed that tech giants have made little progress in recent years. They found that only 1% of venture capital money was going to Black-led startups. Meanwhile, the percentage of Black employees at the largest tech companies? Just 3%. And many of those don't include a single Black woman.

African-Americans are almost 15% of the population in the United States. Why is there not 15% folks of color in those spaces and places? That's Scott Myers Lipton, a professor at SJSU and the creator of the Silicon Valley Pain Index. I'm a person that believes in kind of the language and the philosophy and the thinking of Dr. Martin Luther King Jr. He said, for Blacks, if they have half the good things in life and two times the bad things in life, that's a racist system. And that's what we had in King's time, in the 50s and 60s. And sadly today, that's what we have in Silicon Valley. You have, for white folks, $82,800 on average per capita income.

For Blacks, it's $40,800. So there it is, two times the number. Half the good for African Americans. It probably doesn't help that proactive moves to rectify diversity issues often get called out for being so-called reverse racism. Systemic change gets pushback. When Microsoft announced they were trying to increase Black hiring, for example, the current U.S. Labor Department began investigating them, charging that Microsoft might be guilty of reverse racism. It's easy to feel discouraged. But Myers-Lipton puts into perspective just how much is at stake.

Jacques Cousteau, he was an early environmentalist, was on television, like on PBS back in 1970. And he was asked, you know, are you hopeful about the planet and the survival of humans? And he said, absolutely not, not hopeful at all. But we have to try. You know, we've had a 250 year history of enslavement, another 100-year history of Jim Crow segregation. And we've had 50, 60-plus years, we are, by practice, still segregated. Our schools are more segregated today than they were in 1954, before Brown v. Board of Education. We have less African-Americans owning homes than they did in the turn of the 20th century.

We're not going forward. So am I going to stop trying? Never. But you know it's going to take an incredible amount of folks that are listening that hear this and realize that you know we have to do more. And my hope is that they really hear this you know and decide to make, to actually institutionalize it and tie their job performance to it and, you know, and make that capital available to African-Americans and other folks of color and to develop pipelines.

Because our future of our nation and ultimately our world depends that we figure this out because there'll be continual social unrest unless we figure it out. Another thing Martin Luther King Jr. said was that the arc of the moral universe is long, but it bends towards justice. Despite setbacks and delays, change is always possible. I wanted to ask Arlen about the movement she's seen. Here's a bit more of our conversation. And so what I want to know is, do you think the start of venture capital firm founded by a black woman like yourself is a sign that more doors are opening for black inventors in Silicon Valley in recent times?

Oh, I absolutely do. I still think there are just a handful of black women owned and started and founded funds. That's rarefied air, unfortunately, still. Just look what we do when we have it. Look what we do with that. Everyone I'm thinking of, including myself, we don't sit back and just say, okay, well, how do I make the most money? How do I get the best carry deal for myself? How do I do the bare minimum to get the most output? It's usually this ripple effect of impact and catalyzation. You're seeing that now with Black women, Latinx women, Indigenous women starting their own.

And yes, they start out, we start out with much less capital and resources than we deserve. But we have to start somewhere. And I do think that there's a willpower that we have that is unheard of and unmatched. The better we do, the more good we put out there to the world. The arrival of new diverse VC firms does have the power to change the tech landscape. Zebras might get some love and not just unicorns. Founder-friendly venture capital might prioritize sustainability, and diverse investment can lead to diverse leadership. But I want to close by reminding you that no VC at all is also an option. There are successful companies like MailChimp

that are completely bootstrapped and privately owned. They never felt the need to raise a zillion dollars in funding. Some people get off the ground with just their savings or a loan from a bank. Others build their companies without outside capital by only relying on the revenue they generate. Me, for example, I just launched an audio course startup called Disco. And it's a media tech company, so I need to hire producers. I need to build content. All that means I might need some investment, but I'm still figuring it out.

How much equity am I willing to give? Maybe the trick is remembering that your creation has value even before someone else buys in. And then you decide who gets to invest. This whole season, we've tracked inventors who changed the tech landscape, despite enormous roadblocks. Some of the heroes we featured saw their opportunities narrowed by segregation. Others were denied jobs because of the color of their skin. In tech, we often talk about a meritocracy. But we know that as long as there is systemic racism, such a system cannot exist.

We have to actively uplift the people who are historically held back, give them a chance to do well, and shine a light on them when they do. Ending with Arlen Hamilton's story, I hope we've shown that opportunities in tech aren't actually something that just get handed out in a neutral way. Opportunities are things that people invent. And that means who gets an opportunity and what gets a chance to be invented can change. We can change it. After all, if not us, who? That's it for season six. For more information on arlen or any of the eight heroes we featured this season head over to redhat.com slash command line heroes we've collected a ton of extra information and resources for you in the meantime keep on coding i'm'm Saran Yitbarek, and this is Command Line Heroes. Hi, I'm Mike Ferris, Chief Strategy Officer.

I've been a Red Hatter for about 25 years. And before your episode starts, I want to talk a bit about AI. The hot topic right now is foundation models. And those are important, but at Red Hat, we see them as just a piece of the larger AI infrastructure. And here's what I mean by that. Enterprises are built of hundreds

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