For more equitable startup funding, the “money behind the money” needs to be accountable, too

As protests continue across the U.S. and beyond, there has been chatter this week in Silicon Valley and the venture industry more broadly about race and which venture firms have done a better job of diversifying their ranks and founder bets. There have been mea culpas, promises by firms to hold themselves more accountable, vows to “listen and learn.” SoftBank and Andreessen Horowitz have even announced new funds to invest in startups led by founders of color.

It’s heartening to see, but these efforts will only go so far in leveling the playing field for people who’ve largely been left out of the trillions of dollars of economic value produced by the global startup ecosystem. Let’s face it, the vast majority of VCs, like other business leaders, tend to forget about diversity when they aren’t being questioned about it.

In fairness, inertia is powerful. It’s also the case that venture teams are more fragile than they might appear to outsiders, and because they involve long-term partnerships of highly competitive alphas, changing their composition isn’t an overnight exercise. Still, the bigger obstacle is really perception: investors won’t say so publicly, but many don’t buy the argument that diversity generates returns. They need proof.

One surefire way to get it? Legislation.

Already, most VCs today sign away their rights to invest in firearms or alcohol or tobacco when managing capital on behalf of the pension funds, universities, and hospital systems that fund them. What if they also had to agree to invest a certain percentage of that capital to founding teams with members from underrepresented groups? We aren’t talking about targets anymore but actual mandates. Put another way, rather than wait for venture firms to organically develop into less homogenous organizations — or to invest in fewer founders who share their gender and race and educational background —  alter their limited partner agreements.

It may sound extreme, but study after study has shown that diversity pays dividends. Need one from an Ivy League economist to be persuaded? Try Paul Gompers of Harvard Business School, who has examined the decisions of thousands of venture capitalists and tens of thousands of investments in recent years and found that “diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns,” as reported by HBR.

A separate Harvard-led study involving a broader basket of asset classes — hedge funds, mutual funds, and private equity funds among them — found that, in most asset classes, women and people of color in the finance industry performed at levels equal to their non-diverse counterparts.

Critics might note here that the world of academia is one thing while the business world is another. It’s the very reason we propose legislation that, for starters, would force state pension funds to incorporate diversity-related caveats into their dealings with asset managers, including VCs.

As for the private universities like Stanford and Princeton and Yale that also help fund the venture industry — and which say they are committed to diversity yet refuse to share the demographic data that would prove it — they receive billions of dollars in federal funding each year (and as nonprofit institutions, they don’t pay taxes on investment gains their endowments might make).

In short, if there is a will, there are legal levers that could be applied here, too.

We aren’t talking about funding exclusively or even predominately emerging managers. We’re aware that the California Public Employees’ Retirement System, for example, recently ratcheted back its emerging manager program owing to slipping returns. Think instead of a hybrid approach that sees both new and existing managers required to diversify their teams and their portfolio companies in order to win over future commitments.

It’s seemingly the direction the U.S. needs to move in if it’s ever going to truly eradicate inequality and the conscious or unconscious bias that plagues many money managers. If the approach is codified into law, there might finally be enough data to establish with certainty that investing in more diverse teams pays, especially when investors are forced to make them work.

Some limited partners may lose access to certain venture managers, it’s true. But it wouldn’t be a good look for those managers. On the contrary, you can imagine how such moves would benefit both the institutions that implement them, and every asset manager they fund.

Talking and tweeting and carving out pools of dedicated capital is certainly better than nothing. But black Americans, women, and other underrepresented groups have waited long enough for the powers that be to figure out solutions. It’s time to consider fundamental change within the power structures at the root of the startup world — the money behind the venture firms. It’s time to turn theory into practice.

Len Blavatnik Gets $6.6 Billion Richer After Contrarian Music Bet

Len Blavatnik Gets $6.6 Billion Richer After Contrarian Music Bet(Bloomberg) -- Len Blavatnik bought Warner Music Group Corp. for $3.3 billion in 2011, as the global music industry was grappling with plummeting record sales and a transition to digital listening dominated by piracy.He took the company public Wednesday with the stock pricing at $25. The shares surged 20% to close at $30.12, giving Warner Music a market value of $15.6 billion after its first day of trading.Entities controlled by Blavatnik, 62, sold about 77 million shares and Warner Music won’t receive any of the proceeds, according to a regulatory filing. He will retain almost all of the voting power. A spokeswoman for Blavatnik declined to comment.Warner Music Shareholders Raise $1.9 Billion in Upsized IPOThe pricing was delayed to avoid clashing with Black Tuesday, when the music industry halted business to support protests against police brutality in the U.S, people familiar with the matter said.Its public debut, at almost four times more than what Blavatnik paid for it, underscores the music industry’s resurgence. Warner, whose vast roster of artists includes Lizzo, Ed Sheeran, Bruno Mars and Cardi B, now gets more than 60% of its recorded music revenue from digital sales, helping to insulate it from pandemic-induced lockdowns. Shares of streaming giant Spotify Technology SA have surged 23% this year.Warner Music IPO Aims to Strike Chord in ‘Six Feet Apart’ EraThe IPO and first-day gains boosted Blavatnik’s net worth by $7.5 billion to $31.2 billion, according to the Bloomberg Billionaires Index. The Ukraine-born American jumped to No. 28 on the ranking of the world’s 500 richest people, up from No. 41 on Tuesday.He began to amass his fortune with the purchase of oilfields and factories after the collapse of the Soviet Union, but the deal for Warner Music was his boldest gambit en route to becoming one of the world’s richest people.Blavatnik’s Contrarian Wagers Forge $26 Billion Global FortuneGlobal recorded music sales were $15 billion when he made the deal, with just a tiny fraction of that coming from streaming. By 2019, total sales had climbed to $20.2 billion, and the share from streaming had soared more than 900%.(Updates with closing share price in second paragraph, changes in net worth in sixth.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.


Fight Over ‘Predatory’ J.C. Penney Bankruptcy Loan Gets Ugly

Fight Over ‘Predatory’ J.C. Penney Bankruptcy Loan Gets Ugly(Bloomberg) -- The fight over who gets to fund J.C. Penney Co.’s bankruptcy is heating up.The U.S. retail giant filed for Chapter 11 protection last month with a $900 million financing package lined up from senior lenders including H/2 Capital Partners LLC and Silver Point Capital LP, according to a presentation at the time. Another set of lenders has lambasted the deal, calling the terms “predatory” in court documents and accusing the other group of strong-arming J.C. Penney.The firms opposing the loan, which includes GoldenTree Asset Management LP and Contrarian Capital Management LLC, are also existing lenders to J.C. Penney. They have offered a similarly structured, cheaper financing package that gives Plano, Texas-based J.C. Penney more discretion in bankruptcy, the group said. The retailer’s current loan proposal requires the company go through with an agreed-upon restructuring and gives lenders the ability to veto the plan, according to court papers.“This court and the debtors should not be bullied into yielding to the threats of predatory lending terms that come at the expense of employees, customers, vendors and other creditors,” attorneys for opposing lenders wrote in court papers. The “only answer” as to why J.C. Penney won’t embrace the alternative loan is that the proposed lenders “threatened to use their 75% position in the first lien debt to force the debtors into a liquidation if they don’t get their way,” they write.Commitment FeeJ.C. Penney entered Chapter 11 protection last month having already paid a $45 million commitment fee on the proposed financing package. The loan is contingent on a plan to, among other things, get approval from senior creditors on a new business plan by July 14 and spin some of its properties into a real estate investment trust.Financing tied to a specific Chapter 11 strategy is increasingly common in corporate bankruptcy. Such deals can help companies cut costs and exit bankruptcy quickly, but concerns have been raised about whether they may trample the rights of smaller creditors or lead to suboptimal deals.A J.C. Penney representative declined to comment. The company has said in previous court filings that its proposed bankruptcy financing was “instrumental” in arriving at its plan for exiting bankruptcy, one it says will save thousands of jobs and maximize recoveries for creditors.Attorneys for the proposed bankruptcy lenders didn’t immediately respond to a message seeking comment on Wednesday.A hearing on the bankruptcy loan is set for June 4.The case is J.C. Penney Company Inc., 20-20182, U.S. Bankruptcy Court for the Southern District of Texas (Corpus Christi)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.


Join us to watch five startups pitch off at Pitchers and Pitches on June 10th

If you want to capture investor attention, you need a killer pitch. And that’s under normal circumstances. You’ve probably noticed that circumstances are anything but normal. With a global pandemic and the ensuing economic crisis, you’ll need to up your pitching game and get ready to bring the heat. We can help.

Register today for the second installment of our Pitchers and Pitches series. This interactive elevator pitch feedback session will take place on June 10 at 4pm ET / 1pm PT. Pour yourself a refreshing glass of something tasty and get ready to take your pitching game to the next level.

Note: The Pitchers and Pitches webinar series is free and open to all, but only companies that have purchased a Disrupt Digital Startup Alley Package get to pitch. If your startup wants to be in the running to pitch, you can purchase a ticket here.

We’ll choose five exhibiting startups at random to give their best 60-second pitch to the panel of judges. Who will hear those pitches and offer their sage advice? Excellent question.

Three people will evaluate each pitch and provide incisive feedback. Amish Jani, Managing Director at First Mark Capital is our featured VC judge for this session. Amish will join Darrell Etherington and Jordan Crook, two of our TechCrunch editors with years of experience coaching participants in the epic Startup Battlefield pitch competition.

Whether you watch or whether you pitch, you’ll come away with actionable tips, strategies and fresh ideas to improve the way you present your startup to the world.

Oh, and one more thing — there’s a prize package. Who doesn’t love prizes? The winning startup gets a consulting session with cela, an organization that connects early-stage startups to accelerators and incubators that can help them scale their business.

Early-stage startup founders rise to face challenges on the daily. And now you need to rise further and faster than ever before. Take advantage of every tool and every opportunity to adapt and move forward. The next Pitchers and Pitches session kicks off at 4pm ET / 1pm PT on June 10th. Don’t miss out — register today.

Is your company interested in sponsoring or exhibiting at Disrupt 2020? Contact our sponsorship sales team by filling out this form.

Challenger bank Varo, soon to become a real bank, raises $241M Series D

Mobile banking startup Varo Money has raised an additional $241 million in Series D funding, the company announced today. The investment was co-led by new investor Gallatin Point Capital and existing investor The Rise Fund, co-founded by TPG. Also participating in the round were Bono (yes, that one), along with entrepreneur, impact investor, and movie producer Jeff Skoll; plus HarbourVest Partners, and Progressive Insurance.

To date, Varo has raised $419.4 million in funding.

Launched in July 2017, Varo is now one of several digital banking apps that are taking on traditional banks. Its rivals include startups like Chime, Current, Space, Cleo, N26, Empower Finance, Level, Step, Moven, and many more.

Similar to others in this space, Varo promises an easily accessible bank account with no monthly fees or minimum balance, plus high-interest savings, and a modern mobile app experience. Though it doesn’t have any brick-and-mortar branches, customers can access their money through a network of over 55,000 fee-free Allpoint ATMs worldwide.

During the COVID-19 crisis, Varo served its customer base by providing early access to stimulus and unemployment relief funds, as it already does with users’ direct deposit paychecks. It also increased its deposit and ATM limits, and partnered with job platforms Steady and Wonolo to help connect its customers to new work opportunities.

Like most of its competitors, Varo itself is not a bank — its accounts to date have been provided by The Bancorp Bank, member FDIC.

That may soon change, the company says.

In September 2018, Varo received preliminary approval from the Office of the Comptroller of the Currency (OCC). In February 2020, Varo announced it was the first banking startup to win approval for FDIC insurance. Last month, the company said it was moving to the final stage of its bank charter journey.

“Varo was founded first and foremost to make a powerful impact on systemic financial inequality in communities across this country,” said Colin Walsh, Founder and CEO of Varo, in a statement. “As the first fully digital bank, Varo will bring our mission of financial inclusion to life and create more financially resilient – and thus healthier and stronger – communities. This new investment will enable us to complete the chartering process and leverage our modern banking technology to build on our track record of innovation and inclusion,” he added.

Pending completion of the conditions required by the OCC, the FDIC, and the Federal Reserve, Varo will receive approval to become a national bank.

The company expects this process to compete by summer 2020, at which point it will expand its lineup of services to include credit cards, loans, and additional savings products.

Those expansions will help to further differentiate its mobile banking app from a number of competitors, as a large group today remain largely focused on offering checking and savings accounts, not a fuller range of financial products.

Varo is not the only fintech startup that’s moving towards becoming a real bank. In March, Square said it had also received approval from the FDIC to conduct deposit insurance. It aims to launch Square Financial Services, offering small business loans, in 2021.

These moves by fintech startups come at a time when the younger generation is ditching legacy banking in favor of tech. Millennials in particular don’t trust big banks, preferring instead the fee-free challenger banks offering modern mobile features they’ve come to expect from all their other apps.

“In the midst of all the economic challenges people are facing right now, the digital economy can still be a force for good. Varo’s focus on financial inclusion and the support they offer people to help manage their finances and reduce financial stress really matters at a time when so many American families are struggling in a volatile economy. And that’s why RISE chose to partner with the team at Varo,” said Maya Chorengel, co-managing partner of The Rise Fund.

In addition to its expansion into new products, Varo will hire across operations, marketing, risk, engineering, and communications following the round’s close. It has recently added headcount to its customer care teams.

Varo today counts nearly 2 million banking and savings accounts and is growing rapidly. Since the beginning of 2020, account growth is up 60%, spend is up roughly 1.5x over the same period, and deposits are up by roughly 3.5x.

 

Monzo to lay off up to 120 employees as the ‘economic situation’ remains challenging

Monzo, the U.K. challenger bank, continues to be faced with tough decisions linked to the coronavirus crisis and resulting economic downturn.

Following the shuttering of its Las Vegas-based customer support office and almost 300 staff being furloughed in U.K., the company has announced internally that up to 120 U.K. staff are being made redundant. Reuters first reported the news just moments ago — which I have now confirmed based on my own sources.

According to an internal memo written by new CEO TS Anil, following an all-hands earlier this afternoon led by Anil and Monzo co-founder and president Tom Blomfield, the bank is to make up to 120 roles redundant, despite previously stating that furloughs and pay cuts already carried out would mean further layoffs could be avoided. That no longer appears to be the case, with Anil explaining that the current economic situation isn’t expected to revert back to normal quickly.

I understand a full consultation period for those employees potentially affected will now take place, as is stipulated under U.K. employment law. In addition, Anil told staff that in order to recognise their contribution, the bank will be waiving the one year “cliff” from their vesting schedule so that they won’t lose out on any shares due to them.

The announced layoffs add to a turbulent time for Monzo in recent months, as it, along with many other fintech companies, has attempted to insulate itself from the coronavirus crisis and resulting economic downturn.

In April, I reported that Monzo was shuttering its customer support office in Las Vegas, seeing 165 customer support staff in the U.S. lose their jobs. And just a few weeks earlier, we reported that the bank was furloughing up to 295 staff under the U.K.’s Coronavirus Job Retention Scheme. In addition, the senior management team and the board has volunteered to take a 25% cut in salary, and co-founder and CEO Tom Blomfield has decided not to take a salary for the next 12 months.

Like other banks and fintechs, the coronavirus crisis has resulted in Monzo seeing customer card spend reduce at home and (of course) abroad, meaning it is generating significantly less revenue from interchange fees. The bank has also postponed the launch of premium paid-for consumer accounts, one of only a handful of known planned revenue streams, alongside lending, of course.

And just last week, it was reported that Monzo is closing in on £70-80 million in top up funding, to help extend its coronavirus crisis runaway. However, as new and some existing investors play hardball, the company has reportedly had to accept a 40% reduction in its previously £2 billion valuation as part of its last funding round last June, with a new valuation of £1.25 billion.

Private Equity Gets a Big Win With U.S. Nod to Tap 401(k) Plans

Private Equity Gets a Big Win With U.S. Nod to Tap 401(k) Plans(Bloomberg) -- Private-equity firms notched a major win in Washington with the Trump administration paving the way for the industry to tap a massive pot of money that has long been off limits: the trillions of dollars held in Americans’ retirement accounts.The Labor Department issued guidance Wednesday effectively allowing 401(k) plans to invest in buyout firms. The agency said the move will bolster investment options for consumers and let them access an asset class that can provide better earnings than stocks and bonds.In a statement, Labor Secretary Eugene Scalia said the action “will help Americans saving for retirement gain access to alternative investments that often provide strong returns.”The announcement is a significant deregulatory decision that private-equity lobbyists have sought for years. The move was blasted by consumer groups, which argue that high-fee private equity firms are inappropriate for unsophisticated investors because the industry locks up clients’ money for years and backs businesses seen as far riskier than plain-vanilla bond funds.Deregulatory AgendaBetter Markets Chief Executive Officer Dennis Kelleher, whose group has fought the Trump administration’s push to dial back rules, accused Labor of inappropriately using the coronavirus crisis to loosen restrictions on 401(k) investments. Labor’s press release noted that President Donald Trump had issued an executive order directing agencies to “remove barriers” that would stand in the way of the economic recovery from the pandemic.“The last thing the Department of Labor should be doing is enabling or encouraging retiree money to be diverted from transparent public markets with significant disclosure and investor protections to high-risk, dark private markets with little disclosure and few investor protections,” Kelleher said in a statement. “To use the pandemic as a pretext for this irresponsible action is adding insult to injury.”Public pension funds that manage employees’ retirement savings have a long history of investing in private equity. But complex regulations and concerns about being sued have until now kept individuals’ 401(k) plans out. The private-equity industry has ramped up its campaign to change the rules during the Trump administration, which has made cutting back regulations a core element of its economic platform.Labor’s guidance was focused on professionally managed investment funds that include several types of assets. The agency said it wasn’t green-lighting private equity investments to be offered as a standalone option.‘Positive Step’American Investment Council President Drew Maloney, whose group lobbies for private equity firms, lauded the move.“This is a positive step towards helping more Americans gain access to private equity investment, which regularly is the best performing asset class for pensioners including teachers and firefighters,” he said in a statement.The announcement was also praised by Securities and Exchange Commission Chairman Jay Clayton, whose agency has been considering ways to let retail investors access asset classes that have been largely reserved for the wealthy.Under current SEC regulations, firms such as Apollo Global Management Inc., Blackstone Group Inc., Carlyle Group Inc. and KKR & Co. are mostly limited to raising money from the super rich, sovereign wealth funds and pension funds.Democratizing InvestmentsGroom Law Group principal David Levine, whose firm requested the Labor Department guidance on behalf of its clients, said the move would have a notable impact on workers saving for retirement.“By issuing the guidance, the Department of Labor has taken great steps to democratize the use of private equity in many Americans’ largest investment asset -- their retirement accounts,” he said.(Updates with comments in sixth and 10th paragraphs.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.


Tyson Reinstates Policy That Penalizes Absentee Workers

Tyson Reinstates Policy That Penalizes Absentee Workers(Bloomberg) -- Tyson Foods Inc., the biggest U.S. meat processor, will return to its pre-coronavirus absentee policy, which includes punishing employees for missing work due to illness. Workers with Covid-19 symptoms won’t be penalized, the company said.“We’re reinstating our standard attendance policy,” Tyson spokesperson Gary Mickelson said in an email. “But our position on Covid-19 has not changed: Workers who have symptoms of the virus or have tested positive will continue to be asked to stay home and will not be penalized. They will also continue to qualify for short-term disability pay so they can continue to be paid while they’re sick.”In mid-March, Tyson said that it was “relaxing attendance policies in our plants by eliminating any punitive effect for missing work due to illness.” That will no longer be the case, as the company shifts back to its usual policy that discourages absenteeism through a point system.Some of America’s largest meat suppliers reopened plants recently after a wave of coronavirus outbreaks forced temporarily closures in April, withering available supplies at grocery stores and driving up retail prices for beef and pork. While companies have taken measures such as increasing hand-washing stations, distributing face shields and doing temperature checks, experts and unions warn that workers are still being put in harm’s way in the name of food security as packers seek to boost output.Workers absenteeism has been high in some U.S. plants not just because employees are sick. Some are afraid to come in for shifts because of fears they will catch the virus. Under Tyson’s policy, staying home for fear of exposure could result in punitive measures.Physical distancing is nearly impossible in plants that operate processing lines at very fast speeds. There have been at least 44 meatpacking worker deaths and over 3,000 workers testing positive for Covid-19, according to estimates from United Food & Commercial Workers International Union.“It is irresponsible to move away from strong protections, paid sick leave, and attendance policies that support worker well-being and public health goals,” said Mary Beth Gallagher, executive director of Investor Advocates for Social Justice. “Instead, it appears the incentives and attendance policies further business objectives that may be out of step with keeping workers safe.”Tyson reiterated that its “position on Covid-19 has not changed,” in an emailed statement.“Team members who test positive for the virus or have Covid-19 symptoms receive paid leave and may return to work only when they’ve met the criteria established by both the CDC and Tyson.”On Tuesday, Tyson confirmed 591 positive Covid-19 cases out of 2,303 tested employees at its Storm Lake, Iowa, plant, which was shuttered last week. Limited production at the facility will resume on June 3, the company said, while separately confirming 224 positive cases out of its 1,483 employees at its Council Bluffs, Iowa plant.Mickelson also noted the steps the company has taken to slow the spread of the virus at its plants. These measures include pre-shift temperature checks, providing masks to workers, and creating physical barriers between workstations.(Updates with analyst comment, additional Tyson comment starting in seventh paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.


Snapchat is no longer promoting Trump’s posts

Snap announced this morning that it will not be promoting content from President Trump’s Snapchat account in its Discover tab following statements from Trump last week on Twitter, which threatened that protestors could be met with “vicious dogs” and “ominous weapons.”

The move is notable for many reasons, but particularly interesting because social media platforms have tended to only discipline popular accounts when they’ve violated the rules on their own platform. Snapchat users will still be able to access content from Trump’s feed if they subscribe to it or search specifically for the account. At this point Snap is simply limiting his account to organic reach and stripping him from their curated feed.

“We will not amplify voices who incite racial violence and injustice by giving them free promotion on Discover,” a Snapchat spokesperson said in a statement.

Snapchat’s personalized Discover feed sources content from news publishers and accounts on the service but often skews more towards entertainment news compared to competing products like Twitter’s curated Moments threads, which focuses heavily on breaking news.

Earlier this week, Snap CEO Evan Spiegel shared a letter regarding the recent protests, noting that he was “heartbroken and enraged by the treatment of black people and people of color in America.” In the letter posted to Snap’s site, Spiegel also called for the establishment of a “diverse, non-partisan Commission on Truth, Reconciliation, and Reparations.”

Snap’s decision here comes after Twitter hid one of Trump’s tweets regarding the Minneapolis protests on the basis of its violating Twitter rules for “glorifying violence.” Twitter had previously added fact checks to two of Trump’s tweets related to mail-in voting. Facebook came under fire internally this week after CEO Mark Zuckerberg declined to remove the same content that Twitter had on the basis of newsworthiness, a move that prompted some employees to stage a remote walk-out and pushed company leadership including Zuckerberg to host a company meeting on the topic.