Arlan Hamilton on Finding the Next Unicorn

Arlan Hamilton on Venture Capital and Founder Vetting

Arlan Hamilton, founder and managing partner of Backstage Capital, participated in a discussion at TC: Sessions Justice.

The conversation centered around her approach to evaluating founders, moving beyond traditional indicators like a Stanford affiliation.

Beyond Traditional Signals in Founder Evaluation

Hamilton detailed how Backstage Capital assesses potential investments, specifically emphasizing a methodology that extends beyond relying on signals such as attendance at prestigious universities like Stanford.

This approach reflects a commitment to identifying promising entrepreneurs from diverse backgrounds.

The Evolving Landscape of Venture Capital

The discussion also explored the shifting dynamics within the venture capital industry itself.

Hamilton shared insights into how the role of venture capital is changing and adapting to new priorities.

Impact of Funding Sources on Backstage Capital

A key topic addressed was the influence of different funding sources on Backstage Capital’s overall strategy.

Specifically, the conversation examined the distinctions between raising capital from the broader community versus securing investments from institutional Limited Partners (LPs).

The source of funding can significantly shape the firm’s investment decisions and operational approach.

Backstage Capital’s strategy is demonstrably affected by whether funds originate from community contributions or institutional investors.

Hamilton provided valuable perspectives on these interconnected themes during the TC: Sessions Justice event.

Identifying Suitable Founders for Backstage Capital

The current venture capital landscape is characterized by exceptionally high valuations – often exceeding $1 billion for startups still in their beta phase – and rapid deal closures facilitated by platforms like Twitter. Amidst this heightened activity, maintaining focus is paramount. Arlan Hamilton discussed the strategies employed by her firm, Backstage Capital, which has invested in over 170 companies led by founders from underrepresented groups.

Her discussion encompassed whether the firm actively pursues prevailing trends, the evolving nature of exclusive application-based platforms, and the role of social media, particularly Twitter, in their investment process.

Backstage Capital benefited from its pre-existing remote work infrastructure when the pandemic necessitated widespread remote operations. However, Hamilton emphasized the challenges inherent in evaluating early-stage founders.

The firm maintains a highly selective approach, providing funding to approximately only 2% of the founders they review.

Key Discussion Points

Reasons why certain venture capital firms favor collaborating with first-time founders.
Strategies for creating accessible funding pathways for Black female founders.

Backstage Capital prioritizes identifying founders who demonstrate resilience and a clear vision, despite the competitive environment.

The vetting process is rigorous, ensuring alignment with the firm’s mission of supporting underestimated entrepreneurs.

The Evolving Landscape of Venture Capital

During discussions, Arlan Hamilton expressed her view that Backstage Capital may diverge from the conventional definition of a venture capital firm. This perspective isn't entirely unexpected, given the increasing prevalence of alternative funding methods for startups, including debt financing, rolling funds, and revenue-based loans.

However, Hamilton clarified that Backstage Capital was intentionally established as a pathway into the traditionally exclusive investment sphere. This sphere, despite incremental improvements, has historically been dominated by affluent, white men.

Key Considerations and Future Outlook

When asked about her vision for the next five years, Hamilton highlighted several important points.

The rationale behind startups choosing debt over equity financing.
A critical look at the challenges within the investment pipeline.

Hamilton’s belief in a potential strategic shift for Backstage Capital is also rooted in the venture capital industry’s limited progress in investing in underrepresented founders.

She suggests that the industry risks falling behind on significant opportunities if it continues to overlook diverse entrepreneurial talent. Consequently, venture capital itself may experience a decline in relevance.

The launch of Black Founders Matter, a fund dedicated to supporting Black entrepreneurs, and its initial investment.
An introductory guide to diversity, equity, and inclusion principles.

The Expansion of Investment Opportunities Through Community Funding

Since its inception, Backstage Capital, led by Arlan Hamilton, has consistently championed the potential of underrepresented founders as a prime investment area. Recently, Hamilton discussed her strategic decision to broaden participation in the investment process by utilizing the Republic platform.

While equity crowdfunding isn't novel, the current year is poised to witness a resurgence in its popularity. This is largely due to revised SEC regulations, which now permit companies to secure up to $5 million annually through this fundraising method.

Republic is actively facilitating the adoption of these updated rules by startups and established firms. In 2020 alone, the platform oversaw the deployment of over $150 million in capital across 150 different investment opportunities.

During a recent discussion, Hamilton articulated the significance of securing funding from individual supporters rather than relying solely on institutional funds.

New initiatives are emerging to expand access to direct venture fund investments.
Guidance is available for those seeking to establish a venture fund without substantial personal wealth.
Greater transparency and accountability are needed within the financial ecosystem supporting startups to promote equitable funding.

The complete discussion transcript is available for review here.