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Inclusive Investing for Better Bottom Lines

Get more diverse to get more innovative, sustainable, & profitable!

Hello investor, are you looking for the next unicorn?

Do you want a solid team? Do you want an innovative product?

Do you want a big market? Do you want a high ROI?

If your answer is yes, you want to find and fund diverse teams.

Here’s how.

𝤿 Take Diversity Seriously

Realize the bias. There is an enormous gender gap in U.S. venture capital funding. Female entrepreneurs receive only about 2.2% of all venture funding in 2018, despite owning 38% of the businesses.

Set gender-diversity targets. You can’t ask the founders to do something that you yourself don’t practice. Ask about and track diversity-related metrics in your own firms and in your investees. Leverage your investors’ ability and networks to help your companies with their diversity and inclusion goals and commitments.

Appreciate and act on the data. Diversity is good business. Diverse companies provide stronger returns and have lower risk of blind spots. If your VC has a reputation for inclusion, it will help ensure you don’t miss out on business opportunities.

  • Startups founded and co-founded by women are better financial investments. Boston Consulting Group indicates that for every dollar of funding, these startups generated 78 cents, while male-founded startups just generated just 31 cents.
  • The past 3 years have shown an upward trend in the number of unicorns with at least one female founder. Glossier and Rent the Runway are some of the female-led startups to join the $10 billion-valuation unicorn club.
  • Emerging studies suggest that more diverse teams have greater profitability, more innovation, stronger productivity, and lower turnover. Homogeneous teams, by contrast, tend to neglect potential markets and user needs which could result in missed opportunities, financial failure and risks of serious product bugs, not to mention damage to brand reputation.

“Big VCs that overlook women and people of color are missing valuable opportunities and leaving money on the table. If they’re not seeing the latest innovative, disruptive technology because they don’t understand some things that women are spending money on, I think they’re not making great investments. They’ll start to wake up over time, and there are some opportunities there.”
Melinda Gates, founder of Pivotal Ventures

𝤿 Build your own diverse teams to find diverse startup teams

Include women in investment decisions. One of the most effective methods for you to build a diverse portfolio is to have diverse investors. Understandably, people invest in the problems they understand. Bringing more women and people of color on board could help you broaden the lens of potential investments to new markets, that you may otherwise miss. While the number of women in check-writing roles has seen a bump, it’s not enough. In addition to including women on their investment teams, VCs should look at their processes for evaluating and advancing teams to make sure promotions are equitable.

𝤿 Expand your outreach strategies

Expand your networks and invite under-included founders. Let’s get beyond the “pipeline” excuse and understand why investment opportunities are not coming to you — could it be your process of discovery, reliance on referrals, barriers to introductions, or could it be a lack of diverse founders in your portfolio discourages people from approaching your company? “There are thousands and thousands of women-led tech startups disrupting every industry you can think of: health, finance, transportation, education, fashion, energy, AI, Augmented Reality, and more.”

𝤿 Change your questions — or rather, make them the same

Ask better questions. Investors tend to ask men questions about the potential for gains and women about the potential for losses. This unconscious bias exists among female VCs as well. Responding to promotion questions, male entrepreneurs reinforce their association with favorable gains; female entrepreneurs who respond to prevention questions are put on the defensive and may be negatively perceived.

Not only does unconscious bias leads to women being asked preventive questions and men being asked promotion questions, it shows up by men being judged on potential, women being judged on past performance, male founders overstating their accomplishments while women are more conservative and accurate, women being interrupted and asked follow-on questions more often (which cuts into their presentation time), and the VC pitch process generally failing female entrepreneurs.

Address stereotype traps. For example, avoid simple errors like presuming women founders don’t have the technical knowledge, or as bad, that they are not the “primary” founder. Implicit bias training can improve awareness and empathy, but behavior change is what matters. Make a public commitment to diversity goals and play your part in improving VC culture.

Re-evaluate your selection criteria. Assessing an early-stage startup’s risk can be challenging due to lack of metrics, which is why VCs rely on “gut feeling” about each team. Understanding why teams are likely to be successful can be broken down into more objective criteria — such as is there shared vision and psychological security? “Culture fit” is another trap that leads to preferential treatment of founders who look like and share similar upbringing and experiences as the investors.

“Less than 10% of all venture capital deals go to women, People of Color, and LGBT founders. Other VCs see this as a pipeline problem. We see it as the biggest opportunity in investment.”
Arlan Hamilton, founder of Backstage Capital

“Once women and non-white business owners do get a foot in the door, they have to go the extra mile to prove their redeeming qualities, and overcome higher perceptions of risk, than their white, male counterparts.”
girlboss.com

𝤿 Help Founders Succeed

Coach founders to be proactive. Men are more likely to “fake it till they make it,” and inflate numbers which is inspiring, while women tend to be more realistic and present achievable aims. Don’t think “young but inexperienced” for one gender and “young and promising” for the other. Equip women with your expectations along with the skills to pitch successfully. And for male founders, equip them with your expectations to be realistic about projects, and the negative impression given if/when they talk over their co-founders.

Encourage portfolio companies to pursue diversity and inclusion. Ask them about their diversity and inclusion goals as part of your evaluation criteria. Help and support from VCs by stressing diversity is valuable. The earlier a company bakes in diversity and inclusion, the more likely it will become a part of its DNA and positively impact the company’s development and future success. Their success is your success.

𝤿 Equally Evaluate

Increase standardization in the deal-making process. VCs should standardize the questions they ask of founders and develop a consistent set of de-biased evaluation criteria for all pitches. Some progressive VCs have experimented with a anonymized, online-only pitch process for smaller investments. It would enable investors to make more objective decisions and ensure they do not overlook because of stereotypes.

FAQ for Venture Capitalists

We are looking for excellent teams, creative ideas, emerging technologies and stellar products. It is not necessary to focus on diversity at this stage.

Don’t miss out. Funding startups with more diverse teams is not only a great thing to do, it is the profitable thing to do. Startups with a female founder generated 78 cents of revenue for every $1 of funding, while male-founded startups generated 31 cents. Moreover, in the US, women account for 85% of all consumer purchases. Homogenous teams tend to have blind spots in both markets and products. Overlooking women and minorities undermines your financial goals. Investing in diversity has a great ROI. it is important to foster a diverse culture early on, it becomes much hard to shift a culture and attract top talent, when the core team lacks diversity — who wants to be the “first” and the “only”.

Nearly every VC has female investors, and the number is increasing. We’re fine.

American venture capital firms have added 30 new female senior investing partners in the last ten months. The number of women in check-writing roles has seen a bump. Yet, the percentage of women in leadership roles at venture firms only rose to 9.5% in 2018 from 8.9%, despite emerging evidence that suggests women investors have outpaced their male counterparts in ROI. Your investments will benefit from more diversity.

We treat all founders equally. We don’t have any bias for men or against women.

You might be the exception. Only 2% of venture funding went to female founders. When talking to founders, statistically both male and female VCs are more likely to ask men promotion-oriented questions and ask women prevention-oriented questions. Even when you decide to write the check, unintentional bias may cause you to fall short of equity. Women founders receive lower investment amounts and lower CEO salaries; on average, women founders have received $935,000 or less than male founders. Realize implicit bias happens so you can fix it. Logically, more of your investments should go to women led, or co-founded companies since women-owned startups deliver twice as much per dollar invested as those founded by men. Does your portfolio reflect this?

I am worried that including diversity in investing criteria would reduce efficiency.

Many VCs have already implemented the integration of gender diversity criteria since 2018. Some were motivated by #MeToo or #TimesUp, but most took action because it helps them make more profitable teams. Venture capital is a competitive business and the best VCs coach founders, constructively pointing out weakness and pushing them to become great leaders — people-oriented, good listeners, able to tap into the talents and motivations of their teams, and giving everyone the opportunity to be heard, which highly increases innovative capacity and financial returns. Small efforts in promoting diversity will lead to big dividends for you. Bonus: Startups with at least 1 female founder hire 2.5x more women.

This article was authored by Ao Zhang.

Expanding Diversity and Gender Equity in Tech (EDGE in Tech) Initiative @ UC | CITRIS & the Banatao Institute + Berkeley Engineering http://edge.berkeley.edu