editione1.0.2
Updated February 11, 2023The problem that begins with VC investors invariably extends to the founders of the companies and startups receiving crucial venture capital funding. In 2021, both “European Women in VC” and the State of European Tech reported that all-female startup founding teams received less than 2% of funding (with both reporting approximately 9% went to mixed-gender teams).* As Wired reported in late 2021, “In a Banner Year for VC, Women Still Struggle to Get Funding.” The conclusion: women received less money in 2021 than on average across the previous five years. In the US, only 1.2% of VC funding went to Black entrepreneurs in the first half of 2021; just 0.34% went to Black women. The numbers are even more devastating in Britain, where not-for-profit Extend Ventures found that 0.24% of VC funding between 2011 and 2021 went to Black entrepreneurs.* The Extend Ventures report also identifies a significant socioeconomic class bias in UK VC funding, with 43% of seed funding going to teams with at least one member from Oxford, Cambridge, Harvard, or Stanford.
Representation, or lack thereof, filters through the fabric of the entire industry, as investors are more likely to invest in those who look like themselves. Richard Kerby writes that the illusion of meritocracy is in fact “mirrortocracy,” resulting in adverse effects for diverse startups founders. This is based on similarity bias in investment decision making and the reliance on gut feeling. Given the very limited pool of VC decision makers—mostly white men with Harvard and Stanford MBAs—women, people of color, and those without degrees from elite educational establishments are often left locked out and unable to access the support of venture capital firms.
This is particularly surprising given how clear the business case is for DEI in VC and startups. As PlanBeyond’s recent “Bias in US Venture Capital Funding Report” makes clear: more diverse teams are more likely to financially outperform their non-diverse counterparts and work on making society better with their companies. As these startups are scaling up to become the next wave of tech behemoths, the biases we see in venture capital and founding teams are filtered downstream and reflected as biases within venture-supported companies. Research from the Kauffman Fellows Research Center similarly shows that while only 20% of capital is invested in ethnically diverse founding teams, those teams achieve 30% higher returns than all-white teams. Boston Consulting Group found that female founders generated 10% more in cumulative revenue over five years, and startups with at least one female founder generated $0.78 in revenue for every dollar invested, compared to male-founded startups that generated less than half that ($0.31).
Diversity matters not only when it comes to the business case, but also as a matter of access and participation in shaping the future of economies. Having different kinds of people with unique experiences involved in, for instance, a company board is shown to ensure stronger checks and balances, more thoughtful oversight over company matters, and better performance in times of crisis (for example, when there was female involvement in boards during the financial crisis). When different kinds of people, with different academic backgrounds, different genders and races, from different age groups and geographies, come together, ethical decision-making also tends to be stronger (mitigating the likelihood, for example, of corruption). In contrast, strictly homogenous groups are more likely to show conforming behavior and, particularly for white men, more risky behavior. (The “white male effect” of risk insensitivity is often also connected to generational wealth, another determining factor for whether someone pursues entrepreneurship.)
Thus, the practice of groupthink can be mitigated through the adoption of a more diverse board or leadership structure. Despite all of this data, many, even most, VCs continue to associate more diversity with more risk. Although trillions of dollars have been spent on gut feeling and never returned, it seems diversity is one “risk” some VCs aren’t willing to take.
Things are changing with awareness, albeit very slowly. Hire and Wire is a movement calling for firms to increase diversity in their workforce and write checks to a more diverse group of founders in tech. Rather than yet another mentorship program or office hours that lead to yet more posts on social media, founders who are not male or white need to simply receive more funding. Over the last years, more and more initiatives have been set up to challenge the uniformity in startup finance and tech.
With All Raise in the US, Diversity VC in the UK, the international Thirty Percent Coalition and the 30% Club, Black Founders, the Female Founders Alliance, and the Latinx Startup Alliance, organizations of investors and founders alike are pushing for more representation in general partner (GP), limited partner (LP), and board roles. At the same time, we are finally seeing a small but increasing number of new funds being raised by long-overlooked GPs, mostly led by women or, as in the case of Base10, Harlem Capital, and MaC Ventures among others, by Black GPs. Concrete solutions, tools, and techniques are being proposed, such as with the Diversity VC Standard.
More and more LPs, from university endowments and pension funds to foundations and family offices, are slowly pushing for change from the top, from the investors’ position, too, as we will discuss in our interviews. There is hope.