02:15 - Source: CNN
The NewMe Accelerator

Story highlights

Study: About 1% of tech entrepreneurs who got venture capital in 2010 were black

Some people wonder whether "pattern matching" is hindering racial diversity

Investors use pattern matching to study the traits that helped past ventures succeed

Soledad O’Brien is chronicling the NewMe Accelerator journey in “Black in America: The New Promised Land: Silicon Valley,” airing at 8 p.m. ET and 11 p.m. ET November 19 on CNN. Keep the conversation going on CNN’s new In America blog.

San Francisco CNN —  

Wayne Sutton has been asking venture-capital investors and Silicon Valley executives a question that’s not often broached here in the epicenter of the technology industry:

“Why aren’t there more black people in tech?”

The vast majority of top executives at the leading Silicon Valley tech firms are white men. Women and Asians have made some inroads, but African-American and Latino tech leaders remain a rarity. About 1% of entrepreneurs who received venture capital in the first half of last year are black, according to a study by research firm CB Insights.

This lack of diversity in Silicon Valley made headlines last month when influential tech blogger Michael Arrington, in an interview for CNN’s upcoming documentary “Black in America: The New Promised Land: Silicon Valley,” said, “I don’t know a single black entrepreneur.” Arrington later recanted the statement, saying he was caught off guard by the question, but the sensitive issue sparked a public dispute between the newly minted venture capitalist and CNN’s Soledad O’Brien.

NewMe co-founder Wayne Sutton, center, works on his laptop at a coffee shop with fellow entrepeneurs.
Mark Hill/CNN
NewMe co-founder Wayne Sutton, center, works on his laptop at a coffee shop with fellow entrepeneurs.

It’s an issue that Sutton, who co-founded the NewMe Accelerator for under-represented minorities in the tech industry and is also building a software company, has been grappling with for months.

NewMe is an incubator program formed to help minorities launch Internet ventures. For two months last summer, Sutton and seven other black entrepreneurs worked together in a rented house in Mountain View, California, where they got advice from successful executives and pitched their startup ideas to investors.

The venture capitalists, including business-software designer Mitch Kapor, told them the struggles of blacks in the tech industry might be attributed to a concept called “pattern matching,” which is prevalent in venture-capital circles and yet alien to the rest of the business world.

“Silicon Valley really likes to think of itself as a meritocracy,” Kapor said. In fact, “the general state of Silicon Valley is completely backwards,” he said.

A true meritocracy?

Pattern matching comes from a computer-science exercise in which a system looks for common attributes within reams of data. Its companion is pattern recognition, a term that some investors use interchangeably but which describes a less precise method.

In the business of investing, pattern matching defines a technique for figuring out which human traits, corporate makeup and financial projections are the foundations for the next Facebook or other big Internet success. The criteria can include a founder’s track record, personality type and alma mater, which market the company is targeting and how its peers are performing, and how quickly the business is expected to grow and begin collecting revenue.

Commonly, these successful founders are white computer-science graduates of Stanford University or a similar elite school.

Many of the top venture-capital firms use some form of pattern matching, but no two use precisely the same data sets. The firms typically don’t disclose what exactly goes into their formulas because they see their patterns as trade secrets.

But Sutton’s NewMe co-founder, Angela Benton, wonders whether pattern matching, which critics say favors the status quo over change, is a veiled form of racism.

“I was offended by it,” said Benton, who is also starting a company, in an interview with CNN. “I’m black. I’m a woman. I have kids. I might as well go home.”

People familiar with the pattern-matching process say race is not explicitly a factor, nor is gender.

“Most VCs I know pride themselves on the idea that to be a good investor, you have to learn those skills,” said Cindy Padnos, who founded a venture capital firm called Illuminate Ventures. Her company says in its creed, “We don’t rely on ‘pattern recognition.’”