HBCUs are missing an investment opportunity reserved for predominately White universities
Posted October 8, 2020 6:27 a.m. EDT
CNN — Since the coronavirus pandemic hit in March, an outpouring of financial pledges and philanthropic gifts have made their way to historically Black colleges and universities (HBCUs). The donations, which total more than $300 million, come amid renewed calls for racial justice following nationwide protests and high-profile police killings.
But the commitment to supporting HBCUs doesn't stop there: New efforts are taking shape in venture capital to increase the participation of HBCUs as limited partners in venture funds.
Unlike larger universities, HBCUs have long been missing from the equation -- and the profits -- that come with the role of being a limited partner in Silicon Valley's most successful VC firms.
"The time, the moment, is now, given HBCUs obviously have a commitment to educate Black and African American students," said Keon Holmes, managing director at investment consultant firm Cambridge Associates. "The events of this year really highlight the opportunity we have to invest in a diverse way."
When a venture firm raises a fund to invest in startups, the fund is supported by partnerships that include limited partners (LPs) and general partners (GPs). General partners, also known as managing directors, manage the fund -- which can range from several million to $1 billion -- while imited partners invest in the fund.
These LPs typically include large institutional investors, like university endowments or nonprofits and high-net-worth individuals. The funds usually have a lifecycle of several years, with the vast majority of profits going to LPs. While venture capital is often seen as high risk as a long-term asset that can't be easily exchanged for cash, it can also be a growth-driver for university endowments because it can deliver high financial returns.
And while many VCs tend to secure investments from their alma maters, when it comes to HBCUs, many of the decision makers don't look like people who run and attend Black colleges and universities.
More than 80% of VC firms don't have a single black investor and only 2% of VC partners are Black, according to data collected by Richard Kerby, a partner at Equal Ventures.
Venture firms are stepping up to the plate
Along with other VCs, Lo Toney, founding managing partner of Plexo Capital, a fund backed by his alma mater Hampton University, has been a part of a call to action for more venture firms to include HBCUs in their funds.
"This is going to take some time -- but at least right now while we have the attention, we need to be able to provide the options, strategies and support to be able to make all of these things happen," Toney said.
There are outliers: Unusual Ventures, a firm located in Menlo Park, California, founded by John Vrionis and Jyoti Bansal, has had a number of HBCUs as backers in their funds along with the United Negro College Fund.
And recently, Greylock Partners, an early investor in Facebook and LinkedIn, invited the diversity-focused nonprofit organization, Management Leadership for Tomorrow (MLT) to become an LP in the firm's new $1 billion dollar fund. Although it's not an HBCU, the nonprofit works with a number of Black colleges and universities to equip Black, Latinx and Native American talent with high-trajectory jobs.
"It's a multi-prong approach to being able to increase diversity," Toney said.
Sequoia Capital, one of Silicon Valley's most high-profile VC firms, has also started reaching out to HBCUs to build relationships as a stepping stone to invite them to participate as LPs in future funds, according to a source familiar with the matter.
"The ability to create a wider base of LPs, specifically HBCUs, that's very important," Toney said. "The ability to increase diversity within the ranks of firms top-to-bottom from the analyst all the way to the general partner and the ability for these larger funds to start looking at more deal flow led by black entrepreneurs, these things are all critical."
Closing the endowment gap
Investing in VC could unlock potential for HBCUs' endowments typically enjoyed by predominately White schools.
Much of higher education's involvement with VC stems from endowment funds. University endowments allow institutions to provide meaningful support to operations including teaching, student recruitment and funding research. College and universities such as Harvard and Yale rank at the top of the list of institutions with university endowments exceeding close to over $40 billion.
The vast majority of HBCUs almost always had smaller endowments. That's mainly because of a history of inequitable funding.
Black colleges and universities with smaller endowments are often limited in their abilities to cushion cuts in state and federal funding and how they may allocate percentages of their portfolio to other asset classes like venture capital.
HBCUs have $15,000 on average in endowment per student, compared to $410,000 at comparable non-HBCUs, according to a 2018 study by the U.S. Government Accountability Office. Meanwhile, HBCUs hold a median endowment of $12 million versus $23 million for comparable non-HBCUs, the study found.
For all of the 107 HBCUs, the total endowment sits at $2.1 billion. By comparison, 54 predominantly white colleges and universities have $2 billion or more in their own endowments.
Howard University has the largest endowment among HBCUs, with $689.8 million, according to data from the National Association of College and University Business Officers (NACUBO).
Howard's endowment precedes Spelman College, which has $390.4 million, and Hampton University with $282.5 million, according to data from NACUBO.
The potential for more HBCUs to become LPs in venture funds, says Howard University CFO Michael Masch, "will vary according to the needs of the individual institutions" and "the ability to gain access to top-performing, high conviction GP relationships."
Many well-known VC firms rarely take on new limited partners or investors in their funds. This is because many of these firms' existing LPs tend to invest more to increase their potential for more VC profits.
HBCUs having access to relationships with general partners, or managing partners of VC firms, is extremely important for Black colleges and universities interested in getting more involved in venture capital. They are more likely to be kept abreast of when a firm is raising new funds. It also helps to establish trust for participation as an investor in future funds, knowing the firm can deliver market-beating returns.
Hefty financial returns
Money is being left on the table for colleges and universities with smaller endowments, particularly HBCUs, to grow their university endowment funds.
But as more efforts and conversations take shape around supporting HBCUs in venture capital, what is for certain is the expected benefits this involvement can afford HBCUs.
"What we are seeing today, what we're excited about, is that venture capital funds are stepping up to really help grow HBCU endowments," Holmes said. "In the end, a higher commitment to venture capital should result in a greater ability for HBCUs to support student education."