AMY: From Gimlet Media, this is startup. I’m Amy Standen. In this series, we’ve been following Arlan Hamilton - a venture capitalist unique in silicon valley and this is part three. One thing I realized pretty quickly is that reporting on Arlan would mean spending so many hours in a place I’d had never given much thought to: hotel lobbies.

CHRISTIE: Niniane is gonna be here at 1?

ARLAN: Yes. 

CHRISTIE: Ok. 

AMY: Arlan spent a ton of time in hotel lobbies - she treated them like an office.Back when she was living at the airport, she’d arrange meetings at hotels in Mountain View or San Francisco. If it gave the impression she was staying there? That wouldn’t be the worst thing in the world.  

Now, she had a room at the st regis in san francisco. This was October, soon after I started reporting on Arlan. She and Christie Pitts, her investment partner, were in the lobby, trying to decide where they should set up camp for a day of meetings. 

ARLAN: … do you want to switch? I know. This is reserved… 

AMY: They settled on a pair of blue velvet armchairs, near the window. Arlan and Christie were here to do something you don’t often hear venture capitalists do: pitch. VC’s hear a lot of pitches, from startup founders asking for money. But VCs also pitch.

Arlan pitched constantly, asking other investors to put money in Backstage Capital. Her pitch was that she could take their money and invest it in great companies. Then everybody would do well. And this was particularly important now, because Backstage Capital was out of money. So she’d set up a meeting with a woman named Niniane Wang.

ARLAN: You’re fine … 

NINIANE: Hi.

AMY: Niniane is a CEO and startup founder, a former Google engineer. Her resume notes that she graduated from college at 18. She’d been reading up on Backstage. 

NINIANE: Ok, I’m excited to learn more. So I have some questions but I don't know if you have a typical spiel that you give. 

ARLAN: I don’t have a typical spiel. Happy to answer any questions and go into detail too. 

AMY: Pretty quickly, Niniane gets to the point, with the question any potential investor would ask: How is your fund going to make me money? 

NINIANE: I went through every single company on your list that I've gone to your event and met some of them. So is your goal to focus on the founder? Say someone's a black woman and then they start a product that's not for black women. Is that your focus? Or are you focusing on product market? 

ARLAN: Focus on founder. Sometimes the founder is working on the market that represents them, sometimes they're not. Focusing on the founder is pretty typical when you’re investing in really early stage companies like Arlan is. But Niniane doesn’t seem to think that’s enough of an edge. She's most interested in founders who are focused on selling to their own markets - in other words? People like themselves.

NINIANE: For example, I thought the Haute … um … Hajib?

ARLAN: Hijab.

NINIANE: Hijab. Yeah - was amazing …

AMY: Haute Hijab is one of Arlan's portfolio companies - founded by a Muslim woman. They make high fashion hijabs.

NINIANE: It made total sense. It seems like a huge market. It makes sense that someone who is used to that market would be able to serve it well. Whereas I would be making lots of mistakes. I guess if it's a person who's underestimated going after a market that is being chased by lots of other people, I don't see as much where the advantage is.

AMY: In other words - what’s their edge? Just because a founder is Black or female or Latinx, to Niniane - that’s not an edge. But to Arlan, it is. Because - as we heard in the last episode - she believes that women and minority founders have had to do more with fewer resources. So if you give them the resources - they’ll give you a bigger return on investment. 

ARLAN: Their background and their profile is it makes them in most cases shoot for the moon and attack it and do it at a discount and you know do it resourcefully. The bigger picture for me is in the fact that we haven't been given that chance. I want to give women of color a chance to fail just like every white man had.

NINIANE: But that sounds like a charity than …

ARLAN: It won’t be. It's just it's changing … 

NINIANE: Well let me tell you …

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AMY: It didn’t look like Arlan’s idea won Niniane over. To her, Backstage Capital looked like a charity. Not a way to make money. Eventually Niniane asked to have her salad boxed up, and left.  

ARLAN: All right, thank you for your time. I’m going to go look for my two o’clock.

AMY: Ultimately, Niniane didn’t invest. Arlan’s idea here: that certain kinds of founders are likely to succeed - is well established in Silicon Valley. There’s a term for it. Pattern matching. Only usually pattern matching looks pretty different. It’s VCs investing in guys who look like Mark Zuckerberg because, hey, that turned out pretty well. Exhibit A for traditional pattern matching: This piece of tape from the famous VC John Doerr, talking about the pattern he tries to match when picking founders.

DOERR: They all seem to be white male nerds who’ve dropped out of Harvard or Stanford and they have absolutely no social life. So when I see that pattern coming in, which was true of Google, it was very easy to decide when to invest.

AMY: When you ask people why silicon valley is so white and so male - usually this is the answer you get: Pattern Matching. And yet Arlan was all for it. 

ARLAN: I pattern match just like everyone else pattern matches, but I pattern match for me, which is the point. When I look at people I don’t just PM for a black woman. I pattern match for grit. 

AMY: And grit - Arlan believed - was something you’re especially likely to find in people of color, or women. Because often, they worked harder to get to the same place. This is the formula that led Arlan to a company called Capway. And its CEO, Sheena Allen.

ARLAN: So I pattern matched the hell out of Sheena Allen comes from just a few miles from where I was born in Jackson, Mississippi. 

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ARLAN: She’s younger than I am, but she reminds me a lot of myself. 

SHEENA: I grew up in Terry, Mississippi. A small town right outside of Jackson, Mississippi, which is the capital. We don't have any stop lights, only have stop signs.

AMY: Capway is what’s known as a fintech company - as in financial tech. Right now, it’s mainly an educational platform, to get people comfortable with things like savings and credit. Eventually, the plan is to expand it, to offer basic banking services to users who don’t have much financial literacy. Sheena’s background has everything to do with why she started this company and who it’s for. Because she knows these customers.

SHEENA: My dad actually did not believe in credit cards. My dad was that guy who said if you cannot buy it - meaning with cash or with your debit card - so if you could not afford it then don't get it.

AMY: Where Sheena comes from, it’s routine to rely on check cashing or payday loan places - either because you didn’t trust banks, or you don’t have enough for a minimum deposit, or you didn’t have a branch nearby. This is more common than you might think: Close to 20 percent of Americans are considered underbanked, which is finance-speak for relying on alternative lending outfits - not just check cashing, but pawnbrokers and loan sharks. 

These are Sheena’s potential customers. And if you’re thinking that - like I’ll admit I was - “oh, but they’re poor - why would a startup think they could make money here? I have another number for you: 200 billion dollars. Financially underserved Americans spend almost 200 billion dollars a year on interest and fees from predatory lending outfits. In other words: Sheena’s customers are already spending a ton of money on products that don’t serve them very well. Which is, in business, what you call a market. To study this market - Sheena’s potential customers - all she has to do was drive through her home state. A few months ago, she took producer Bruce Wallace on a tour. 

SHEENA: See, title loan place, back to back, see - check cashing, there’s a approve -cash.

BRUCE:What's title loans?

SHEENA: Title loan is actually crazy. So what you do in a title loan place is you literally take the title of your vehicle. You're going to take it inside of there and they're going to give you what they feel the value of your vehicle and you get a loan. And if you do not pay the loan back within whatever timeframe they gave you, they come pick up your car.

BRUCE: So it's like a home equity line of credit except, except on your the car.

SHEENA: And it's just more of a short, it's a shorter time period.

BRUCE:  Right. You have to pay back pretty quickly?

SHEENA: Yeah. So it's pretty quick. It's not like a five year. usually like three months. Sometimes. It depends. So it’s those people we care about and were trying to shine a light on. There are people who live in banking deserts. There are people who live paycheck to paycheck. There are people who do not even have a bank account. That is, to me that's the biggest thing I want to show and prove with Capway. 

AMY: This should be a great time for Sheena to raise capital. Financial tech is very buzzy in silicon valley right now . Venture capitalists put more than seven and a half billion dollars in fintech last year. And Sheena’s homing in a part of the sector that isn’t well served. But when Sheena flew out to Silicon Valley for the first time, investors were skeptical that Capway would find enough customers. 

SHEENA: Capway falls flat a lot of times. And I think the biggest reason is you go into these rooms and I'm speaking sometimes to white gentlemen who probably can actually say I am part of generational wealth or I live in my two-million dollar home in you know Beverly Hills or San Jose. And I've actually had to convince - this a true story - I’ve actually had to convince an investor that there are people that do not have a bank account in America. I think a lot of times they invest in things when it gets to AI and VR and AR and then I come in and I’m like, hey, I’m here to help people in rural Mississippi and the south side of Chicago where no bank will go, and in their world,  there's no way that people in America in 2017 are still having those problems.

AMY: If investors didn’t believe Capway had a market, Sheena would have to prove it to them. So she started going after customers. 

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AMY: Sheena started with her alma mater: the university of southern mississippi. She pitched USM on the idea of offering Capway to all incoming freshmen. And they were into it. A USM administrator named Amy Miller told Sheena that financial problems are the number one reason students drop out of school. 

AMY MILLER: Our students rely so heavily on need based aid and then on loans as well that they need it and lean on it but they don’t fully understand it and so they just kind of guess at what to do, and it leads to peril. Because what happens a lot of times is either they run out of financial aid or they expend it on the wrong things and then they can't pay their bills and they can't register (for the next semester). 

AMY: Sheena convinced USM that Capway could help solve this problem - by teaching students how to manage their money better. She sold the school on a two year contract to automatically enroll every incoming freshman in Capway. This was going to give her 45 hundred customers, immediately. And another 4500 the following year. It was evidence she could show those investors in Silicon Valley that Capway had a market. 

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AMY: Sheena’s current investors would want to know about this too. So not long after her meeting at USM, Sheena and Arlan got on the phone for a check in. 

ARLAN: Sheen! 

SHEENA: Hi!

ARLAN: Hi Sheena!

AMY: And Sheena gave Arlan the news.  

SHEENA: Things for us things actually been going well. You know we did the private beta with Southern Miss - which is our very first official partner! I got a email Friday where they have agreed to sign off for the next two years. 

ARLAN: That’s great. So you have a way to be continued to be plugged into the team anytime you need something? Anastasia is the bomb… 

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AMY: Alran wanted to make sure that if Sheena needed help with the contract, or anything else, she could call someone at Backstage. It’s pretty common for venture capitalists to be helpful with this stuff. It’s in their interest - because VCs want the companies they’ve invested in to take off. But in a portfolio with dozens of companies - this kind of one on one coaching was a huge job. It left little time for pitching to potential investors like Niniane. So Arlan had hired a team of people to help her. After the break, we'll meet the most important member, the woman Arlan referred to as her secret weapon. 

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AMY: Welcome back to StartUp.

A couple years into running Backstage Capital, Arlan realized she needed help. The constant fundraising ate up much of her time. She needed someone to review the pitches that came in, and help run the company. She needed an investment partner. 

AMY: Thank you! Introduce yourself?

CHRISTIE: I’m Christie Pitts! I’m Arlan’s partner at Backstage Capital. 

AMY: Arlan was the visionary, the one with the big profile. Christie was more behind the scenes. The one with the more formal business experience. And Arlan’s thing about underestimated people - she once told me she thinks Christie fits that profile too. Christie’s blonde and very bubbly. She wears sparkly sneakers. Silicon Valley is not the world she came from.  

CHRISTIE: I grew up in Gilroy. Garlic capital of the world, shout out!

AMY: Gilroy is to Christie what Terry,  Mississippi is to Sheena. Not just her hometown, but the site of her early education into what customers need and want. Christie had a job selling cell phones at a Verizon retail store. And because this was Gilroy, closing the deal on mobile phone contracts meant selling to lots of kinds of people. Christie thrived at Verizon. The company put her through college, and promoted her up through the ranks in the marketing department. At Verizon, Christie said, everyone knew that the population in the US was getting browner, and Verizon wanted to keep up. 

CHRISTIE: Literally, we’re making signage in multiple language, we were holding focus groups in multiple languages. Really wanted to make sure customer looked like what the country looked like. 

CHRISTIE: Verizon was not the only brand doing that … Clorox and McDonalds, every major consumer brand has been address ong this business opportunity for over a decade.

AMY: Eventually the company promoted Christie to its ventures team - the division of Verizon that invests in startups. Suddenly that diversity focus was gone. Venture capital struck Christie as a world of white guys making products for white guys. Which, from a purely business standpoint made no sense to her at all. 

CHRISTIE: Venture capitalists invest in companies that reach maturity 7-10 years out. So if you’re investing in a consumer company today that is going to be in maturity in 2028 or 2027? who’s buying that product? The answer is probably not a straight white guy.

AMY: While old behemoths like Clorox or McDonald’s were bending over backwards to serve diverse markets? Venture capital treated diversity as a good deed for conferences and photo opps. Christie felt like she was the only person noticing this problem in VC. Was anyone else onto this? Then, she found Arlan on Twitter.

CHRISTIE: I just hearted ... Or at the time it was like stars … I just starred every tweet. She would tweet a tweet and I’d be like oh that was so good and I’d star it. Part of the reason why I was so impressed with Arlan was because she understood the business opportunity.

AMY: Arlan noticed all the retweets. She and Christie started emailing, and then Arlan asked Christie if she could take on some work for the firm. For about a year, Christie worked part time for Arlan, in addition to her Verizon job. Then, last August, Arlan asked Christie to join Backstage Capital full-time. This had been a risky move at the time. But as the months passed, the financial situation at Backstage Capital was getting dicier. Christy’s take on this was basically the same as when she started. 

CHRISTIE: At this point, my attitude is a little bit YOLO. Maybe like six months from now, I’ll look back at this and be like oh my gosh, what was my problem? What was I thinking? But like right now I feel confident that we're going to be a stable organization for a long time. 

AMY: Christie and Arlan were convinced that Backstage would make it in the long run. But truth is, by late fall, the company was in trouble.

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AMY: Arlan was running out of money in two separate, but related, ways. First: she needed more money for her fund, money she could use to invest in startups. That’s the pitch she was making to Niniane. But the second problem was more urgent. She was very close to not being able to make payroll. There's something I heard more than once while I was reporting this story 'Arlan rolls deep’. And she did travel with an entourage. One flight she and I took from LA to San Francisco, Arlan’s staff videographer, Dianne, sat behind us. At the airport, Chacho, Arlan’s apprentice, was there to meet us at the gate with a diet coke and unsalted almonds for Arlan. In October there were 7 full and part-time employees on the Backstage staff. That’s more than you find working on funds ten times Arlan’s size. Even Niniane, the investor we’d met at the St Regis, had asked about this, how Arlan was able to pay for all those salaries. All full time employees worked remotely. But once a month, the company would fly them out to los angeles, for a team meeting. For the end of the year, Arlan had planned something special: a team retreat at an airbnb in San Diego, with a sunset cruise. This was going to be expensive. 

AMY: You were thinking about, like ‘How am I going to pay for the big staff retreat next week?’

ARLAN: We pay for it … I always figure it out. 

AMY: How did you figure it out?

ARLAN: I sold some of my GP, which covers … which I’ve been doing for 2 years … 

AMY: GP. GP stands for General Partner - which is Arlan’s title at Backstage. But in this context, it’s a shorthand for GP Carry. That’s money Arlan would get if Backstage Capital’s investments pay off.

ARLAN: I’ve been diluting my equity in the fund, piece by piece, as needed, while we have these small funds. She’s selling off chunks of her own future. We talked to a lot of VCs in reporting this, and selling CARRY is pretty unusual. It’s something most VCs would do only as a last resort - because CARRY is the most valuable thing you own as a venture capitalist. It’s the thing that can make you rich. Arlan could conceivably buy her Carry back. The whole scenario struck me as a little like what Sheena had said about title loans and check cashing - this system of bad deals that people get forced into, when they have no other choice. That’s what selling carry was for Arlan. 

ARLAN: Every time that happens, it’s a little painful. So when I sell that, my hope is always .. It’ll carry me the next couple of months. And hopefully by then, I have something to catch me. Some sort of revenue that’s coming in. Or some something’s come through.

AMY: But nothing had. A few days later, on her way to the staff retreat, she sent me an audio diary. 

ARLAN: It’s November 29th, and I am at an Amtrak station in Burbank. 

AMY: She had been counting on selling more GP carry, but the deal had fallen through. 

ARLAN: So this morning I woke up to some news that some capital that was the B plan is actually not coming through. And that is a clear and present danger for us. I just have a few days to figure this out.

AMY: That evening, I wrote Arlan back. This situation didn’t sound good. And I was thankful she was being so honest about it - so I told her that. But it also made me wonder what she was doing about all of this - whether the financial crunch was making her rethink all of her expensive traveling, or the fancy hotels she sometimes stayed in. So I asked her - using a word I would very much come to regret - whether she intended to make lifestyle changes, as a result. 

She emailed me back. She was not happy. 

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AMY: “You mention my lifestyle a lot” she wrote, “and I don't think you see what you're implying by doing so. The issue is, this feels like it is coming from your personal opinion and not from an unbiased opinion.” 

AMY: Arlan often bristled at my characterizations of her - she was sensitive to how her story was told - especially when I, a white reporter was the one doing the telling. And I didn’t blame her for that. But at the same time, I was telling her story. And the ways she spent her money were part of that story. We set up a call. 

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ARLAN: So what it feels like since we started is that you somehow have a little bit of this thing where I shouldn't be doing something. Like I shouldn’t be at the St Regis or I shouldn't be getting into this certain car. And so when you ask me about, does not having money mean that you’ll change your lifestyle - my lifestyle three years ago was sleeping on the ground. I’m doing everything that I had to do to build a venture fund from the ether.

ARLAN: To me it’s a little concerning bc if you’re framing the entire story and other people don’t understand that and the first thing that they hear is ‘I drove up to the St. Regis where Arlan has a palatial suite,’ you know, it’s like - well, no, that’s not the full picture. 

Of course, the hotel room wasn’t really the point. By far the most expensive thing Arlan had done was hire staff - way more staff than she could arguably afford. 

ARLAN: It’s my life, it’s my decision as the founder of backstage capital, it’s my decision to go in this direction. I think about it with great weight on my shoulders and this is the decision I’ve made 

AMY: Why does BC have such a big staff, compared to other VC firms?

ARLAN: We’re comparing apples and oranges. We are not like other funds. we have a much larger portfolio and a very short amount of time. I didn’t start Backstage and set that goal of 100 companies just to look cool or to sound crazy - I started it so that we could be a very effective and high touch firm. 

AMY: High touch meant Backstage would have a big enough staff to work closely with all of its portfolio companies, like it did with Sheena and Capway. Arlan believed Backstage was was going to be big. So why not make it big now. 

AMY: But don’t you worry that if you run through the money too quickly, you limit what you’re able to do. 

ARLAN: Not really. I know that anything in the middle would be… so boring. And where You’re saying if I back things up, it gives me more runway. But runway to where? Is that a destination I that I really want to go to? Runway to what, to being mediocre? Ughhh. 

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AMY: And she knew that from the outside - this might look a little like Wylie Coyote running off the cliff without looking down. But Arlan knows what’s down there under that cliff. She had lived with uncertainty her entire life.

ARLAN: It doesn’t scare like I see the way that is scares a lot of people in Silicon Valley. It was never a given that we were going to have money three months from now, when I was a kid. That was rich people on TV or rich people at my school. Like, you’re rich because you know where you are going to live in three months. I know the opposite. OK, I don’t know where the money is coming from now. But I know that I survived last year, I’ll probably survive this year. I know what that feels like. 

AMY: Arlan had a team now, and they depended on her. This strategy could cost them their jobs. The people she hired were young, diverse. Many had found her on Twitter, drawn to her ambition, the scope of what she wanted to do. But her tendency to keep building Backstage, even when this was unsustainable, was putting the firm and herself in financial peril. She’d need to find some kind of creative solution, fast.

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AMY: Coming up next time on Startup - Arlan goes to Texas in pursuit of a potentially transformative business deal …

ARLAN: I haven't really let it hit me yet because I'm just preparing for it and, It'll be big Be really really big if it happens. It'll it'll change it'll change my life. I think if it happens. 

AMY: Hey Listeners - In June, Arlan and I will be speaking together at GimletFest in Brooklyn. She’ll be talking about what it was like to followed around by the startup crew for so long, and what she thinks of these stories. I have no idea how it’s gonna go. Get your tickets at gimletfest.com. Also at GimletFest: Hosts from Reply All, The Nod, The Habitat and other shows talking about what they do. Check it out: gimletfest.com  

Today’s episode was produced by Bruce Wallace, Simone Polanen, Luke Malone and Angelina Mosher. Our senior producer is Lauren Silverman. Editing by Heather Rodgers, Lulu Miller, Kimmie Regler, Lisa Chow, Molly Messick and Sara Sarasohn.

I’m Amy Standen. Our theme song is by Mark Phillips, remixed by Bobby Lord. Build Buildings wrote and performed our special ad music. For full music credits, visit our website, GimletMedia.com/startup. Peter Leonard mixed the episode. Special thanks to Ulili Onovakpuri at Kapor Capital and Renata George at Zenmen Venture Fund. Find out more about the show at GimletMedia.com. You can follow us on Twitter @podcaststartup. Thanks. We’ll see you in two weeks.