Venture capital firm Andreessen Horowitz is reportedly investing $350 million in FlowFLOW2 -3.4%, a new commercial real estate company that is disgracing WeWork co-founder Adam Neumann. Flow’s valuation is over $1 billion. Andreessen Horowitz, also known as a16z, has never invested so much in a financing round for a company, according to the New York TimesNYT -0.3%.
WeWork’s initial valuation in 2017 was $20 million. This peaked at $47 billion for a quick, colossal plunge. Today it is valued at about $4 billion. Many of the co-working office space company’s problems have been attributed to Neumann’s poor decisions and reckless leadership style. He was expelled from WeWork in 2019.
How could someone so publicly fired walk away with $200 million in cash and $245 million in company shares for themselves and then make such a lucrative deal from an elite Silicon Valley venture capital firm within three years? It could be Neumann’s good ideas. But it is also Neumann’s prerogative. A privilege that is not fairly distributed.
Research consistently shows that black entrepreneurs, especially black women, are systematically disadvantaged by underinvestment in their startups. For example, a 2020 McKinsey report notes that white entrepreneurs start businesses with about three times more capital than black business owners: $107,000 versus $35,000. Similar inequalities are also stifling other colored entrepreneurs and white women. Even if their ideas are good (and perhaps better substantively and financially more profitable than Neumann’s), several innovators are often considered too risky or insufficiently proven. Ironically, Neumann’s failure has been proven.
In an announcement on her website yesterday, a16z co-founder Marc Andreessen wrote: “We are thrilled to see repeat founders build on past successes by growing from lessons learned. For Adam, the successes and lessons are many and we are excited to share these. journey with him and his colleagues to build the future of life.” In any case, three things are noteworthy.
First, too few entrepreneurs and women of color get the chance to become repeat founders, even if their first startups are successful. In other words, starting their first business is challenging due to investment inequality. Those inequalities snowball as guys like Neumann get rounds and rounds of funding for multiple business ideas.
Characterizing Neumann’s previous leadership as “success” is another noteworthy aspect of the a16z co-founder’s statement. Neumann has not made WeWork public. Under his leadership, valuation plummeted significantly. He and his wife allegedly made lavish expenses at WeWork’s expense. Employees found the workplace culture toxic. All of this is extremely well known, as Neumann and the company have been subjects of the Apple TV+ series WeCrashed, multiple books, business school case studies, expert analysis, and perhaps way too many comments.
Women and entrepreneurs of color cannot fail in such grand ways and then convince investors to trust them millions more.
The unequal distribution of second chances is not limited to failed startups. It occurs in various sectors and has a disproportionately negative effect on the careers of various professionals.
Let’s take higher education, for example, an industry where several head football and men’s basketball coaches at major athletic conferences earn multimillion-dollar salaries. Black coaches are severely underrepresented. But even if they are given head coaching opportunities, they are given shorter time frames than their white counterparts to turn around underperforming teams. In other words, black coaches are fired faster. Also, finding another job as head coach at the highest level rarely happens for them.
As entrepreneurs go, WeWork’s failed head coach has been given a financially lucrative second chance that certainly wouldn’t have been bestowed on a Latina who had achieved similar results.
Andreessen’s claim that the “lessons are enough” for Neumann is also fascinating. It is very likely that most diverse entrepreneurs who failed or were driven out of their businesses because of poor leadership learned a lot. This may also be the case for Neumann. The difference, however, is that hopefully he will learn from past mistakes when he launches Flow. Underrepresented business leaders who fail usually don’t get such opportunities to show they’ve learned or to apply lessons from past failures to new, well-funded startups.
Ultimately, Andreessen Horowitz gets to decide in whom and in what his capital is invested. But $350 million could certainly make a huge difference in the lives and businesses of entrepreneurs of color and women who have not failed as Neumann has.
Venture capital firms should really stop contradicting themselves by claiming that several startups are too risky, yet invest hugely in entrepreneurs like Neumann who have in fact failed miserably.