Mitchell Kapor is a pioneer of the personal computing revolution. He is the founder of Lotus Development Corporation and the designer of Lotus 1-2-3, the “killer application” which made the personal computer ubiquitous in the business world in the 1980s. In 1982, Mitch took lotus public, and in 1990 he co-founded the Electronic Frontier Foundation (The EFF is a non-profit civil liberties organization working in the public interest to protect privacy, free expression, and access to public resources and information online) Mr. Kapor was first chair of the Mozilla Foundation, maker of the open source web browser Firefox, and continues to serve on its board. He is the founding investor and first chair of Linden Research, the creator of the virtual world Second Life. Currently. he is a trustee of the Mitchell Kapor Foundation, a private foundation works to ensure fairness and equity, particularly for low-income communities of colour.
Mitch and his wife Freada Kapor Klein launched Kapor Capital to prove that investing in gap-closing start-ups—companies whose services or products close opportunity gaps for both communities of colour and low-income communities—is good business. Over the past decade, they’ve broadened the definition of success to include profits and accountability for the impacts a business has on employees, communities, and the planet, helping to launch close to two hundred companies engaged in achieving social and economic justice while showing remarkable growth, with many valued in the hundreds of millions or billions of dollars. Like every VC firm, Kapor Capital has experienced high-profile blow-ups and total losses. But its investing principles have created a stunning new ecosystem of Black and Latinx entrepreneurs, CEOs, and investors, all devising innovative, effective solutions to address the most pernicious problems afflicting many of America’s poorest communities. Mitch and Freada detail the stories of some of these remarkable businesses in their new book, Closing the Equity Gap.
In this interview, I speak to Mitch Kapor about the inequality created by venture capital and how Kapor Capital has proven that economic and social impact can occur together – benefiting the investor, and society.
Q: How important is venture capital to our economy?
[Mitch Kapor]: Over the past decade it’s just been abundantly clear that the major drivers of economic growth and change have come in large parts from venture capital backed companies. The internet, Google, Facebook, all the good, all the bad, all the change, all the jobs, all the differences in how we live our lives… venture capital has been behind the definitional companies of this era.
Information technology now infuses every single sector of society – you can’t run a pizza shop without having online ordering – behind that pizza order will be a company, not known to consumers that provide all the infrastructure by which we do all our daily transactions. They are largely venture-capital backed as well.
[Vikas: Why has this created an uneven wealth distribution?]
[Mitch Kapor]: Most venture capital funds are organised around limited partners. The financial flows into the funds tend to be from foundations, endowments, and pension funds – not from the average citizen. When wealth is created therefore, it tends to make the wealthy, wealthier – and so income inequality increases. Similarly, while the workforces of technology companies have grown to be very large – the founders and workers in those tech companies have gained wealth – but those founders and employees are not a fair reflection on the citizenry of the countries in which they operate. They are a rarefied group.
Q: Are venture backed businesses a meritocracy?
[Mitch Kapor]: Most of the venture backed businesses, and venture capital firms, are a mirror-tocracy not a meritocracy! Senior executives are disproportionately drawn from a narrow stratum of society – in the US, this means Ivy-League Schools such as Stanford. They tend to be overwhelmingly white (and increasingly now Asian) but certainly overwhelmingly male. There are entire segments of the population who are dramatically under-represented at all levels in these companies – women and people of colour to name just two groups.
There is also a knock-on effect on society – look at San Francisco, and what technology sector(s) have done to housing. The middle classes are being priced out of the cities where they work.
Q: Has our definition of success caused this to happen?
[Mitch Kapor]: We have lived through an era where success has been defined only in financial terms- leaving out any consideration of the impact of business on communities or the world. Just because accounting standards don’t require you to measure certain things, doesn’t mean those things aren’t real – rather – it means our systems continue to permit companies to not consider what their impacts are.
Q: How did you become passionate about creating change?
[Mitch Kapor]: I grew-up as a pre-internet era kid. I was smart, not terribly well socialised, what you may call an outsider at school. In my 30’s (which was the late 1980s) I unexpectedly built Lotus, a very high-growth tech start-up of its’ era. I wanted to create a workplace that was inclusive and welcoming for misfits like me – or people who felt like outsiders. And that came from my personal experiences. My wife, Freada Kapor-Klein was instrumental in that journey.
It was through this journey, and my own experience, that I understood that there were large segments of the population with tremendous talent, who were being overlooked and underestimated because they didn’t have the right ‘pedigree.’ – These individuals had fabulous business ideas and were genuinely going to change the world as they were solving real problems (often problems which they had faced themselves!). Freada and I decided to conduct an experiment to see if we could invest in founders explicitly creating companies that close these gaps of access and opportunity for low-income communities, and communities of colour. That was the genesis of Kapor Capital (c.2010) and it worked out far better than my initial scepticism would ever have predicted. That experience forced me to change my convictions on investment!
Q: What is the investment thesis for Kapor Capital?
[Mitch Kapor]: We’re interested in businesses that can simultaneously grow-large and be profitable by having a core business model that closes gaps. We’re sector agnostic and apply our investment discipline with the flexibility to realise the differences inherent in closing the gaps across fin-tech, health, ed-tech, and different areas. If we look at ed-tech as one example – we ask whether children and students are going to benefit if that business succeeds – is it going to help under-resourced schools – or is it some sort of service for affluent parents who want to buy further advantages for their kids in the race to get into a top school by hiring $300 an hour tutors! Who benefits? Does that business close the gap between the top and bottom of the ladder? Does it widen it? This approach obviously then combines with the more traditional evaluation of total market size, team, competitive positioning and so-forth. We also love working with founders who are very mission oriented – people who have been told to never say that aloud because they won’t get funded, you know? We’re the ones who say, ‘yes! We like that!’ we believe that mission is the core of building a great business with huge competitive advantage.
Q: Do you think the life-experiences of the entrepreneurs you work with contributes to their success?
[Mitch Kapor]: My wife Freada coined a phrase, distance travelled. We’re very interested in where somebody started in life, and what hurdles and barriers they have already overcome in their journey – and how that grit has got them to where they are now. That’s an indicator of resilience, persistence, and many other character traits that are significant in terms of entrepreneurial success. It doesn’t matter if you went to Harvard or not – you might have gone to Harvard because you won the genetic lottery, and were born in the right zip code, with the right parents, with the right wealth. We’re interested in the distance travelled in your life. For a lot of our founders – their lived experience is inspirational. Let me tell you about Phaedra Ellis-Lamkins. In the US, some kids get access to a free (or reduced) school meal – but those kid are often made to stand in their own special line and they’re made fun of by other kids – it’s traumatic. Phaedra’s mission in life is to answer the question of how you treat low-income people with dignity and respect as they conduct their lives. Her business helps people pay bills to government – water bills, and bills which qualify for rebates (such as COVID support). She does that in a way that is simple, straight-forward, and gives people control – allowing them to be full participants. Guess what… people want to pay their bills! It’s a totally different approach to debt collection and has been wildly successful. This entire business idea came out of her own lived experience and commitment.
[Vikas: How can we persuade more investors to join this movement?]
[Mitch Kapor]: We don’t try to persuade people too hard – they persuade themselves by looking at the evidence. In 2011, we said we would be 100% impact focussed – every company will be closing a gap. We published our results in 2019, showing that for over 150 companies, our results are top quartile. That’s the gold standard for limited partners when deciding where to put their money – we’ve shown these returns are possible, systematically, and consistently for over a decade. We are forcing investors to rethink what a good entrepreneur looks like – we’re showing non-traditional entrepreneurs, people of colour, female entrepreneurs and more – these entrepreneurs are killing it.
Q: Do investors ever feel a moral quandary about making a profit from closing the gaps?
[Mitch Kapor]: There are certainly some people who feel ambivalent about making a profit – we probably don’t want them to invest, we’re dyed-in-the-wool capitalists! The conversation I’d like to have really, is why they think like that? Have they previously experienced investment models which are exploitative?
The reality is this- you can create value economically and socially in parallel – there isn’t a contradiction. Some investors still find impact investing to be concessionary and they’ve internalised this – we can prove, with over 150 companies we’ve invested in – that you can simultaneously create value for the investor, and society.
Q: What do you hope your legacy will be?
[Mitch Kapor]: I hope that the totality of what I’ve done, or that which Freada and I have done together, really gives people a sense of hope and possibility, in a practical way, that business can be a constructive force in the world and genuinely help make the world a better place for everyone.
If what we’ve done is inspirational and offers some practical insights, that’s a wonderful legacy.