This episode has been updated to add additional detail about the status of Backstage Capital’s $36 million dollar fund.

AMY: Welcome to StartUp   

Over the first four months I spent with Arlan Hamilton there is one thing I never saw her do, not even once. Something pretty central for a venture capitalist. She didn’t invest in any companies.

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AMY: When I met Arlan, she had a list of companies she was excited about and wanted to invest in. But she didn’t have the money.

Then, in February everything changed. Backstage Capital itself got a big investment. So now, the company was finally sending money to startup founders again. 

FOUNDERS: Is it there? 

No, no. Oh wait..wait...

AMY: The day the wire came in, the founders of Sunhouse, a music tech company, got on a conference call from LA and New York to watch Arlan’s investment land in their bank account. They’d been waiting on this money for months. 

FOUNDERS: Yo, it’s here! We got it? Yeah we have a wire here. 

FOUNDERS: Should I pop some champagne over here in LA? Here’s the sound of a beer opening. 

AMY: This is the final episode in our series on Backstage Capital. And where we’re picking up - the company is on a roll. 

Backstage was a bigger company in every way than it had been when I first met Arlan. Startup founders, potential investors, staff - were coming in from all directions, wanting to be part of what Arlan had created. 

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AMY: In the spring of 2018 Arlan and Christie invested in 30 new companies. Pretty soon, there would be 100 startups in the Backstage portfolio — a milestone. 

One new company, HabitAware makes a wearable to help people manage compulsive behaviors, like nail biting. Nedl is an app that lets users search live radio by keyword. Novoron is working on a treatment for multiple sclerosis. 

One investment check went to Sarah Chipps, founder of a company called JewelBots, which makes bracelets that teach girls how to code. For Sarah, it was like joining a movement.

SARAH: I'm on team Arlan. That's great. I'm so stoked about it .

AMY: The Backstage strategy was to invest small amounts into a lot of startups. In effect, Arlan was building a network of underrepresented founders. 

And for a lot of them, the network is what they were after, even more than the money.

SARAH: Like money’s always helpful, we’re a hardware company, that’s crazy expensive. But I think just being part of Arlan’s portfolio is really important for us because she's breaking all these barriers. I mean we’re getting in the bottom floor of Arlan right now. This is great. 

AMY: Plus, hundreds of new pitches from founders were coming in to Backstage each month. Arlan and Christie needed more people to go through all those companies, and look for winners. So, they were hiring.

Like so many of Arlan’s meetings, this job interview was taking place in a hotel lobby, in Oakland. 

BRITTANY: I’ll kinda start at the beginning. I actually began my career in investment banking.

AMY: Brittany Davis is 32 and nervous and also really impressive. She reaches into her purse and pulls out a powerpoint detailing how she’d organize her first six months on the job at Backstage. And there’s this acronym that keeps coming up, almost as an aside. 

BRITTANY: I went to HBS, um, and there was my introduction into the startup world—

ARLAN: Can I stop you for a second… Did you say Harvard business school? She says it so, i went to Harvard, no big deal. 

AMY: A few years ago, someone like Brittany might have set her sights on a big, established venture capital firm in Silicon Valley. But now, she and other recent graduates from top schools were finding Arlan and her network on Twitter. They believed in her mission. They wanted to work for her. 

ARLAN: Does brittany have a question?

AMY: By March, Brittany - who got the job - and Arlan were screening potential startups over the phone. 

BRITTANY: Hey, Hassan. So I know you’re working in real estate now. could you talk through kind of just that long term plan of moving into other industries? 

HASSAN: Yeah, yeah sure, right now we’re <FADE UNDER>> 

AMY: Backstage was becoming a magnet for founders who didn’t look like Mark Zuckerberg. They were flocking to Arlan on Twitter, lining up to pitch their ideas to her outside of conferences. 

And other venture capitalists were looking to Arlan too. When they wanted people of color or women to invest in, they came to Backstage — often, to Brittany — for leads. 

BRITTANY: We're showcasing that there’s a ton of underrepresented founders that are just not getting the support they need from other places, so they come here. And the other VCs now are coming to us … essentially we now filter startups to them.

AMY: Arlan had begun building this network of underrepresented startup founders years ago, back she was living with her mom in Texas. As Arlan’s profile grew, so had the network. Now, other venture capitalists were trying to catch up. 

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AMY: Statistically most startups fail. So Arlan, like any other VC, was looking for the needles in the haystack: the few companies that would take off and make what’s called a good ”exit.” An exit is when a startup gets acquired or goes public, or has some other event that lets its investors cash in. An exit is a defining moment for a venture capitalist. It’s proof you’re good at your job.

And in May - a company in Backstage’s portfolio was looking at a kind of exit - albeit a very untraditional one. 

The startup is called Kairos. It’s a tech company founded by Brian Brackeen. 

BRIAN: We do facial recognition for everything that you wouldn't expect. The idea is how can we help our customers to better understand humanity. Keeps us busy.

AMY: Kairos makes software that recognizes faces — to keep financial transactions more secure, or register how people are responding to something they watch.

And in most ways, Brian is the quintessential tech founder. He’s been coding since he was eight. He dropped out of college to go work in Silicon Valley, first at IBM and then Apple, before founding his own company.

But after that Brian charted a different path than what’s typical in Silicon Valley — in part, because of what he called the Oh. Oh! Phenomenon. 

BRIAN: Often times when I go to a meeting in SV, I’m the African American guy who owns the facial recognition company, I’ll walk in, sit in the lobby, and they say ‘OH. OH! You’re Brian!’ 

AMY: The Oh Oh happened in San Francisco. It happened in Palo Alto. Brian thought: Maybe I don’t need to be in these places anymore. So he moved Kairos to Miami - which struck him as a smaller, warmer, browner alternative to Silicon Valley. And Kairos did well there - Brian became a fixture in the local startup scene. He raised several million dollars in venture funding. And it was around that time that Arlan reached out to him. 

BRIAN: I think first on Twitter, then through email. And said hey Brian, I'm doing this crazy thing. I'm starting a venture fund.

AMY: Arlan asked Brian to let her invest in Kairos, because she was excited about his company. 

And here’s something that surprised me. A buzzy, up and coming startup like Kairos? Just because an investor, like Arlan, wants to invest, doesn’t mean the founder will necessarily let them.As for Brian - he liked what Backstage stood for. He wanted to help Arlan, even though he didn’t really need her money. 

BRIAN: We were so taken with you know, Arlan and her spirit, you know going from literally homeless to running a venture fund and the mission that she was trying to solve. So one, I said to her yes, but two, I said it's my job also to help you to win as well. This isn’t going to be an investment where you make the investment and we take the cash and off we go. I'm going to do everything possible to make sure that backstage is a success because I'm so driven by your mission. 

AMY: Then, about a year and a half ago, Brian hit a rough patch. He needed to take Kairos to the next level, and he wasn’t finding the big investors he needed. So he did something that wasn’t even possible a few years ago. Something that’s considered unconventional, even risky.

Kairos launched an ICO, which is an initial coin offering. There are lots of cryptocurrencies out there: Bitcoin, Ethereum. By selling Kairos tokens, the company was effectively selling tiny shares in Kairos, to people all over the world.

Brian was sidestepping the traditional venture capital system. He had found a way around it.

BRIAN: It took off like a wildfire, people were investing every 30 seconds or so, we couldn't keep up with the checks. We took in the first ten million dollars in the first 10 days. 

When we spoke to Brian, he had just heard from Arlan. 

BRIAN: Her very last text to me, sent yesterday at 11:28 a.m. Eastern was “Maaaaan!” 

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BRIAN: Her investment and is about to go way up and she's super excited about that.

AMY: Altogether - Brian says investors gave him 30 million dollars, and in return they got tokens, pieces of his company. Pretty soon he says Kairos investors will be able to sell their tokens. The question is, for how much. So - the Kairos ICO? It could be a flop. Maybe the coins start trading high, but then quickly lose value. This would still be an exit - but not a great one. But if the sale goes as well as Brian expects it to - Backstage could make millions. Arlan could pay back her investors. Arlan herself might get a big check too. But Kairos… was an anomaly. The vast majority of the companies in Backstage’s portfolio were really young - what’s called seed stage — at least a few years away from any kind of exit. And in the world of venture capital, Arlan was a small fish. So far, she’d raised about five million dollars - compared to the hundreds of millions of dollars that the bigger VC funds have. Arlan was playing the long game. She wanted Backstage to become a major powerbroker in Silicon Valley. And she was about to take a bold step in that direction.

Arlan goes rogue! That’s coming up, after the break.  

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AMY: Welcome back to StartUp.

Arlan did a lot of public speaking - often, she’d cover three or four cities in a single week, hopping from conference to conference. In May - she was invited to a big one. The United States of Women Summit in LA. Michelle Obama was there. Jane Fonda. Kamala Harris. 

Just a few minutes into her talk, Arlan paused, turned to her staff, and went off script.

ARLAN: Is it okay if i go rogue a little bit? 

CHRISTIE: Go rogue!

ARLAN: I’m about to make an announcement that we hadn’t planned on making. We are launching a $36 million dollar venture fund that will invest a million dollars each in black women. 

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AMY: Arlan was calling this the It’s About Damn Time Fund. She was taking direct aim at one of Silicon Valley’s most damning statistics - that black women get less than point two percent of venture capital. The next day, there were Arlan Hamilton headlines in Forbes, Fast Company, Ebony, TechCrunch, Recode. But there was one critical detail that a lot of the media was unclear on. Arlan didn’t have $36 million dollars in the bank - not yet. 

ARLAN: The truth of the matter is that we have been working on this for a while and we have like an entire army behind the scenes that has been working on it.

AMY: This is so much bigger than previous funds. I’m just wondering why are you confident you can raise so much more money for this one?

ARLAN: Why do I feel confident? Just because the appetite is there. 

AMY: Arlan did not want to be specific, but said that she had verbal commitments from investors and was confident that the money was on its way. Still - when we talked to other venture capitalists, they said making an announcement like this - before you actually have money in the bank - is unusual. 

JOANNE: Most Venture firms. Usually don't do that until they have some certainty that that's going to happen. 

AMY: This is Joanne Chen. She’s a partner at a mid-size venture capital firm that invested early in netflix, among other companies. 

JOANNE: Because what if you don't get there (laughs) and you how to be like, oh I never mind. I didn't raise this money! Like you may be like, oh I have $100 million dollar target. I only raised 80. Like, nobody wants that story. Everybody wants to be like, oh my target was 100 I raised 125. 

AMY: The conservative thing would have been to wait on announcing the 36 million dollar fund until Arlan had closed on at least some of that 36 million dollars. But I got the sense Arlan didn’t want to be conservative. Arlan believed Backstage was going to make a lot of money... and so was she.  

Whenever I’d asked her about her future, Arlan was clear on one thing: She was going to be a very wealthy woman. Maybe not Oprah rich, but rich. She would joke about what an eccentric mogul she was going to be - like how she’d lounge around her penthouse in a purple Velour tracksuit, maybe with a bird on her shoulder, or something. 

Arlan knew she was going to be rich. And she knew exactly how she was going to get there. 

AMY: When I ask you how much money you want to make by the time you retire, you retire, you’ve said $10 mil would make you happy.

ARLAN: Did I say 10? I said 50 would be good. I didn’t say 10. I’ve never said 10.

AMY: 50 would be good. Ok. Describe the scenario where you end up with 50 mil. How does that happen. 

ARLAN: I can do that. I can do that for you. Ok so, that’s exciting. Okay, so I had to create the first three funds in order to... 

AMY: For Arlan to get rich, a few things had to happen. One, her investments had do well. She’d need a bunch of companies to have Big Exits - big as in hundreds of millions of dollars. Then, she could use those exits as evidence that she knew how to pick good companies. This would help convince other investors to give her more money for her fund. That would let her invest in more companies- leading to - ideally more big exits. 

So that 36 million fund she had just announced? That was only the beginning. 

ARLAN: In order to have a 100 million fund that I want in 2020, you have to have this 36 mil fund. So you see how one begots the other - however you say that tense of the word. 

AMY: This is, very often, how Venture Capital works. VCs start small, and then build on their success to get investments for bigger and bigger funds. That’s how Venture Capitalists get rich.

But in Arlan’s case, there was a significant obstacle to that dream of personal wealth. The issue of GP carry we’ve talked about this before. 

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AMY: Because Arlan was building her venture firm from scratch, she had made an unusual decision. In order to pay the bills in these early stages, she sold off a percentage of her own future profits - remember? Her carry. VC firms typically get 20 percent of future profits. As it stands now, Arlan herself would get only about five.And Arlan had sold her GP carry for ALL Backstage investments. So, if any company Backstage Capital invested in did well, either now or in the future, she’d make less money.

Unless… she got her carry back. 

AMY: Arlan planned to buy back her equity from the people who had bought it from her, which would be expensive. 

AMY: How important is buying carry back to you?

ARLAN: Very important. Very very very important. Impact and legacy drive me so I’m not going to curl up into a ball and cry myself to sleep if I can’t make it happen. The thing we talked about before about dignity? I think it would be lost if i did not have more equity in this company by 2020. 

AMY: Explain that, why? 

ARLAN: Because I built it. Because I envisioned it. And I shouldn’t be making less than someone else ... comparatively.

AMY: Arlan knows she needs a lot of things to happen for her to make 50 million dollars. She’ll need to raise that 36 million dollar fund, or close to it. She has to pick a LOT of companies that get big exits. And she’ll need Studio - that company she’s just formed - to launch its own hugely successful companies, also. Getting rich - this wasn’t just about the penthouse and the purple velour tracksuits. Making a fortune as a VC would be a vindication of everything Arlan stood for. It would show the world - especially the venture capital world - that there is a ton of money to be made when you don’t just invest in the white guys. 

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AMY: There are also other metrics of success - including one Arlan had always excelled at: Bringing a lot of people together, around a big idea, with herself at the helm. Most of the year, this movement was virtual - on twitter, or in conference calls. But once a year - the whole Backstage network came together… in Austin Texas, for SXSW - the interactive part of the festival. Arlan had invited every company in the portfolio to come here - she’d covered their tickets, which cost about 800 dollars, and offered a travel stipend. Lots of big tech companies are at SXSW. I got the sense Arlan felt her companies deserved a place there too - making deals. Chatting up potential investors.

ARLAN: Hi everybody! Hey!

AMY: One day was set aside for something special: a gathering of Backstage Capital portfolio companies -

ARLAN: YES! YES! 

AMY: In the audience were Arlan’s mom - recovered from her surgery; Holly Levow - Arlan’s biggest investor. The entire Backstage staff, wearing special purple SXSW t-shirts. And the Backstage founders, all women, LGBT founders, people of color. ALL under one roof.

ARLAN: If you were invested in 2018. Can you raise your hand too? Look at that. Look at that. 

AMY: Having all of these people in one room? This was physical evidence of what Arlan had been able to accomplish in her three years as a venture capitalist. 

ARLAN: So Brian Brackeen is in the building … and Brian was my very first check. The very first check I ever wrote.

AMY: During breaks, people milled around munching on popcorn and churros. I tried to keep up with Arlan as she pushed through the crowd.

ARLAN: Hey! How you doing?! 

AMY: As we walked, a founder named Ahmed Zedan came up to her. 

AHMED: I didn't want to say this when I was on the stage because I didn't want sound like a sucking up to you. But like dude, we're building Wakanda. Like that's what we’re doing. You know what I mean like it's awesome. This is the future and the reason why you get it and other people don't is cause we're part of the future. They don't get it. 

AMY: Every couple of seconds, someone new would stop her - tell her about some company they were launching. And then… Arlan and Christie wanted to get everyone together, for a group photo. 

AMY: Christie asked me to take the picture. I had to climb to the back of the room to get everyone into the shot. Looking at everyone through the frame - I wondered what was going to happen to all of these companies? Statistically, most of them were going to fail. But it was entirely possible that a few of them might go on to do something exceptional: become a household name we haven’t even heard of yet. There’s a word used to describe the people in this picture: Under Represented, which is accurate - if you’re just talking about numbers. 

But Arlan used a slightly different word: Underestimated, which is to say that they are undervalued. Invest in them and you could make a lot of money. Arlan was making that bet on each of them. 

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AMY: One night, back when Arlan was sleeping on the floor of the San Francisco airport, she wrote a blog post. It went viral. This was her manifesto. It was the first time a lot of people in silicon valley ever heard of Arlan Hamilton. For so many of her startup founders, this became their manifesto too. 

HEADLINERS: Dear white venture capitalists, do not pity black founders …I’m gonna redo that! Cause that was like an exclamation mark, i need to go back...

Do not pity black founders.

If you’re an investor of the caucasian persuasion, I cordially invite you to pull up a chair, turn off your Yeezy mixtape and listen to me as if I were not an anomaly sent from another planet. Diversity talk can get really uncomfortable and awkward. While I genuinely believe most people in tech have good intentions, there are quite a few who seem to be the loudest who don’t know how to talk about it all. The most dangerous thing that's happening is we're talking about black and hispanic founders and African American and hispanic markets like their aliens that need help. Not every black person came from a broken home, grew up poor, can double dutch or dance. For example, I'm not qualified to show you how to nay nay, for that I feel shame, but I am my own person. Don’t box me in. Don’t box me in. Don’t box me in.

AMY: Once, I asked Arlan how she was able to weather so much rejection - sooo many nos - back when she was just starting out. Arlan said when she got a no, she’d think: Well, that person doesn’t see the future yet. They’ll catch up. Just wait. But Arlan isn’t just waiting for white silicon valley investors to change the way they think about women and founders of color. She’s crashing their party. Bringing her founders to SXSW. Saying we belong here. If other venture capitalists don’t see the future yet? Arlan is showing it to them.

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AMY: Hey listeners, it’s not too late to grab tickets for GimletFest on June 16th and 17th. It’ll be two days of the best of Gimlet in Brooklyn. Arlan and I are going to sit down to talk about this project - including some of its rockier moments - and we’ll be joined by Shereen Marisol Meraji from NPR’s Code Switch. Also, hosts from Heavyweight, The Nod, The Habitat and other podcasts take the stage to bring you live versions of their shows. Find out more at Gimlet Fest.com. 

This episode was produced by Bruce Wallace, Simone Polanen, Luke Malone and Angelina Mosher. Our senior producer is Lauren Silverman. Editing by Heather Rodgers, Emanuele Berry, Blythe Terrell, Lisa Chow… and especially Sara Sarasohn. 

I’m Amy Standen. Our theme song is by Mark Phillips, Bobby Lord remixed the version you heard at the top of the show. Build Buildings wrote and performed our special ad music. For full music credits, visit our website, GimletMedia.com/startup. Peter Leonard mixed the episode. Special thanks to Renata George at Zenmen Venture Fund and Sarah Downey at Accomplice. 

Find out more about the show at Gimlet Media.com. You can follow us on Twitter @podcaststartup. And if you enjoyed this series, please tell your friends - that’s the best way for a show like ours to find new listeners. 

StartUp will be back in a few weeks. We’re going to meet founders in a business so tough, it tests their careers, their marriages and their morality. 

CHARLIE: Your vices will show up. So whether it's pornography whether it's uh sexual immorality, so you go out and bang some other chick on the side. Anger issues. Whether it’s over indulgence, eat too much, spend too much, cause you’re trying to compensate for the emotional upheaval that you’re having internally and externally. 

AMY: The unique challenges of starting up a brand-new church, in a neighborhood that isn’t looking for faith. That’s our new series coming in a few weeks. Keep an eye out for it. 

And thanks for listening.