Recently, Cisco Investments sat down with Lo Toney, Founding Managing Partner of Plexo Capital, to discuss the challenges facing today’s BIPOC, female and other underrepresented founders and venture fund leaders. He discusses why so many of today’s diverse entrepreneurs are already accustomed to operating in a challenging environment and how investment in diverse-led companies provides a smart, bold choice in times of disruption.
In the wake of Magnetic Aspire 2022, where Cisco Investments explored the challenges facing today’s diverse founders, we heard firsthand of the challenges — and the impact — diversity can have on a company’s potential to thrive and succeed when more diverse voices and ideas are invited to the table.
According to a new 2022 survey*, 62% of Black and Hispanic/Latino business owners have experienced a 16-point decline in offers of business collaboration, despite positive revenue growth.*
We also know that when investors back BIPOC, Latino and other underrepresented communities, these companies — and the industry as a whole — prosper through better business outcomes.
Q: How would you describe today’s current market and economic climate?
A: Over the past decade, and particularly the last two years, we saw an explosion of institutional capital investments in both private equity and venture capital looking to achieve target returns while balancing risk in a low-yield, low-interest rate environment.
However, today’s shifting geopolitical and macroeconomic climate has led to a significantly different global economy, marked most notably by record inflation and sharp declines in stock valuations. Also, when you consider the venture-backed companies that went public over the past two years, many were enterprise SaaS companies, whose collective market cap peaked last year in 2021 but has since experienced a 50% reduction as of mid-year this year.
Q: What challenges are founders facing as a result of the current market and how are they navigating them?
A: The drop in stock valuation overall is now having a trickle-down effect on those companies that were on the cusp of going public. Once the valuations drop for the public market companies that set the comparables and determine the value for the on-the-cusp private companies, the impact begins to have a profound effect on those companies close to going public in the growth phase of venture capital.
For entrepreneurs, there’s this psychological issue around the inability to accept the fact that their company, based on the comparables, is now worth 50% less than what it was less than 12 months ago. That’s a tough thing for founders to get their arms around. For many founders, they are fortunate enough to have raised enough capital that they don’t need to go back to the markets to raise funds until that IPO window opens again, but that’s not the case for all companies.
On the upside, while everyone tends to focus on valuation and round size declines, what we have actually seen, with data supported by Carta’s Q2 report, is that entrepreneurs actually have not suffered any significant dilution to their equity at the early stage.
On another positive note, during periods of disruption, the best companies, the leaders in their markets, have opportunity to come out ahead by attracting and retaining top talent without having to pay aggressive salaries.
Q: How is the economic turn impacting BIPOC, female and underrepresented founders specifically? Are you seeing changes when it comes to innovation or access to capital?
A: While we don’t have the data yet on the impact the economic shift is having on BIPOC, female and underrepresented founders, we do know that anecdotally it’s increasingly difficult for these founders to raise capital. But, to place this in context, even in the frothiest environment and under any market environment, it’s been difficult for these founders to raise money.
That said, I think BIPOC, female and underrepresented minority founders are really efficient with their use of capital and better at stretching the dollars they’re given.
Q: From your perspective, what are some of the successful strategies and approaches these diverse founders are leveraging to navigate the macro-economic challenges? What’s working, and what’s not working?
A: The successful founders are being more conservative with their growth plans, making sure their hires are “T-shaped” and able to handle multiple tasks without raising too much money that they’re in the position of having to grow into a valuation.
Diverse founders have also been forced to keep their “day jobs” while advancing innovations that might ultimately manifest into a profitable venture that will allow them to leave those day jobs. While this has often been viewed as a negative, that mentality is working to their advantage now.
What’s not working? Thinking that nothing has changed doesn’t work. Trying to use existing strategies like identifying “hot” investment areas is also challenging. We all need to understand and internalize that we’re in a new market.
Q: What are some of the industry innovation trends that, in your opinion, founders should focus on to withstand today’s challenging economic climate?
A: While many people think about hot areas to invest in, that’s never the approach that I took as an entrepreneur or as an investor. What we like to focus on are market opportunities from the perspective of a product manager.
Product managers are trained to identify opportunities and problems that exist across multiple industries and then try to understand the dynamics of why those problems and opportunities exist. Who are the people that ultimately could be customers, whether consumers or enterprises, who have these problems? What solutions are they using today? Why don't those solutions ultimately achieve their desired outcome? And therefore, where are those gaps that are opportunities? Are those opportunities big enough to achieve a venture-scale business?
We look for entrepreneurs who are extremely smart and can address those types of opportunities or problems with the best solutions in a really innovative way that almost has a secret element to it.
Of course, there are also certain trends we like, such as digital transformation. Every company needs to be a software developer, a software vendor, a software integrator. Companies who have the ability to develop, manage, deploy, monitor and integrate software efficiently will provide the best opportunities.
We also like to think about those industries that have enormous market opportunities but have been laggards to incorporate technology, such as FinTech, which we’ve seen really explode over the past five to 10 years. Education tech is also interesting. That’s kind of how we think about some of the trends that can withstand the challenging economic climate.
Q: There is a significant amount of industry data that demonstrates diverse founders are outperforming their white counterparts, but access to capital remains restrictive to diverse founders. What holds VCs and other investors back from providing access to capital to them versus their white counterparts?
A: At the end of the day, what we’re really talking about is systemic racism. It not only applies to education and wealth creation but also to company formation and the ability for those companies to get founded. However, instead of dwelling on the problem, I prefer to focus on the solutions, like highlighting the success stories. In my opinion, money is green and we are in a business as investors of trying to make money, first and foremost. But there’s also an opportunity to make money and have a positive impact.
There’s enough data that shows that diverse-led companies, teams, boards and execs produce better financial returns. And so for those of us at the forefront of believing we have an obligation to incorporate that into our models, to identify those diverse founders and help and support them to re-create the returns, then we need to showcase these individuals. That will help lead to the change.
Q: What advice do you have for your fellow VCs and investors to encourage them to seriously consider investing in diverse founders? What are the positive opportunities they are missing by not investing in diverse founders?
A: As an investor, I want to focus on a set of opportunities that’s as large as possible. The larger my consideration set is, if I have the appropriate screening mechanisms to focus on, the more opportunities I have and there’s a higher probability that I’m going to achieve the target returns.
Again, going back to the benefits of investing into diverse teams, this is not limited to founders. There’s also venture capitalists. The ability to invest into diverse founders creates an opportunity to increase that consideration set. If people identify this opportunity early, those are the folks who are going to achieve the outside returns.
The one thing we do know about this business is it’s not a follow-the-herd industry. It’s a business in which one has to take bold steps to identify the not-normal. That’s where the big returns are. I hope that it changes at some point in the future, but now, diverse founders are the not-normal, and I believe, because of that, that’s where the significant returns are going to be achieved now and in the future.
About Lo Toney
Lo is the Founding Managing Partner of Plexo Capital, which he incubated and spun out from GV (Google Ventures), based on a strategy to increase access to early-stage deal flow. Plexo Capital invests in emerging seed-stage VCs (led by diverse managers) and invests directly into companies sourced from the portfolios of VCs where Plexo Capital has an investment. Investors in Plexo Capital funds include Alphabet/Google, Intel Capital, Cisco Investments, the Royal Bank of Canada, Southern New Hampshire University, the Home Depot, Hearst Corporation, the Hampton University Endowment, JIMCO + the Ford Foundation.
His expertise includes investing into areas such as enterprise infrastructure, cybersecurity, financial technology, marketplaces, e-commerce, gaming + technology enabled consumer. In addition to managing Plexo Capital, Lo is CNBC Contributor providing his expertise on financial markets and technology companies on a regular basis.
Prior to founding Plexo Capital, Lo was a Partner on the investing team at GV, where he focused on marketplaces, mobile, and consumer products. Before GV, Lo was a Partner with Comcast Ventures, leading the Catalyst Fund and worked with the main fund focusing on mobile messaging marketplaces.
He also worked with Zynga as the GM of Zynga Poker with full P+L responsibility For Zynga’s largest franchise at the time. During his leadership, bookings increased by over 150% to $250M with margin expansion. Lo has also held executive roles with Nike + eBay.
Lo received his M.B.A from the Haas School of Business (University of California at Berkeley), where he completed the Management of Technology program, a joint curriculum program with the College of Engineering. Lo received his B.S from Hampton University in Virginia.
*Research references this source: 2022 EY Entrepreneurs Access Network Survey (Ernst & Young LLP), https://www.ey.com/en_us/news/2022/11/ey-survey-black-and-hispanic-latino-entrepreneurs-see-strong-growth-but-fewer-long-term-business-opportunities