This Venture Capitalist Is Minting Unicorns Using A Values-Based Investing Strategy

Forbes

Freada Kapor Klein started her career in activism, founding the nation’s first organization dedicated to fighting sexual harassment in 1976. It was through “following the trail to the center of power, which leads to money,” that she landed in Silicon Valley. She and her husband, Mitch Kapor, cofounded early-stage venture firm Kapor Capital in 1999 and, in 2011, changed its strategy to exclusively invest in mission-oriented startups. Between that year and 2017, the firm achieved a 29% internal rate of return, and today, Kapor Klein says, the firm continues to achieve “top quartile returns.” In the last three years, seven of its portfolio companies—including Gusto, Formlabs and Newsela—have reached unicorn status.  Read the full story on Forbes: https://www.forbes.com/50over50/  Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1  0:00 - Introduction: Why My Career Over 50 Has Been More Powerful 1:04 - On Being 'The Moral Center of Silicon Valley' 2:48 - The Uber Letter: Why I Spoke Out 5:27 - Would I Speak Out About Elon Musk? 6:42 - The Spark of Activism & The Through Line of My Career 8:36 - Neuroscience of Bias & The Power of 'Closing Gaps' 10:29 - The Kapor Capital Mission: Proving Impact Investing Works 13:20 - The Founders' Commitment: Baking in Diversity from Day One 15:35 - Navigating the DEI Backslide in Corporate America 18:03 - How We Support Underrepresented Founders 20:39 - The Myth of 'Value Neutrality' in Venture Capital 22:58 - Fixing Philanthropy: The '95/5 Problem' 25:12 - Advice for Young Women: 'Slow Down, Girl' 26:17 - What My Younger Self Thought I'd Be Doing  Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:  https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript  Stay Connected Forbes newsletters: https://newsletters.editorial.forbes.com Forbes on Facebook: http://fb.com/forbes Forbes Video on Twitter: http://www.twitter.com/forbes Forbes Video on Instagram: http://instagram.com/forbes More From Forbes:  http://forbes.com  Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.

Transcript

00:00Freda Kapor-Klein, thank you so much for sitting down with Forbes for the 50 over 50.

00:12It's my pleasure and I'm way over 50.

00:15You're not just over 50, you're over 70.

00:18I am. I am 72, looking at 73 very soon.

00:23You are an entrepreneur. You are the founding partner of Kapor Capital and Kapor Center for Social Impact.

00:30You are an author. You are an activist.

00:34Do you feel like your career over the age of 50 has been more powerful than the years before 50?

00:41Absolutely.

00:42Why?

00:44Some of it is what I've learned along the way.

00:48Some of it is, I think, what happens to many of us as we age, which is we care a lot less about other people's opinions.

00:57We say, okay, whatever held us back previously, we don't know how much time we have left on this earth and let's go for it.

01:06Let's go for it.

01:07You know, you have been called, I want to get this right, the moral center of Silicon Valley and an OG in technology.

01:15How does that title sit with you? Is it a heavy burden?

01:17No, it's flattering. It's amusing. I emphasize the O part of everything.

01:26And I take it as a badge of honor and an inspiration to keep doing more.

01:34But to be called the moral center of Silicon Valley, let's get into it. How did that title come to you?

01:40Well, first of all, the moral center of Silicon Valley is a very low bar.

01:46So I think it's possible to jump over it, even being as short as I am.

01:53I think it came about because several actions and public statements that I've made are about staying true to my values instead of loyal to a certain insular group.

02:05So, for instance, when we wrote our public letter to the Uber board about feeling that things had gone too far with the toxic culture,

02:16many venture capitalists felt that that was sort of breaking the code, that you should never speak out about a founder in a negative way.

02:26My view is companies have a responsibility about the culture that they build and how they treat their employees.

02:36And if we've tried to deliver a message about you've crossed the line, let's help you build a better culture,

02:44and they haven't listened and they haven't listened and they haven't listened,

02:48then we have an obligation to speak up, not to be loyal to someone, no matter what their behavior is.

02:55And, of course, you were an early investor in Uber and also some other companies that are pretty well known, Asana, Dropcam, Twilio.

03:06And you had been working behind the scenes at Uber for a while to try to help clean up culture

03:10because that had been your longtime organizational focus in your career.

03:15Exactly.

03:16But we reached a point with Uber Culture in 2016-2017 that it became necessary for you to speak out. Is that correct?

03:22That's absolutely correct. Uber did a lot of amazing things. Uber launched a whole new industry.

03:33And there were many lines that Uber crossed.

03:38Now, one question is, crossing the line with the taxi industry, had they waited for permission, they never would have gotten it.

03:45And that's one of the things that I love about disruptive innovation and startups.

03:50But some of the lines they crossed with respect to how employees were treated, how employees treated each other,

03:57the culture that tolerated excess of all kinds, of sexual harassment, of racism, of drinking,

04:07those things just went way, way, way out of line.

04:10We did try to raise that issue to senior management on multiple occasions.

04:18I went and spoke to all of the ERGs, employee resource groups, when they came together globally.

04:26I had women from the women engineering groups reaching out to me quietly and tried to do something

04:34that I've done my whole career, which is to protect those who are most vulnerable,

04:41to create a safe space for them to speak out, and then to relay those messages to senior management

04:47and say, look, this isn't good for your brand, this isn't good for retention,

04:52this isn't good for your long-term profitability, and it's a terrible way to treat people.

04:57You took a decent amount of courage to write that Uber letter, and Silicon Valley, your peers, judged you for it.

05:06We're sitting in a moment where there is one very large tech company whose founder and CEO

05:13has been a little distracted by politics.

05:16I'm talking, of course, about Tesla's Elon Musk, and there are some calls for his board and or investors

05:21to be more outspoken.

05:23If you were on the board of Tesla or a big investor of Tesla, would you be speaking out right now?

05:31Great question. I think I probably would.

05:34There are lines that shouldn't be crossed, and when I talk about bias, when I talk about unearned advantage,

05:43I don't think you should buy a presidency.

05:46I don't think you should buy a way into the White House,

05:50and I think that that's problematic.

05:54You might have a temporary advantage in your company, and we've seen it's been mixed,

05:59not necessarily a full advantage.

06:01I think it has terrible consequences for democracy.

06:06As you talk about protecting the most vulnerable,

06:08you have focused most of your career on creating change, positive change in some capacity,

06:14and you didn't start in Silicon Valley or investing.

06:18Can you talk about your first work experiences or your first experiences with activism?

06:23What was the spark?

06:24My first experience with activism actually is back to middle school,

06:28where I'm a terrible role model, and I don't tell our high school kids in our program this.

06:35I used to cut school and go picket for the farm workers.

06:37So being an activist has been woven into everything that I've done as my career has evolved.

06:45I co-founded the first group on sexual harassment that focused exclusively on sexual harassment in 1976.

06:52It wasn't even illegal behavior back then.

06:55And that got me into a deep interest in what makes for good organizational culture.

07:04How do you build a positive culture within a growing and profitable business?

07:11So that's what got me interested in business.

07:15So what I did is I followed the trail to where's the center of power?

07:19And what that leads to is, unfortunately or fortunately, that leads to money.

07:25And so the closer you are to making financial decisions, the more power you have to create change.

07:34Money is, of course, power.

07:36And I've heard you say before that you can almost tie a direct line from your early work in sexual harassment work,

07:42or even in college you volunteered for a rape treatment center, is that correct?

07:48Yes, that was part of my field work as an undergraduate.

07:51You can draw a line from that work to the bias that we see in Silicon Valley and really corporate America writ large.

07:59Is that correct?

08:00Absolutely correct.

08:02That you can see, whether it's a rape crisis center, whether it's sexual harassment,

08:06you can see that people are treated or mistreated or abused in certain ways simply because of their demographics.

08:13And if you follow that line, you see that into who gets into good schools,

08:20who gets into the schools that are the feeder schools for technology companies or for startups or for venture capital.

08:27And so the through line is about identifying and disrupting bias.

08:34And how do you do that?

08:36Well, easier said than done, as we are seeing with the hills and valleys, the peaks and valleys of fighting bias in this country,

08:47in this society, in corporate culture.

08:52But what neuroscience teaches us is that the human brain is wired to be biased.

08:58And by that, we mean associating two things together.

09:03And so it's probably how our four mothers and four fathers could remember,

09:10if I eat that mushroom, I'll die.

09:14And if I eat that mushroom, I'll get high.

09:16And how do you remember these things that keep the species going?

09:21So when we talk about bias, it's just about associating two things together.

09:26What happens, how it plays out in terms of workplace bias that limits people's opportunities,

09:33is we associate gender or race or a school that someone attended,

09:39we associate that with positive or negative abilities, attributes, capacities.

09:46And we get very far away from a level playing field.

09:50We get very far away from a meritocracy, which we, I think, believe in in this country.

09:58We do, though the way it has entered conversation in the last year or two has changed.

10:03But I like the way you often frame it, which is closing gaps,

10:08which kind of takes some of the more divisive terms out of it.

10:12Do you find that people are more receptive when you talk about evening the playing field

10:16and making a fairer entrepreneurial ecosystem for all?

10:20That generally is a more palatable and more accessible way of describing the problem,

10:27which is sort of let's close the gaps between haves and have-nots.

10:31Let's get rid of unfair advantage.

10:34Nobody should be jumping the line.

10:37Nobody should be paying to get to the front of the line.

10:41That we should really have a level playing field.

10:45We should have an even competition.

10:48Competition is great.

10:49Competition is important.

10:50We get many societal advances and many tech companies come from that competition.

10:56But we need a fair competition.

10:59A fair competition is not when some people are born on third base

11:02and some people are born miles and miles and miles from the ball field

11:07and can't even get there to play.

11:09Now, of course, when we talk about building companies and getting investment,

11:14we see a lot of folks who start on third base,

11:16whether it be through connections or family or what have you.

11:21Can you talk about what you've built at Kapor Capital

11:23and also why, when you talk about your financial success,

11:26you don't include some of those names that I mentioned earlier,

11:30the Asanas, the Twilios, the Ubers of the world,

11:33which have had tremendous return,

11:34but you don't factor that in when talking about the returns Kapor Capital has achieved.

11:40Starting in 2011, we decided to embark on a big experiment,

11:45which is to look at whether or not a venture capital portfolio

11:50built entirely of tech startups

11:54whose core business closed gaps of access, opportunity, or outcome

11:59for low-income communities and or communities of color,

12:02whether that type of portfolio could, in fact, earn top quartile returns.

12:10And so some of those great successes, it's weren't fully gap-closing.

12:16Some aspects of each of those companies are gap-closing,

12:18but we were looking for 100% of the company

12:22was producing either products or services who were gap-closing.

12:30So 2011 began our gap-closing mission,

12:33and that's what we count when we get to something like our 2019 impact report,

12:39where we did indeed achieve top quartile financial returns.

12:44You calculated that between 2011 and 2017,

12:49your internal rate of return was 29%.

12:52How does that compare to the VC industry writ large?

12:56It certainly puts us well in the top quartile financial returns.

13:01Top quartile financial returns with an impact focus.

13:05Have you done an updated look at that?

13:07We've done several impact reports,

13:10and I'm no longer a GP at Kapor Capital.

13:13A step back, we are Kapor Capital's largest LP,

13:17but Kapor Capital has continued with the same DNA,

13:21same investment criteria,

13:22and has continued to earn top quartile financial returns

13:26with a 100% gap-closing portfolio.

13:30And you also have this really interesting founder's commitment

13:33that's baked into what you ask of your portfolio companies.

13:37You instituted this in 2016,

13:39and we believe this was among the first in Silicon Valley.

13:43Can you talk about this?

13:44The founder's commitment, you're absolutely right.

13:46It was implemented in January of 2016, quite a while ago.

13:51And I think it's really important to give credit where credit's due.

13:55Our founders.

13:56Our founders came to us.

13:58We were running a focus group.

13:59We were going to hire our first portfolio services director,

14:03and we said, what should this person be doing?

14:06How can we help you?

14:07And our founders said, you know what?

14:10It's really difficult competing for talent with big tech.

14:14The salaries they pay, the equity.

14:18So what we want is to be able to signal,

14:22and they actually said,

14:23we want the equivalent of the good housekeeping seal of approval.

14:26We want to be able to say to people who care about the mission of the companies

14:31that we're a gap-closing company,

14:35and to say that's what it means to be at Kapor Capital.

14:38And so we started the founders' commitment,

14:41and we wouldn't ever impose it retroactively.

14:43That's unfair.

14:44So it was going forward.

14:4775% of our existing portfolio in 2016 said,

14:51wait, wait, can't we sign on too?

14:53There was just this real pent-up demand to say this is who we are,

14:59and we want to attract engineers and other talent

15:03who believe in gap-closing companies.

15:07And just to be clear, when we talk about your portfolio companies,

15:09you are primarily investing relatively at the seed stage?

15:13Yes, absolutely.

15:15Seed is the sweet spot.

15:17Occasionally pre-seed, occasionally will come in later,

15:19but seed has been where we've focused most of our attention,

15:23with some follow-on.

15:25Why is that?

15:26Because I was looking at rates of success,

15:28and of course there's a higher chance of failure among seed stage

15:31than there are at series A or series B.

15:35Well, I love seed stage.

15:37Seed stage is where you find incredible inspiration.

15:41You find these entrepreneurs who are passionate

15:44about a problem that they want to solve.

15:47And in the gap-closing startup world,

15:49we're talking about founders who bring their lived experience,

15:53something that shaped them,

15:55an obstacle that kept their family back,

15:59and that they are determined to solve it

16:02so that other families don't suffer what they suffered.

16:06And so just an incredible amount of inspiration.

16:09At the seed stage, it's an idea.

16:14It's a little bit of a prototype,

16:18but there's not a whole lot of data to dig into.

16:22And that makes it much more interesting, I think.

16:25It makes it more interesting,

16:26and I imagine it's easier for these companies

16:28to adopt the founder's commitment when they're still building

16:31versus you've used the example of turning around a cruise ship

16:35compared to a canoe if we're thinking about company size.

16:39Exactly.

16:40No, it's much easier to bake in a commitment to a great culture,

16:44a commitment to a diverse team, gap-closing,

16:49becoming a public benefit corp.

16:51All of those things that we advocate for

16:53are much easier to bake in from the beginning.

16:56Easier to bake in at the beginning,

16:58but in this moment, before we started recording,

17:00we were talking about the backslide.

17:02And it's been going on for a few years.

17:04We saw an increase in diversity initiatives

17:07following the murder of George Floyd in 2020.

17:09But in the past two years,

17:11there have been a loss of more than 2,600 DEI jobs

17:15in corporate America alone.

17:16We've seen the acronym DEI become really a volatile word,

17:22if I may, this year.

17:25What's been your experience,

17:27and what are you hearing from the founders in your portfolio

17:30or prospective founders?

17:32Are they looking to pull back on diversity?

17:37Unquestionably, this is a difficult time.

17:39It is a backsliding moment.

17:41It is one of those valleys to contrast with the peaks.

17:45But there is still a solid commitment

17:49amongst many corporations, large corporations,

17:52and in the tech community to the principals.

17:56I do think it's worth taking a look at what people have found about DEI

18:03that went too far, and is there any substance there?

18:08So I think having a commitment to building a diverse team

18:13and an inclusive culture is primarily good business.

18:17From the beginning and with our founders' commitment in 2016,

18:22we said, look, this is not a quota.

18:24This is not performative nonsense.

18:27This is to be customized.

18:31So we said to each and every founder,

18:33we want your employees to look like your customers.

18:38I can't think of anything offensive about that.

18:43I can't think of anything but what a great business principle about that.

18:48And so some of it is the narrative.

18:53How do we explain what we're doing and why we're doing it?

18:56And there's a range of approaches to DEI,

19:00just as there's a range of everything else.

19:02And I think there are probably some DEI practices

19:06that maybe weren't in a business's best interest.

19:11But by and large, the fundamental principles are consistent

19:17with creating long-term, sustainable, great businesses.

19:22We often see that female founders or female founders of color

19:26are more capital-efficient when they're running their companies,

19:29which create more resilient businesses.

19:31And yet, I've heard you speak in the past year or so

19:34about concern about some of these underrepresented founders

19:37in this environment who might be attracting less investment

19:42as there are pullbacks in DEI.

19:46What are you doing about this?

19:47Or what can you do about this,

19:49especially if you are just one investor on the cap table,

19:51but this underrepresented founder is struggling in this environment?

19:54Well, we've always cared about supporting founders.

19:58We've never been in the standard Silicon Valley model of you look for one home run out of 10

20:05and you kill off the other nine.

20:06I find that fundamentally offensive.

20:09If we're backing gap-closing businesses that do good in the world

20:14and that create great jobs, why would we want to help kill them off?

20:18So we try to support all the founders.

20:20Not all of them are going to be great for financial returns,

20:22but we're going to try to support all the founders.

20:25Platform services have always been important to us.

20:29And we want to look at the lived experience that brought these founders

20:35their understanding of what problem they're solving.

20:38Also, sometimes comes with some baggage, and we want to support them through that.

20:43We want to create a safe space for our founders.

20:47We want to create support when there are messages from the outside world that say,

20:52you're not worthy.

20:54That's a hard message that we know as women to take in that say,

20:58you shouldn't be here.

21:00And so what do we do to counteract those negative messages?

21:03And what's the practical business support?

21:06How do we build a community of entrepreneurs to support each other?

21:10We work very hard to not invest in competitive businesses.

21:16And then we're in about 30 funds.

21:18And so we bring our GPs together.

21:20We do GP convenings, and we have them learn from each other.

21:24We bring in LPs, and we have the LPs talk to them about what they're looking for in a fund.

21:31We have founders, successful founders, come in and say,

21:34there's a lot of people that want to be on my cap table.

21:37Well, here's what I'm looking for in an investor.

21:41When you spoke to Forbes in 2022, you said that one of the great myths of venture capital

21:45is that there's some value neutrality investing.

21:49Investors try to let themselves off the hook by saying,

21:51oh, we don't have anything to do with that.

21:53We're just here to make money.

21:54But you say making money is a value.

21:57It doesn't hide all sins, but it funds all sins.

22:01What does that mean?

22:02Oh, goodness.

22:05I still believe that.

22:07I don't think there is such a thing as value neutrality when you're investing.

22:13I believe that the pursuit of financial returns only, what I lovingly call greed only investing,

22:20is itself a value.

22:22And it says, we want to make money no matter how we make it,

22:28no matter how many people are harmed in the process,

22:32no matter how much inequality is fostered by this company or by this investment.

22:39I don't think that's good for investing.

22:41I don't think that's good for society.

22:43I don't think that's good values.

22:44So I think that all investing, I think all companies in the same way that all investing

22:53is values-based, good values, bad values, mixed values, I think that all companies are impact

23:00companies, negative impact, neutral impact, positive impact, and that we ought to talk about

23:07bringing the whole picture in.

23:08This idea that there's externalities and we don't count them is absurd to me.

23:16That's a really good point.

23:19I'm thinking also about what you've said about philanthropy,

23:21and this kind of ties into money having a value.

23:24Can you talk about the 95% versus the 5%, especially for folks who maybe run a philanthropy?

23:30Great question.

23:31Endowments are an increasingly important source of capital for GPs, for venture capital funds,

23:39but then, of course, in turn, fund startups.

23:43But how philanthropy has operated traditionally is this 95-5 problem, as I think about it.

23:5195% is their investment.

23:54And usually, the chief investment officer is in a world separate from the program officers.

24:03And so with the 5%, we are fighting poverty, or we're educating low-income kids, or we're feeding

24:14the hungry, or we're fighting climate change.

24:16But 95% over here, the chief investment officers are evaluated based on one and only one criterion,

24:25how much money they make.

24:27And so they're over here.

24:28They're not talking about the program manager's concerns.

24:33They're not talking about the mission of the foundation.

24:36They're singularly focused on making money.

24:39So if 95% of your money goes into investing in things that promote climate change rather

24:48than fighting it, that increase gaps between haves and have-nots instead of reducing poverty,

24:55and 5% goes over here to programs that fix it, who's going to win in the 95-5?

25:02So we're trying to get foundations to invest consistent with mission.

25:08And part of that is to compensate chief investment officers and their teams for both their impact

25:16and their financial returns.

25:18So that sounds like your mission for the next 50 years or more, next 70 years or more.

25:23But since we are talking for the 50 over 50, I have a few questions that we like to ask everyone.

25:28And I'll start with this one.

25:29Is being over the age of 50, over the age of 70, an advantage or disadvantage in your line of work?

25:37Well, from my perspective, it's an advantage.

25:41From the external world, it's a disadvantage.

25:43And so juggling those things is often a concern.

25:47Interesting.

25:48How do you juggle those things?

25:50Well, in a few ways.

25:52One is I try to put myself in positions where my experience or my perspective is helpful.

25:59And one of the things I can do is to mentor and lift up younger women.

26:07And that's a huge joy.

26:10Speaking of younger women, what would you tell women in their 20s or 30s who feel like they have to rush

26:16to accomplish everything they want to before the age of 40 or even before the age of 30?

26:21Well, slow down, girl.

26:25Look, I'm here in my 70s.

26:29Your life expectancy, if you're in your 20s or 30s, probably is into 100.

26:35And so think about what you want to accomplish in different phases.

26:39Think about how to live with yourself for the long term.

26:43When you, you know, put your head on your pillow at 20 or 30 or 50 or 80, what are you going

26:50to be proud of?

26:53We talked about how your activism started as a teen, a preteen, picketing for farm workers.

27:00Did that preteen, Frida, ever imagine her career after the age of 50?

27:05And if so, what did she think her older self would be doing?

27:10I don't know.

27:1150 seemed like remote to a middle schooler.

27:14But I thought that I wanted to be a lawyer at that age.

27:21I thought, okay, that's a way to make things better, to fight for the, you know, the marginalized.

27:27And then I learned that the law doesn't always coincide with fairness.

27:35And I was more interested in fairness than in following the rule of law everywhere it went.

27:43And so now you are working to secure fairness for the world's entrepreneurs.

27:49Exactly.

27:50Frida K. Borklein, thank you so much for sitting down with us.

27:52It's been a pleasure.

27:53Thank you so much for the opportunity.

27:55Frida K. Borklein, thank you so much for joining us today.

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