BRIAN KENNY: “I want my money to do things that have never been done before.” That proclamation made by Georges F. Doriot, also known as the father of venture capital, captured the enterprising spirit of the early days of venture capital. In 1946, Doriot, a tenured professor at Harvard Business School, founded the first venture capital firm, the American Research and Development Corporation. And for the next 26 years, he and his small band of investors helped grow some 150 startups, including the first unicorn, Digital Equipment Corporation. Today, venture capital is a crucial node in the startup ecosystem. Through July of 2021, VC firms invested 268 billion in startups around the world. VC backed firms represent 43% of public US companies founded since 1980, including companies like Google, Intel, and FedEx. But at the end of the day, it’s the people in these companies who are doing the hard work of creating the products and providing the services that keep the economy running. If you’re trying to decide where you can make the biggest impact, the answer may not be so obvious. Today on Cold Call, we’ll be featuring the case entitled, Kevin D. Johnson: To be a Venture Capitalist or an Operator, featuring case author Jo Tango. I’m your host, Brian Kenny and you’re listening to Cold Call on the HBR Presents network. Jo Tango is a senior lecturer at Harvard Business School who also teaches the Venture Capital and Private Equity course and he is the founder of Kepha Partners, an early stage VC firm, and we are thrilled today to have the protagonist in today’s case, the namesake in fact, Kevin Johnson is with us. He is the founder and president of Johnson Media, an Atlanta-based marketing and communications firm. And he’s the author of The Entrepreneur Mind: 100 Essential Beliefs, Characteristics and Habits of Elite Entrepreneurs. That’s a big promise that that book makes but I guess it’s delivering on it because you’ve sold a lot of copies. Kevin, thanks for being with us and Jo, great to have you here too.
JO TANGO: Thanks for having us.
KEVIN D. JOHNSON: Thanks for having me.
BRIAN KENNY: I think we’ll have some fun with this one today because it’s always great to have the protagonist in on the conversation so we can hear directly from you, Kevin, about kind of the thought process that you were going through as you made this important decision at this inflection point in your life. And we’ll get more into that in a minute. And Jo, I think this raises some uber issues, about VC versus operating companies and how people can think about that, and gives us a glimpse into kind of the VC industry today as it exists. And some of the gaps that we know exist within that industry too. Let’s just dive in. Jo, I’m going to ask you to start by telling us what the central theme of the case is and what you say to start the class off. What’s your cold call?
JO TANGO: The cold call, Brian, is simply: what career option should Kevin choose? The beauty of the case method, as you know, is we put the students in the protagonist’s shoes. And I think one of the most relevant questions they need to answer while they’re at HBS is what’s their next job? And Kevin has a lot of choices but as we know, life isn’t always pretty or linear. And in his situation, his decisions are amongst apples and oranges and each option has a different timeline. It’s a complicated decision he has to make that every student has to make at HBS.
BRIAN KENNY: And I think our listeners should know that you are a graduate of the school, so you too have faced a cold call in your background so you know a thing or two about what it’s like to be on the receiving end of one of those.
JO TANGO: Yes. Fear and trembling.
BRIAN KENNY: Kevin, let me turn to you for a second. I’d like to hear more about your background. I know you came to be at HBS, you were a student at MIT and you did the crossover course thing there, which is great. But just tell us a little bit about your background and why you decided to get an MBA.
KEVIN D. JOHNSON: Sure. First of all, thanks for allowing me to be an interloper from across the river. I appreciate that. I was born in Youngstown, Ohio and eventually attended high school in Boxford, Massachusetts, about 40 miles north of Cambridge, Massachusetts. And while in high school became really interested in computer science and this fascinating thing called the internet. I eventually went to Morehouse College here in Atlanta, Georgia to pursue a computer science degree, courtesy of NASA. And that’s where I began to discover entrepreneurship. In fact, during my college days, I used to return to Boston during the summers to intern at IBM. I spent a lot of time actually on MIT’s campus because my friend was a student there. And so we used the labs at MIT to build websites and come up with outrageous ideas and I eventually started a company while at Morehouse College. Fast forward, I still have that company, Johnson Media Inc, and it continues to do well. It’s actually discussed in the case. We evolved from a pure technology consulting company to a professional services company that specializes in marketing and in communications. The funny thing about that too, is that when I started the company, people would always ask me, “What in the world does technology have to do with marketing?” I never get that question nowadays and we still rely on technology to deliver our services and be competitive. That’s just a little bit about my background.
BRIAN KENNY: We hear often to our dismay at Harvard Business School that some founders who have had success, some entrepreneurs say, “You don’t need an MBA. You’re going to learn everything that you need to learn on the job and in the experience.” But you took a different path. And I’m just curious about that, why you decided after already having a successful venture in your pocket, in your back pocket, you decided to go back and get an MBA. Why was that?
KEVIN D. JOHNSON: Great question. I struggled with that early on and I put the pursuit of my MBA to the side for many years, focusing on building my company. And this particular experience turned out to be really tremendously valuable. I decided that the time was right in 2019 to get my MBA for three reasons. First to learn strategies and techniques to scale my company. I really wanted to grow. Second, to take advantage of the wonderful entrepreneurial ecosystems of not only MIT but of course also Harvard Business School. And third, to obtain the requisite degree to teach at the college level. I really enjoy teaching and have been fortunate to teach at MIT Sloan in the Martin Trust Center for MIT Entrepreneurship.
BRIAN KENNY: Jo, the case does a good job of going back and looking at some of the history here that may have led to some of the systemic issues that we know exist. And so I’m wondering if you can talk a little bit about some of the economic peril that Black Americans face today and how it impacts their attitudes about the financial system. And obviously Kevin, if you want to chime in on that too, that’s fine.
JO TANGO: I think the data sadly is very sad. There’s a clear wealth gap based on race in America. The Census Bureau report that the average Black household owned about $10,000 of assets, the average white household, over A $170,000 of assets. And the data are very clear on this and there are multiple root causes to the wealth gap, starting with opportunity gap. For example, we know that education is a very important way for people to be upwardly mobile. Well, the GI Bill excluded Black soldiers. Those veterans who fought abroad and came home were not given government support to obtain college degrees. We also know there’s very variable funding of public school districts. And in fact, another root cause is that there was clear quote unquote, redlining, where predominantly Black neighborhoods were given higher mortgage rates and as a result, property values were lower and as a result, there was less tax dollars available to fund public schools. There’s no one root cause but multiple root causes but what’s very clear in the data is the wealth gap.
BRIAN KENNY: And those multiple causes are what make it a systemic issue. Kevin, you were going to say something there.
KEVIN D. JOHNSON: There’s so much to discuss here that I fear that my answer will be wildly inadequate. The economic peril of Black Americans starts with the beginnings of this nation and what a colleague of mine calls “unbridled capitalism.” We often talk about and see the physical atrocities of slavery in America but we seldom talk about the economic atrocities in real specific terms and the lingering effects. I’ll share this estimation that I think really puts the matter in perspective. To erase the wealth gap between whites and Blacks, economists estimate that it would take between 10 and 14 trillion dollars. Yes, trillion with a T. That’s a lot of money. And with regard to how this reality, tragic reality, impacts Black Americans’ attitudes about the financial system, I think we’re amazingly optimistic and dare I say, forgiving people. In the same way that we believe in the promise of democracy, many of us believe in the promise of capitalism when it’s conducted properly, when markets are fair, and when the invisible hand is not the iniquitous hand and so on.
BRIAN KENNY: That’s super helpful. And I think this is a nice way to sort of segue into some of the specifics in the case about the decisions that you were making, when you finished up at MIT. I want to pull the lens back a little bit on entrepreneurship and talk about what the landscape there looks like for minority-owned businesses. Jo, you mentioned a little bit just now in terms of some of the funding but is there funding available specific to Black-owned businesses? And what does that landscape look like? And I’m going to actually start with Kevin on this one because you’re closer to this.
KEVIN D. JOHNSON: Overall I think the landscape is indeed improving. Funding is increasing. The push to invest and fund Black businesses in general lately is translating to greater success. I’ve witnessed it close as KINETIC progresses but the success is incremental when it should be and needs to be monumental, catalyzed by those who historically benefited from misbegotten privilege, wealth, and power. American history suggests that the latest push to support Black-owned businesses will be short lived, perhaps distinguished by what I like to say, the political winds or the change or passing of time. And in fact, my colleagues and I have already begun talking about that this abatement of energy, the zeitgeist is gone, so to speak. And ultimately, the demographics of our country are changing and Blacks along with other groups will become the new majority around 2040s. But it’s coming and it only makes sense to invest in those who increasingly generate economic growth.
BRIAN KENNY: You started this journey a long time ago when you founded your firm and I’m wondering what your experience was like as a young Black man starting out and trying to build this enterprise? What opportunities were there for you? What challenges did you face as an entrepreneur?
KEVIN D. JOHNSON: One of the reasons I’m so passionate about this issue is because when I started my company, I didn’t know what I didn’t know. And now that I have the numbers and I have the other experiences of my colleagues, it makes a lot of sense why we struggled in a lot of ways that we did. I think one of the things that just irks me is every time I see an entrepreneurial idea that I had and pursued but could not get funding for, that nowadays has either gone public or has done very well. And so it makes you wonder, it makes me wonder how I can change the landscape to help people like me now who may have to go through those same barriers but just don’t know.
BRIAN KENNY: You kind of wrote the book on entrepreneurship. I mentioned it earlier on, it’s a book that still resonates today. Did you write that with any particular audience in mind? Or is that just for all entrepreneurs?
KEVIN D. JOHNSON: I wrote it for all entrepreneurs. And I’ll tell you a quick, interesting story. When I went to publishers, a lot of the publishers that reached the general market said, “Kevin, we think you should change the title of your book.” I said, “Oh, here it comes.” And they said, “Kevin, we think it should be, The Black Entrepreneur.” And that was very discouraging because I think the lessons are universal. And ironically, I think it’s become a bestseller and continues to do well because it resonates with everybody and those lessons are universal.
BRIAN KENNY: Jo, let me ask you a little bit, as you looked more broadly at the sort of VC community, how diverse is it? Is it just a small group of people that are making all these decisions? Or is it becoming more diverse? Or are VC firms thinking about this in an active way and taking action?
JO TANGO: I would say that all firms are thinking about this because the data show very clearly that having a more diverse partnership leads to better investment outcomes. Again, just citing some work from HBS professor Paul Gompers, both on terms of internal return rates and success rates, more diverse partnerships produce better outcomes. But the challenge is that this is an industry slow to change because of structural reasons. Most people don’t realize this but most venture firms are owned by one or two people, the founders of the firm. And the legal entity that owns the firm is an LLC and these LLC structures are unique, because there are no boards of directors. There is no independent group that tells the venture firm, “It’s ridiculous that less 1% of investors are Black.” My gosh. Two my students, Devon Sanford and Richard Petty wrote a great research paper showing that the percentage of women in venture capital and private equity has been going down over 30 years. And so it’s a structural issue. Everyone has good intentions but things just have not changed as quickly as I think people in the industry want. And I think it’s an opportunity for self reflection for investors.
BRIAN KENNY: And I would say it’s interesting because if you look at established companies, they have boards of directors, they have customers who are putting the heat on them to take a careful look at this but the investors are sort of behind the curtain. They’re not being held accountable in the same way. It sounds like that’s what you’re saying.
JO TANGO: Right. And this structure by the way, is used in all private capital firms. This is how hedge funds are structured. VC firms, PE firms, these are the LLCs that own the firms and so this is a struggle that private capital in general has to deal with because again, diversity increases returns but the rank and file of people making the decisions are very few. A friend of mine is Elliott Robinson, he’s a guest speaker in my class, from Bessemer Venture Partners. Guess how many Black partners there are at the top larger firms in the US? Four. That’s it.
BRIAN KENNY: Outrageous. Kevin, you’re clearly passionate about this, the case mentions that you thought about going into politics where I think a lot of people look at that as a way that they can have the biggest impact and make the most change, and you decided not to. I’m just curious as to why you changed course on that. And do you ever think maybe I should have run for office. Maybe you’re still going to, I don’t know.
KEVIN D. JOHNSON: What an appropriate question. In one of the two class sections and during the question and answer portion, a student asked me if I’ll consider running for an office in the future. And I wish I knew his motives in asking me that question. I do know that if I had a dollar every time I were asked that question, I would perhaps have enough money to launch a formidable congressional campaign. I’m joking. Inspired by Harvard alumnus Barack Obama, who I had the privilege to help raise money for in 2007 and eventually visited in the White House in 2015, I ran for a seat in the Georgia House – that was 2009. Did well, but got in the race late. And I think if I’d gotten in earlier, I would’ve won. But I’ve since learned that entering politics is not necessarily the best use of my talents. Part of the reason why making KINETIC a success is so important to me. And I love telling this brief story, my mentor Ambassador Andrew Young, who was Reverend Dr. Martin Luther King Jr’s righthand man, encouraged me to maximize my entrepreneurial opportunities and financially support causes and politicians who are much more cut out to do that. After my talk with Ambassador Young, I fully committed to affecting change through entrepreneurship and the financial resources that come with it.
BRIAN KENNY: And we talk a lot about the fact that business leaders are also in a position of affecting change. We can’t rely on politicians and government to make change. We all have to be part of that process. Let’s talk a little bit more specifically about the things that you were considering when you finished up your degree at MIT and now you’ve out a new career that you’re going to embark on and you had some options in front of you. Can you describe what those were and what some of your thought process was as you considered each of these options?
KEVIN D. JOHNSON: The framing of the case around four clear options and how I, as the protagonist, might weigh them is Jo’s genius. It’s all Jo and I love how he put it together. If you don’t mind, I would really enjoy hearing Jo discuss the options and how he brilliantly facilitated the students to evaluate each other.
JO TANGO: Oh, wow.
KEVIN D. JOHNSON: Well to me, the genius of this case is the fact that it’s highly relatable to the students in their current condition. Jo, isn’t asking them to put themselves in my shoes as much as he’s asking them how they plan to walk in their own shoes. In other words, many of the students are brooding over similar questions. Perhaps the most burdensome of which is, do I follow a path that is socially and or professionally impactful? As Jo might say, can you do well and do good at the same time? I’d love to punt that to Jo if he doesn’t mind.
JO TANGO: Kevin’s options are a couple fold. One is continue operating his company which started as a startup and is now a mature, growing, thriving business. Two, is to enter venture capital and door 2A is join an established larger venture firm, and door 2B is to join a smaller venture firm or in fact, help start one himself focused on Black entrepreneurs. And then the other option as well is to continue working on a project that he started at MIT that just went viral and exploded called KINETIC, which connects sources of capital with BIPOC entrepreneurs. What I ask the students to consider is, how do you make this decision? Because they’re apples and oranges. The timelines for each option are different. And if you think about sort of a two by two matrix on one axis, there’s sort of the risk element, how much risk to take when. And the other element is how much of a job should be about having social impact versus generating personal career wealth or satisfaction? The case discussion centers around breaking down a decision and offering frameworks to help them think about what should Kevin D. Johnson do? But also what should they do? Because they’re living this decision as well.
BRIAN KENNY: Kevin, let me ask you, from your perspective, what were some of the considerations that you had?
KEVIN D. JOHNSON: There were many and each option carries different results. What I think the ultimate lens that I used, especially at this point in my life was, what will the biggest impact be? This point in my life, you might say an inflection point, is similar to that of other MBA students. We’ve reached this point in life where we can pause and think critically about what we want to accomplish in life. How it changes many people’s lives for the better and how we can use business to make it happen. That was probably the most important lens through which I made a decision.
BRIAN KENNY: And tell us about your decision, where did you end up?
KEVIN D. JOHNSON: Yes. Spoiler alert! Sometimes I think we abuse this idea of a false choice. We asked in the case title, to be a venture capitalist or an operator, does one do well or do good? These questions are complicated and can often be answered with a, “yes, both are possible.” And so, the upside I think of venture capital and private equity is greater than the downside. And while they’re not a panacea for social ills, I think the positive again, outweighs the negative. And so I decided to enthusiastically pursue KINETIC with all my passion and while at the same time continuing to run Johnson Media. It doesn’t make too much sense to shut that down when it’s still profitable and can actually help propel the mission and vision of KINETIC.
BRIAN KENNY: And KINETIC gets all its marketing communications stuff done for free so that’s pretty good.
KEVIN D. JOHNSON: There you go. I like how you think.
BRIAN KENNY: Let me ask you this because I’m curious, in the entrepreneurship community, is it your experience that Black entrepreneurs are thinking consciously about the profile of the investors that they choose to take their ideas to? Are they looking for investors who they feel they can relate to and who think really understand the challenges that they’re going to face as Black entrepreneurs?
KEVIN D. JOHNSON: That’s a great question. One of the beauties of being in academia and having students to mentor is that I hear directly from them that yes, they are very conscious about who they want to invest in their businesses. One of my student’s companies comes to mind. She came to me and she said, “No, we’re going to be very deliberate about finding women to invest in us. And we are actually willing to turn down a term sheet if for whatever reason, a lead investor isn’t okay with us having that diversity on our cap table.” More and more, I think more so than the X generation, the Y generation and even younger are very deliberate about thinking about who’s going to invest in their companies and the relationships that will come about because of that.
BRIAN KENNY: Jo, let me ask you sort of from the inverse perspective, do you think that venture capital firms recognize that entrepreneurs are really starting to think consciously about this? And are they taking steps to figure out how they change their profile to meet that new expectation from entrepreneurs?
JO TANGO: I think the answer to that is yes. And I’m an optimist, that’s why I’ve been a VC for 23 years. But the question I ask is, what do the data say? And again, all female teams only received 2% of venture capital dollars last year. And that’s been flat for over 10 years. We did not see a surge in female hiring after the MeToo movement. If a venture firm wants to attract deal flow because the population is getting more diverse and diversity improves performance, they need to have a more diverse team. Einstein said, I think, “The definition of insanity is doing the same thing over and over again and expecting a different result.” I think every private capital firm should examine how it sources and vets candidates. And again, there’s data on that. At Harvard we had the first ever webinar last summer on unconscious bias. And I found it to be fascinating because the research shows that everyone has unconscious bias. And in fact, this professor, Professor Mahzarin Banaji, her research focuses on this. And she says that a lot of the things firms do to screen people and test fit, introduces bias. Now when she recruits graduate students, she won’t go out to dinner with them because that she feels that encourages her biases to come out. I think it’s incumbent on every person to take a look given what the data are saying to say, “What can I do differently to fight whatever unconscious bias I may have?”
BRIAN KENNY: This has been a great conversation. I’ve got just a couple more questions. One for each of you before I let you go. And Kevin, I’ll start with you. If we just sort of pull the lens back a little bit, you as a successful entrepreneur and as somebody who has written about this, I’m wondering what lessons can entrepreneurs take from your experience regardless of race? What is a message that you would want entrepreneurs to take from your experience?
KEVIN D. JOHNSON: The most important lesson is that economics matter, equity matters. At KINETIC, we envision a world where funding is available, accessible, and adequate for all people to pursue their entrepreneurial dreams. Venture capital is a powerful tool to realize this vision informed by what’s possible when our ideals increasingly match reality. Ultimately that’s what I’d like for readers of this case, particularly students to leave with.
BRIAN KENNY: And Jo, let me give you the last word and ask, what’s one thing you want listeners to take away from the case?
JO TANGO: Well, it’s actually how I end the class. I tell the students, be the change to make the change and that’s not either or, do I make money or do I have impact? I think it’s both and, not either or. And in particular, I think the way you make change is you create financial capital, which gives you the social capital and the podium to say what you want. We’re fortunate that we have a lot of great alumni who come back. In fact, we have a prominent guest speaker at every case discussion in the course. And I ask my students, if these people weren’t perceived as successful, would we care about what they think? Would a case be written about them? Personal capital and social capital together are a very powerful combination to create positive impact in the world.
BRIAN KENNY: Jo Tango, Kevin Johnson, thank you both for joining me on Cold Call today. It’s been great talking with you about this case.
JO TANGO: Thank you for having us.
KEVIN D. JOHNSON: Thanks for having us.
BRIAN KENNY: We are excited to be celebrating the 100-year anniversary of the case method at Harvard Business School. If you want more on the history of the case method, visit our website: www.hbs.edu/casemethod100. Cold Call is a great way to get a taste of the case method, after all each episode features a business case and its faculty author. You might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. If you enjoy Cold Call or if you have any suggestions, we want to hear from you. Write a review on Apple Podcasts or wherever you listen or email us at [email protected] Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.