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Less than 1% of VC goes to Black founders. Steve Case and Rodney Sampson want to change that.

With Rise of the Rest's new virtual pitch competition, Case and Sampson hope to build connections between Black founders and tech investors.

Less than 1% of VC goes to Black founders. Steve Case and Rodney Sampson want to change that.

Rodney Sampson (left) and Steve Case want to see more venture capital directed toward Black founders.

Photo: Revolution

Steve Case has been trying to bust the tech industry's Silicon Valley bubble for years. With his venture firm, Revolution's Rise of the Rest Fund, the AOL founder travels the country, scouting startups worth funding outside of traditional tech hubs.

Now, Rise of the Rest is taking a new approach to inclusivity in tech, announcing a $2 million virtual pitch competition for Black founders this December. As part of the event, Revolution has partnered with Morgan Stanley, the investment group 100 Black Angels & Allies, and Rodney Sampson, co-founder and CEO of Opportunity Hub, an Atlanta-based organization focused on racial equity in the tech industry. Winners and finalists will get meetings with dozens of top venture capital groups and will be invited to Morgan Stanley's five-month accelerator for multicultural and female founders.

The so-called "Equity Edition" tour comes at a time when both tech companies and investors are making lofty commitments to diversifying the industry. Case and Sampson talked to Protocol about what it will really take to make that happen and how they're trying to help.

This interview has been edited for clarity and brevity.

What sparked your interest in launching this virtual tour?

Steve: From day one when we did our first tour, we recognized that place is important, but creating more inclusion around people is also important. Five years ago when we were in Atlanta, we partnered with Rodney and Opportunity Hub. It's always been a part of what we've been trying to do with Rise of the Rest. At its core, it's about leveling the playing field in terms of opportunities for more people in more places.

For this particular initiative, we started talking over the summer, partly related to the George Floyd murder, but more broadly: 15 of the companies we back have Black founders so that's some progress, but how do we step up those efforts when we have to do things virtually and can't hit the road? We said let's do something that's more of a virtual tour that builds on the kind of the things we've learned.

Rodney: I've been living this life for 20 years. A lot of people are talking about the data. I am the data. Twenty years ago I was the first Black founder of a high-growth tech startup in the South. There were three of us in the country at the time that raised over $1 million in venture capital. Over the last 20 years there hasn't been one Black founder a month that has raised their seed round. Juxtapose that to just last year, National Venture Capital Association data said [more than 10,000] mostly non-Black firms raised [$133 billion]. The data don't lie. When you look at it, particularly with where our nation is today and this call for racial equity, the first place you go is to the allies you've been working with and building with.

[Revolution partners] David Hall and Anna Mason and I jumped on the phone and started co-creating. Usually in the Black tech startup world, when there's a pitch competition, it's like $5,000, $25,000 and cloud support, but not any real money. This is 200x. I think it's an incredible signal. It was a no brainer to join forces with Steve and his team on this.

Steve: Overall with Rise of the Rest Fund now, about 45% of the companies we run are Black-run and female. In terms of Black entrepreneurs especially, [Black people] represent about 14% of our population and get less than 1% of our venture capital. That defines the problem. How do you close that gap? We're hopeful about not just what we're doing in December, but the coalition we're building to get venture funds to pay more attention.

There are more and more investors who do want to do better. They do want to be more inclusive. They recognize they have a role to play and want to be part of the solution, not part of the problem. But they often tell us they don't know where to go. They don't have the networks. That's what we hope is more of the lasting, sustainable impact of this effort.

What percentage of Rise of the Rest Fund companies are run by Black founders?

Steve: Fifteen of 150, so that's 10%. It should go without saying: There's a kind of fairness aspect to it, but it also just makes good business sense. A lot of great founders are on the sidelines because they don't have the networks. Often we hear from Black founders and other groups that they don't have the money or the friends or family with money to do that initial seed round.

Rodney, obviously this is not some sudden realization that less than 1% of VC is going to Black founders. There's been a pretty clear understanding about the lack of investment in Black founders for, I don't know, a decade? Two decades? Why isn't the needle moving?

Rodney: I think for the first time in history the elephant that's been in the American room has been talked about — our country's legacy and present-day work around creating racial equity. Until George Floyd and Breonna Taylor and Ahmaud Arbery, we politicized the terms and came up with nice words like "unconscious bias" and "pattern matching."

And our networks are not connected. I was a founder who didn't have a network of folks who had a lot of money, and those who did didn't look at this asset class as a viable investment opportunity. The world Steve has helped build, and we've helped build, really remains stealth until a company goes public or gets acquired.

There's a lot of untapped capital on the sidelines. Part of closing that gap is getting the active capital from active VCs and angels that I believe honestly want to do better, but even just beyond wanting to be better, want a market advantage. Data shows that ethnic teams, teams with Black and Latinx folks on them, yield a greater economic output. Tell that to a limited partner, their eyes light up.

Rodney, I know there's some concern among Black founders around what they see as one-off initiatives to invest in Black-owned businesses, when what they actually want is to be part of that mainstream investing conversation. Does that concern you at all with respect to this initiative?

Rodney: It doesn't. I've been pretty outspoken about performative types of initiatives and things that seem like one-offs. What I knew about working with Steve is he's got a brilliant team that knows when there's something there. If you talk to Black people in America and particularly Black founders, we want to thrive in all of America. We want to thrive in white spaces, and we want to thrive in what would be considered Black spaces. I don't think it's one or the other.

Seven years ago OHub was the first multicampus Black-owned coworking space. We were known as the Black WeWork and the Black TechStars. We've been intentional about our target market and who we serve, but at the same time we're intentional about building relationships with allies. That's important. If you study American history, the advancement of Black people in America has always required willing and able allies, and this is just another example. I'm unapologetically for both.

Steve: We certainly acknowledge this event we're doing is not going to solve the huge disparity in funding, but it's a step in the right direction. It builds on some of the work we've been doing for five or six years. Funding is important. Ultimately investing, writing checks is a big part of it. But the most lasting is to be part of a broader network. That's what we've done with Rise of the Rest. I don't know how many venture funds will end up being part of this in December, but I'm guessing there will be 50 or more. Some of those hopefully will rise up to the opportunities even beyond the pitch event.

Given the number of companies that have said they're going to shift to remote work permanently, what impact do you think that will have on lifting up underrepresented communities in tech? Will it create more inclusivity in tech, or do you think we'll just see more tech gentrification in smaller cities like Atlanta?

Steve: I would obviously hope this situation, however difficult it's been, does lead to a reassessment at least for some people in Silicon Valley, and they decide to not just temporarily move somewhere, but permanently move somewhere. Maybe they stay working for their current company, but eventually some people, once they're building a network in that community, very well may decide to start a company or join a startup. I think this can be an accelerant of the rising city impact we've talked about.

I do think as that happens, as these cities that have been struggling in terms of brain drain and loss of jobs are rising and growing again, the communities really do need to make a priority around inclusive growth and making sure you don't lose the people and magic of those communities. It's certainly a second order challenge. The first step is turning the tides of cities on decline, where economic growth has largely ceased or dwindled, and as a result, there's a big brain drain. At some point we're hopeful we can slow the brain drain and create boomerang talent. I do think this situation is likely that tipping point.

Steve, I know you're close with Vice President Biden's right-hand man, Ron Klain, who is a VP at Revolution. What sorts of policies would you like to see a possible Biden administration propose to spur investment in underrepresented groups?

Steve: The vice president did put out his economic plan a couple months ago, and it did touch on some aspects of this issue of underrepresented entrepreneurs in places that have been left behind. I hope that will become even more of a focus and front-and-center issue. I even hope it's maybe part of the debate [this] week. Obviously there are a lot of topics on the agenda, but ultimately we need to have a discussion about inclusive growth and making sure it's not just income inequality, which is important, but also opportunity inequality.
Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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