Harlem Capital Partners is clearly defining what the world could look like when investors, in parallel with founders, are diversified...
Wow. Like, wow. Henri is so impressive. In recent months, I've seen Harlem Capital Partners pop up all over my social feeds. Reading about how they invested in underrepresented founder and further, represented what this blog is all about, diversifying the controllers of capital--VCs. I was so intrigued by what this awesome team based in New York (and now Harvard Business School!) was doing that I had to dig into their story. Check it out my interview with Co-founder and Managing Partner @ HCP.
Megan: Let's talk about the beginnings of Harlem Capital Partners. As we know, less than 2% of VCs are black, and even less have founded their own fund, so you're really going against the grain. Could you tell me a little bit about that experience, and how it felt for you getting started?
Henri: Yes. We started a few years ago doing it by ourselves. The initial goal was just to invest a certain amount of our own personal dollars into various startups. There had been a lot of talk on the lack of diversity on the founder side, and now from the investor side. We were asked to speak on a number of panels and go to events and you start to ask yourself “why is a 25 year-old who is writing $25,000 - $50,000 checks being asked to speak at these events with twenty year veteran white men?” Ultimately, people wanted diversity, and in New York there were less than 10 people of color in venture, so they kind of had no other options.
As we started doing that, we started to take it a little bit more seriously; we focused on branding, and began to bring a lot of the things that we used in private equity to our processes. Even though we were investing our own capital, we wanted to act like we were a fund and do everything as if we already had outside capital. (*Quick Megan Interjection: Now this is a message! Act it and so it shall be. Very powerful. Now back to Henri!)
We added a new partner, John, who had sold a business in Harlem and founded the first incubator in Harlem. So it made sense, given the number of minorities in Harlem focusing on venture, that he join our team. From this point, we've made the decision that after school, we will do this full time.
Megan: If you all raising a new fund right now, how has raising capital been for you while in school at HBS?
Henri: Yes, we're raising a $25 million fund, making it the largest diversity focused fund that's not corporate. It’s definitely a big task but it has been going really well and we feel like we're pretty well positioned. We're also fortunate enough to have a network that can support us and can get us access to people that are interested in the space. It's been challenging with school, but luckily we have a team that makes it a lot more manageable when some of us can't focus, others pick up the slack.
Megan: That’s fantastic. You mentioned earlier how you were often the only people of color in the room and had significantly less experience than the other VCs who may have been on the same panels. I’d really like to hear about your reception in the VC community. You're young. You're black. How supportive, if at all, have other VCs been as you've made a space for yourself in the field?
Henri: The community's been pretty accepting. We first leveraged people of color by compiling a list of 100+ people of color in the venture world. I had probably 50 to 75 conversations on the phone last summer, so that was a lot of my time. It was largely just to introduce myself, get to know other firms, and figure out how we can add value to each other. That was super beneficial and has led to a number of deals and partnerships for us.
Megan: Let me ask you about one of the markets that you guys play in, which is the seed market. A lot of people are saying that the seed space is dangerously over-capitalized and unreasonably competitive. This is leading to much higher valuations and capital being deployed into so-so companies. Can you tell me a little bit about how your team is fighting against that and how you think your investment thesis is differentiating you in a really crowded space?
Henri: The number of seed-focused funds has magnified over the last five years. Yeah, so from a dollar perspective, you're seeing more mega deals happening, even in the seed space. Number of deals are down. Exits are lower. There are more dollars going in and less dollars coming out, so there's definitely a gap there and that's a concern.
So for most people diversity just means non-white males. But we are going deeper. The fact that we're very focused on people of color, women of color, is a very differentiated process and we generally don't have a challenge getting into the rounds that we think are good. I think from the founders' perspective, they want investors of color. They've told us that and I think that's when we realized, "Oh, we can do this."
We invest in companies that we can add value. We're not looking to invest in companies we can just make money. If we wanted to do that, we'd invest in Amazon and probably make more money than with a startup. We want to invest in companies where we feel like our marketing and finance backgrounds can be of value. For a lot of seed-based companies we've seen, they have a lot of investors that are very product-focused. They understand how to do the sales strategy, but we're more focused on the business processes. How do you operate business if you're a late stage seed company? Do you have revenue? Are you thinking about a Series A? Do you have a couple acquisition offers? What does that look like from an acquisition standpoint? What would get a private equity firm interested in you even earlier? People don't realize 80% of mature exits are corporate acquisitions under $80 million. So the reality is that you're probably not going to go public. You're probably not going to be a $1 billion company. So how do you position yourself to be that $50 to $80 million company acquisition, which is where the majority of mature exits are going to happen?
We have experience in that stage of understanding on what corporations and PE firms look for. You can't just start changing your processes half a year out before you want to get acquired. You've got to start that process earlier, even though it may not be beneficial right away. It's going to be beneficial in two years or three years so you have to kind of have to lay the foundation. That's where I think a lot of founders realize that their current investor pool doesn't have that knowledge.
Megan: That makes a lot of sense, actually. So what are some of the things that you're excited about? Crypto and other things like vertical SaaS products are really popular right now. And in that same vein, is there anything that you're staying away from? Like, "Whoa. That’s too crazy." Is there anything like that?
Henri: Yeah, we've gotten a lot of Crypto deals, but mostly focused on people who are starting funds. But we don't invest in other funds. We pass on a lot of those. We're generalists. We're industry agnostic, but we focus mostly on tech-enabled businesses and not high-tech. Anywhere we need a PhD or high-level engineer to help us, that's just not where we can add the most value. So we generally don't invest in those sectors. And, given we're investing in diversity, high-tech is not where a lot of diverse founders are. For better or for worse, founders solve their own problems. For a lot of people of color, creating an AR company isn't helping them or their communities so it's not where they spend their time. So we haven't seen a lot of deals in that sector industry anyway.
I think the sector that we have seen a lot of interest would be beauty. So our latest investment was a beauty company. We're tracing the beauty space pretty aptly. There's just a lot more black folks' products like Mented, Rihanna’s Fenty Beauty, and Beauty Bakerie, which we invested in. So it's a pretty hot industry. A lot of VCs, they think that it's hard to position yourself in beauty. It's super competitive. But some of the biggest exits have been in the beauty space. These conglomerates will put in millions of dollars to get access to these products. I think it is a space where there will be a high number of acquisitions.
The second space would be law. We've seen a number of startups that are focused on either creating AI and technology to scrape legal documents or partnering with companies targeting different clients whether it be on the non-profit side or on the litigation side. It's a very human intensive business and I think technology is going to change that space in the next few years. The US is by far probably the most regulated country in the world and whether it be lawsuits or financial regulation, there's just so much to understand and know. So the more help you can get, the more efficient your firm can work. I think that's going to be the hot market going forward.
Megan: Okay, two more quick questions. Being in an MBA program right now I imagine it's incredibly tough and I know Harvard is super competitive.
Henri: Very similar to the GSB!
Megan: The good thing about us is that I feel like we're a little bit more relaxed when it comes to school.
Henri: You're definitely more relaxed.
Megan: Yeah, we’re a little less buttoned up, not that one's any worse or better than the other. So, I'm interning at two different VCs right now and it's madness. How are you managing your huge role with Harlem Capital while being in school, because that's kind of crazy. I know you have a team, but how are you balancing it more generally for yourself?
Henri: Very, very calendar driven. Everything has to be on my calendar, whether it be calling family, working out, going to church. I've been very focused on the calendar and then just staying balanced. Since I was young, my whole model of life is "Work hard, play harder." I went to Brazil for two weeks in December. I had a blast.
Megan: Oh fun!
Henri: I did some work while I was there. We have five weeks off for our break so I spent two weeks in New York doing meetings every day and then this week calls every day. The main thing is to keep a balance and to keep perspective. It's very important to me. Then having check-ins with the people who are important to me and making sure I'm supporting them and they're supporting me. I do other stuff, like journaling, sometimes meditation, work out at least five days a week, whether that be playing basketball or tennis. We've always been trained to focus on the future, but making sure you're present is important. As you get older, you lose some friends or friends lose their parents and you realize that not every day is a given and so I think you have to appreciate that and enjoy the ride.
Megan: I totally agree. So finally, what's next for you guys? In the next five years, what expectations and goals do you have for the firm in terms of investments, growth, and team? What does success look like for you?
Henri: You always continue to push your goal line as you make more progress. When I think about our initial goal a year ago, it was, "Okay, we're going to reach $5 million." And then it became 10 and then 25. I think as of right now, our mission is that over 20 years, we want to raise five funds totaling a $1 billion of capital. We think that amount is needed to invest in 1,000 diverse founders over 20 years. We worked our way backwards to see what capital we needed to see this mission through and to build a real legacy in the space and change communities.
I think in the next five years, we definitely want to raise our second fund. We want to add more people to the team. We want a woman on our team. We want to continue to invest in more founders. We can show our LPs and investors that this whole myth that there is no pipeline of diverse founders doesn't exist. That said, as we grow, we also need the ecosystem to grow. If we raise a $100 million fund today, there's just no way we can deploy that capital to invest in diverse founders. It's not possible right now.
In five years we hope that we've been successful and we hope that the people we have invested in, whether it be the Tristan Walkers or Ryan from Cadre and other black founders and people of color, that they are successful. We need them to be successful for other firms and for other LPs just to believe that people of color can execute. Hopefully that creates more founders so when we raise our next fund there will be even more founders to invest in. We need the pie to grow as we grow.
Megan: That's fantastic. Thank you so much for sharing. Well that's all for me. I appreciate your time so much. I'm really grateful that you wanted to be a part of the blog, so thank you for that.
How cool is he? You can find out more about Harlem Capital Partners here.