Brian Kenny: "I want money to do things that have never been done before."
That proclamation in 1961 by George F. Doriot, aka the father of venture capital, captured the enterprising spirit of the early days of what was to become a critically important part of the startup ecosystem. In 1946, Doriot, a tenured professor at Harvard Business School, founded the American Research and Development Corporation, the first venture capital firm. And for the next 26 years, he and his small band of investors helped grow some 150 startups, including the first unicorn, Digital Equipment Corporation. Doriot saw the power and the possibilities of not only investing in new companies but actively guiding them along in their development. VC-backed companies represent 43 percent of public US companies founded since 1980, including companies like Google, Intel, and FedEx. Impressive for sure, but it doesn't mean that all is well in the world of venture capital. According to Inc. magazine, last year 98 percent of VC money went to male founders, which is not surprising given that 89 percent of partners at VC firms are men. Today on Cold Call, we'll hear from Laura Huang about her case entitled, Arlan Hamilton and Backstage Capital. I'm your host, Brian Kenny, and you're listening to Cold Call, recorded in Klarman Hall studio at Harvard Business School.
Laura Huang's research examines early stage entrepreneurship and the role of interpersonal relationships in the investment decisions of financiers such as angel investors and VCs. She's also the author of a brand new book entitled, Edge: Turning Adversity into Advantage. Laura, thanks for joining me today.
Laura Huang: So great to be with you.
Brian Kenny: And we are thrilled to have on the line from Los Angeles, Arlan Hamilton, who is the protagonist in the case, also the founder of Backstage Capital. Arlan, thanks for being here with us today.
Arlan Hamilton: Hey, thanks for having me.
Brian Kenny: I think this is going to be a really interesting conversation. A lot of people are kind of aware of VC … but I don't think they really understand what the full picture is. So on the one hand, I think we get to give them a glimpse into how all of that works. But on other hand, I think we get to give them a glimpse into what's not working and how you're trying to fix that, Arlan. Let me start with you, Laura. Can you set the case up for us? How does it begin?
Laura Huang: The case takes place at a point in time where Arlan has to make some tough choices. She and her team have to think about where they're going in the future. Do they want to start an accelerator? They're trying to make as big of an impact as they can and they're trying to figure out how to do that. They've come a long way already, but they're facing challenges around what their vision is going to be long term.
Arlan is not the stereotypical VC. She doesn't look like the stereotypical VC. And so she's done a lot already to change perceptions of who should get funding, of who's doing the funding, and how they're going to be doing so. And they're really thinking about how do they sustain this and how they can reach as many underestimated founders as they can.
Brian Kenny: One of the reasons we decided to do this case is because you have your new—congratulations by the way—on your new book. I'm excited to read it. You thought Arlan was a great example of “the Edge.” And I want us to take the opportunity today to start to look at what that means and why you think Backstage is such a great example of what all that means. Maybe you can start by telling us how you found out about Backstage Capital?
Laura Huang: I had been studying for a really long time disadvantage, inequality, people who are underestimated. And I was specifically looking at the startup ecosystem for a while, looking at who got funding and who didn't, and why that was. I was finding a lot of depressing findings, that [funding] wasn't necessarily based on the quality of the idea or the size of the market, but instead based on perceptions and signals and stereotypes that investors would have about certain entrepreneurs.
I was also getting questions around what can we do about this? If we know that this bias exists, we know there are these disparities, what can we do? It was getting to this point where it was sort of depressing. We had all of these negative things coming out of the entrepreneurship world and in terms of these resources that entrepreneurs so critically need. A number of people kept mentioning this woman, Arlan. "Have you met Arlan Hamilton? Have you talked Arlan Hamilton?" … She had been thinking about this for a long time. I reached out to Arlan and the two of us hit it off very quickly.
Arlan Hamilton: Oh, yeah.
Laura Huang: Both of us felt very passionately about this. And I saw immediately that she is exactly how we see her now. She's somebody who was underestimated herself and was really able to turn that around. She really personified and embodied this person who didn't let the perceptions and the stereotypes and the signals and cues and attributions that others had of her weigh her down. She instead took that and was able to turn it to her advantage. And not only has she turned it to an advantage for herself, she's done it for countless entrepreneurs. She's been able to sort of pay it forward in that way. And so I really wanted to encapsulate that in one of our cases.
At that time we had very few cases that really spotlighted strong women and Arlan embodied just in terms of gender and race and class and sexual orientation. She had so many factors that were, by all classical accounts, strikes against her, but yet was able to take those and really turn them into assets. I thought it important for our students to see that and have Backstage Capital and all the people involved with that as part of that story as well.
Brian Kenny: Arlan, I don't know if you're blushing on the other end of the phone, but that's quite a nice set of remarks about you. What was your childhood like?
Arlan Hamilton: I grew up in Dallas, Texas with my mom and younger brother. We moved around a lot. We didn't have much money. I was working since I was about 14 and contributing to our rent and expenses, and things like that. I definitely have always, my mother and my brother too, we've always had a really good sense of humor… We definitely understood the humor in the absurd, which when you are broke and poor is very helpful. And so there was a lot of love, a lot of laughter, a lot of good will, that sort of thing. But I definitely grew up with a very specific idea of what money was. And I did not like money in general. Money was not something that was a friend of mine. So I think I'm a result of both seeing a very realistic view of how life was, the cold hard facts, early on, but also able to spin that and turn that around a little bit with humor.
Brian Kenny: Were there particular influences in your life that you think helped to shape what you are now?
Arlan Hamilton: Definitely. I've thankfully been able to reflect on this a lot in the last five years because life has changed so dramatically for me, and it absolutely starts with my mom. Everything, the good and bad I went through, I went through with her and it was almost like we were on the same footing. I got to see what she had to endure and I appreciated that so much, and so much of her work ethic and her moral foundation I respect so greatly and try to follow myself. And she just had this fortitude and the strength … that I haven't met someone to this day who matches it.
And then it really was Janet Jackson. When I was 13, I went to a Janet Jackson concert and it changed my life. I still think of it today and it helped me in many ways with independence and understanding a lot about myself. That has helped me advocate for myself and others. Since I've been 15, I have been greatly influenced on the business side by Richard Branson. I've just found him to be incredibly inspirational and I love his sort of bucking the system, having fun while he does it, being successful, taking a lot of hits along the way. That was helpful to watch that as I was growing into my adulthood.
Brian Kenny: Laura, I want to go back to Edge for a second because as I'm hearing Arlan described some of the people that have influenced her, I'm hearing some of the same characteristics that you talk about in your book. Can you just described sort of what “the Edge” is as we get further into the conversation here.
Laura Huang: Edge is very much about turning the obstacles and the adversity and the stereotypes that other people have about us in our favor. Flipping those things in our favor so that we can create and gain our own edge.
The E of Edge is around enrich, knowing how you enrich and provide value. But a lot of times we don't even have the opportunities to show people how we enrich and provide value because either we don't belong to the right circles or we don't have the right networks, or we just don't get the opportunity. And so there's something that needs to catalyze, that needs to give us that chance to have that opportunity to show how we enrich. And that's the delight piece. It's doing something that's perhaps surprising or somebody takes notice of that allows us then to have that opening. G is for guide. You need to continue to guide people's perceptions of who you are, of your trajectory. And the final E is for effort and hard work. We often think of hard work as coming first, that our hard work will speak for itself, but it often doesn't.
And so when you do know how you enrich, delight, and guide, that's when your effort and your hard work actually work harder for you. What I really think is important is that even though I'm such a big fan of Arlan and of this case, the case also is very realistic in the sense that there are lots of struggles, lots of adversity and challenges. And so this aspect of being knocked down and having to get back up, we are all going to have these periods where we are knocked down… And that is part of it. That is part of finding and gaining your edge.
Brian Kenny: So Arlan, because now that people have an understanding of what “edge” is, as Laura thinks about it, it comes across very clearly in the case as I read it—that you have the edge. But tell us a little bit about your journey. You had some early entrepreneurial pursuits that led you down a certain path. Can you describe those?
Arlan Hamilton: When I was in it I never thought of it really as a path. It felt like I was floating and trying to find my way. But I had always, since I was a child, wanted to start something and I started these little companies along the way, and little projects that became things. I started a music magazine in my early 20s, a print magazine, and that was a whole thing and had a pretty popular blog in my late 20s. And along the way never had any money. It was always a struggle, because I wasn't able to figure out certain things that I know now. And then I got into the music business on the touring side, on the production side of touring. That's like the nonmusic side. I took artists out on tour and was part of either a big group doing that or I was a solo person doing that. And that was really exciting. And everything has been kind of this entrepreneurship way of doing things. And it was only after, I think I turned 32 or so; where I understood that everything I had done before—the book, the blog; everything I'd done before—had been a real company that I had launched and I just didn't have the means or the resources to turn it into something bigger.
This was the time period, 2011-2012, where I started really understanding Silicon Valley and the startup world. I kind of found myself at that point. I found my people, my tribe. It was truly like coming out for a second time. And it was like, "Oh, that's why I do those things. That's why I feel that way. That's why I don't have health insurance." Because I can't toe the company line. I'm not made for this corporate world. And I have been building these things since I was in the third grade. And that's what really started the last seven years or so.
Brian Kenny: But you're making it sound easier than it was. I think the case really talks about the amount of perseverance and tenacity you had to have to get Backstage to even a starting point.
Arlan Hamilton: I mean that was just the beginning. That realization of what and who I was around 2012 was the beginning of what has become seven plus years of the greatest challenge of my life and a great pleasure and honor of my life. But definitely the hardest thing I've ever done. So before then I had ... I like to refer to it now as housing instability. It's a fancier way of saying that sometimes I didn't have a place to live and that happened, starting when I was in my early 20s, just off and on for various reasons. But then in early 30s I'm right back in that position again and I'm also, at the same time, learning about the startup world and learning about venture capital, because I didn't have a dime to my name. So I certainly couldn't be out there angel investing. But I came to understand what the startup world was and I said, "Well, I'll start a company. I'll start something on my own now. I've done this before and now I know kind of the process. So let me research as much as I can so I can be ready to talk to investors."
So I started having this ... I call it a four-year homeschool university. And when I started learning everything I can, I'm like, "Okay, I'm ready. I'm ready to talk to VCs." And that's when I started learning from other founders and from little bits and pieces of articles here and there, and then my own experience over and over again, that the investors of Silicon Valley and in the venture capital world were not out there for me. They were not looking for someone like me or my peers. They were looking for what had traditionally worked for them. You have to understand that that was the world that I, as a gay black woman from the south, with no college education, was walking into trying to start a company.“You have to understand that that was the world that I, as a gay black woman from the south, with no college education, was walking into trying to start a company.”
Brian Kenny: I teased that in the introduction. Eighty-nine percent male representing these firms, 98 percent of the money goes to white men. So, clearly, you're stumbling into a place where you're definitely unexpected.
Arlan Hamilton: There were certainly people before me and I like to point that out as much as I can because it wasn't like I just landed here and I'm the first here. And the fact that I have a case study proves what I’m saying. We were being overlooked. People couldn't see us before for some reason. And some of it was bias, some of it was worse than bias. Some of it was just ignorance and that's what I was trying to highlight. Really waving my arms and saying, "I exist. I know that I am going to make something of myself. I know that I could take a company and take it really far." And I know there are many other people like me who could. So, the bigger picture here besides the company, the one company that I want to start, the bigger picture here is the entire construct of it all.
Brian Kenny: I want to go to you Laura, because you've looked at this industry throughout your research, this is part of your scholarship. What is the sort of dynamic that you see at play in VC?
Laura Huang: This construct that Arlan's talking about. This is a context in which you need to have money to invest in order to get experience. And you need that experience in order to show that you can do it and show that you can do it well. I've had investors tell me before that they never invest any amount of money that they're not willing to and prepared to burn. And so if you're making a $10,000 check or a $20,000 check, they're willing to burn that amount in cash, because that's how you get the experience. You get the experience by writing these checks, making mistakes, losing all of that money. Because of this sort of portfolio approach where you're going to have 29 absolute losses and one huge home run and then you'll be lauded as this amazing investor, it's very hard to get in if you don't already have the means to do so.
The same thing applies from the entrepreneur's standpoint, where capital is so critical. You can't grow and scale a company. You can't develop a prototype. You can't test the market, you can't do lots of things without access to capital and lots and lots of capital. And so when we see that certain people are more likely to fail, we don't always know why that is. It may be because of access. It may be because of the inherent idea or the market and all of these dynamics go into play that make it hard for people who are normally outsiders to get on the inside and make it really easy for the insiders to stay as insiders.
Brian Kenny: So Arlan, what was the turning point that allowed you to finally launch Backstage?
Arlan Hamilton: It was a series of many small turning points. The one that sticks out is when I got my first angel investor to back me to back someone else. Susan Kimberlin, in September of 2015, after knowing me for about three or four months after I found my way to Silicon Valley physically, she backed me and said to me, "I don't know what you're going to do with this, but I know you'll do something." She gave me a $25,000 check to put into another company and another $25,000 to invest in my overhead and make sure that I was on solid footing. And because of my personal situation at this point now sleeping at the airport and not knowing really where the next meal was going to come from, for a long time that overhead money meant the world to me. I always said I had been preparing for that moment for a good three-and-a-half years. And I had always said there would be no party, there would be no celebration. It would be, "Let's get to work. I'm ready now." I was ready for that moment. I made an investment that I had been working on, and then that led to the next, and that led to the next. And over time I was able to build on that for a variety of reasons and get more investors involved behind the scenes. And people like Marc Andreessen, Brad Feld, Ellen Pao and many others became investors in the fund that I was working on.
Brian Kenny: Those are huge players. How would you describe your vision for Backstage?
Arlan Hamilton: I don't want to walk into a room five years from now in Silicon Valley or in another tech hub where all I see is nerdy, white males in hoodies tap away at their computers working on the next billion dollar idea or the next innovation that the whole world will be using. I don't want to only see that. I want to see them and I want to see me and I want to see people who look like us all and who come from different backgrounds and who did not have to buy a ticket in. That to me is really important, because if you leave it to who can afford to be in the room, you're not going to tap into all of the creativity and innovation that's out there. In fact, in my experience, I've found that people who have less, have more creativity. So wouldn't you want them to have more access to the resources needed to share that with the world?
I also have looked at it in a different way more recently. A big part of being in the US is we want to compete with the rest of the world. I don't think we can compete on a technical level, on a business level, if we don't tap into other resources that we have here on the ground. Like other people's opinions and thoughts and creativity and skill. If we continue to go with the status quo, we're going to be dinosaurs really, really quickly. And so I think that's another way of looking at it. It's not just a feel good, black people should get what white people get thing. It's partially that, because that is true. But it's also a competitive thing. It's a logical thing. It's a business case thing, and all of those are top of mind when I walk into ... theoretically, you walk into Backstage every morning.Brian Kenny: What are some of the things that you and your team look at when you're looking at possible founders to work with?
Arlan Hamilton: We look at different things and that's part of why I put together the group that I put together. We argue about things and we have different opinions and we agree on a lot, and that's what we want. We want diversity within Backstage as well. So if you ask someone else on our team, you're most likely to get a different answer. So a lot of it does still have to do with the founder because I'm making bets so early in a company's life that you really don't have a ton of data points to look at. I'm looking at someone who reminds me of myself and gives me that same idea, like Susan said to me, "I don't know what you're going to do, but I know you'll do something." And that's a skill that I've developed over time and that instinct and understanding, and time will tell how good I actually am at that.
As I get older and the world is what it is, I start to look at bigger and bigger, tackling bigger and bigger problems within the thesis of looking at underrepresented, underestimated founders. So on top of what your background is, what are you working on? Is it something that is going to move the needle in a major way or is it a very incremental change and it's something that ten other people could do just as easily? I am more and more attracted to things that are life-changing, and if not life-changing, making life a higher quality while you're here. That kind of lens has been really exciting over the past couple of years because I spent the first five years of it really just thinking about what every other investor thinks about, which is like, is it going to make money? Does it scale? Are you the person to do it? And on top of that, with the lens of diversity.
Now I'm able to, with a little bit of the augmented privilege I was able to source in this process, I'm able to kind of sit back and say, "Now I want to look at it just from an investor lens and I want to have my own thesis around that." So I'm looking for big, bold ideas, people who I believe can execute on those, and who will give it a hell of a shot even if they don't succeed, and someone who has thick skin and somebody who can take constructive criticism and someone who can lead. You can usually find out if someone's a great leader by looking at how they treat everyone around them. You can find that out within 15 minutes in most cases.
Brian Kenny: Laura, what's Arlan's leadership style like? How do people perceive her as a leader?
Laura Huang: Being a leader also is knowing that you're going to lead different people in different ways, that every time you have a different interaction with somebody that it's going to differ based on who you are and your background and your experiences as well as who that counterpart is and where they've come from and who they are and their experiences.
One thing that Arlan does well is that she both knows herself—she's a strong independent person who is not apologetic about who she is—but at the same time can interact with others in a way that also shows that she understands that they may not have come from the same place or they may have, but either way that she's able to have that connection with different people. She and I are very different in some ways … but every time we have a conversation, anytime we talk about something that's business or personal or something else, we're able to find a point of overlap and a point of understanding while still pushing each other. I remember I had one conversation with Arlan. This was early on, and I sort of thought that she was going to kind of agree with me and wanted the case to be written in a certain way that I had kind of envisioned, but she was very quick to kind of say, "I like this piece, but I don't like this piece,” or, “This piece, it doesn't really represent what I actually am," but still kind of getting at the essence, because it's really important when we write these cases to have an independent perspective outside of what the protagonist is maybe thinking at that moment, outside of what the company is, so that students can really dig their teeth into the underlying issues, the underlying pain points that maybe even the protagonist doesn't see. And she was able to understand that. And I think that's a really strong indicator of somebody who can lead as well as be reflective.
Brian Kenny: And if you think about edge, again, going back to the four criteria, I'm hearing it in Arlan's voice and the way that she's talking and the things that she's describing, it sounds to me like that gets perpetuated because she looks for people that have the edge also. It's sort of a self-fulfilling…
Laura Huang: A little bit. I mean, the thing about creating your own edge and gaining an edge is an evolving process. Some people naturally have an advantage, and other people have to create their own advantage wherever they go. The thing I emphasize in both the book and in the research that I do is that everyone has something. We talk a lot about the normal cast of characters like gender, race, ethnicity, sexual orientation. Arlan happens to embody a lot of those that put her either in a situation where she is underestimated or that she's going to face disadvantages. But everyone has something. Everyone, no matter what situation you go into, people are going to be making perceptions and attributions of you. And you're going to have to be able to guide those perceptions and attributions in a way that really show who you authentically are and allow you to have this interpersonal relationship with somebody else in a really rich, more value-driven way.
It's important to understand that when we were writing this case, one of the key questions we kept coming back to was, how will students react to this fact that she's trying to give back to, for example, if she's thinking about a fund that is funding just black women or if she's putting together a fund that is meant for only a certain type of entrepreneurship, how do we sort of grapple with those issues? How do we grapple with the fact that bias and discrimination and disadvantage is a much deeper kind of concept? Those are the concepts that we get into in the case that make for a really rich discussion. The fact that this is not just about diversity and inclusion, this is about how you actually prevent against those things, what can you do, what are the strategies, and what are the deeper rooted issues that go into that.
Brian Kenny: Arlan, did you join Laura when the class was taught?
Laura Huang: No, she will be here the next time that it's taught, hopefully, right, Arlan? I'm getting you to promise on air.
Arlan Hamilton: I can't wait. I can't wait to be grilled by your students. I'm ready to be there.
Laura Huang: And they are tough, and so I think it's a fun ... Arlan's exactly the type of person that it's just a really fun discussion because I always say to my students in the initial part of the discussion, "We are going to pretend that this person is not in the room." In fact, someone like Arlan would be upset if we let our comments be altered based on the fact that she is in the room. The beauty of it is that it provides perspectives to the protagonist as well. It gives them a perspective that they can take back to their company and say, "Hey, here's some of the things that people outside of the company raised that we never got an understanding about." And the same has happened when I've talked to people about this case, just different perspectives on how we think about diversity, inclusion, nontraditional leaders, and why do we even use the word nontraditional leader to sort of describe these types of protagonists?
Brian Kenny: All good points. And I can tell you one thing. When the students read the case, Arlan, I don't think that they'll underestimate you in the class. So great case. Thank you both for joining me today.
Laura Huang: Thanks so much.
Arlan Hamilton: Thanks so much.
Brian Kenny: If you enjoy Cold Call, you might like other podcasts on the HBR network. Whether you’re looking for advice on navigating your career, you want the latest thinking in business and management, or you just want to hear what’s on the minds of Harvard Business School professors, the HBR Presents network has a podcast for you. Find them on Apple podcasts or wherever you listen. I’m your host Brian Kenny and you’ve been listening to Cold Call an official podcast of Harvard Business School on the HBR Network.