The National Venture Capital Association’s (NVCA) 2020 VC Human Capital Survey sampled 2,500 investors in the US, and found that 3% of partners—those with decision-making and check-writing power—identified as Black (compared to 12.6% of the US population); 3% of partners identified as Hispanic or Latinx (16.9% of the US population); 14% of partners identified as women (52% of the US population). In the UK, figures based on a similar sample of around 2,100 venture capital investors mirrors this picture. For the UK, Diversity VC’s latest survey from 2019 reported that only 13% of partner roles are held by women (compared to 47% of the UK labor force overall), and 83% of all UK venture firms have no women in their decision-making bodies. Further, the number of women on investment committees has not improved since Diversity VC started reporting on these numbers in 2017. The study found that just 8% of all VCs in the UK are Black or of mixed heritage (versus 13% of the population in London, where most of the UK’s tech sector is based), while 12% are Asian. As we’ll discuss later, these numbers have remained stagnant since 2020, and some have shrunk to even smaller percentiles.
The disparities in other parts of the VC world are similarly pronounced: a 2022 report on the European ecosystem, “European Women in VC,” found that 85% of VC general partners in Europe are male, with the UK (87%), Southern European (90%), and Central European countries (90%) trending even above this average. Even more telling is the “fire power” that certain investor groups have, meaning the overall share of the money in VC; according to the same report, women in Europe control only 9% of capital (5% in the UK, 6% in the Nordics). Indicative numbers for Latin America and Canada tell a similar story. Class is a significant variable as well, and the numbers are staggering: in 2018, 40% of US VCs had degrees from Harvard or Stanford; in the UK, one in five VCs went to Oxford or Cambridge (compared to 1% of the UK population average). As this book will reveal, the closed networks of elite institutions play a large part in keeping the industry homogenous, with many people intentionally locked out.
The Consequences of Homogeneity
For an industry which has for the last 80 years filtered which ideas and technologies reach the market and change the world, this is a disastrous picture. Not only is this group nowhere near representative of the population it makes decisions for, it has neglected to make the best investments to maximize financial outcomes. Increased diversity in investment teams has been shown to contribute positively to the performance of venture capital funds: an authoritative Harvard study based on over 20 years of quantitative data from the US VC industry, for instance, demonstrates the impact a lack of diversity in the investment committee of a VC fund can have. The more similar the investment partners in a fund are, the lower the success rate for acquisition or IPO. To the contrary, if a fund increased their share of female partners by 10%, they had on average a 1.5% higher overall fund return each year and 9.7% more profitable exits. McKinsey & Company have published several studies (“Why Diversity Matters”, “Delivering Through Diversity”, “Diversity Wins: How Inclusion Matters”) on diversity in more general corporate contexts, which conclusively find that having more women and people from diverse ethnic backgrounds as executives in companies leads to higher financial performance. According to McKinsey’s recent study, companies in the top 25% for gender diversity of executives were 25% more likely to report above-average profitability than companies in the bottom quartile. Similarly, companies in the top quartile for ethnically diverse executive teams have a 36% higher likelihood for above-average profitability.
The data and the business case are very clear but—in the converse of the 2020 NVCA report’s optimistic conclusions—very little progress has been made towards changing the numbers so far. This book looks both at the history and reasons we are in this position, and provides a first-of-its-kind overview of proven best practices to inspire action towards the change that is needed now.
There are four key reasons why the homogeneity of the VC industry matters:
VCs are the kingmakers of our digital age. They filter who gets money to build companies and bring ideas to market. Venture capitalists have enabled the success of the world’s most highly valued companies, from Amazon, Apple, and Facebook, to WeWork and Theranos. Who these people are and what kind of decisions they make matters to us all.
The VC sector has so far seen very little scrutiny. Both in terms of DEI but also more broadly within the ongoing “techlash,” VCs have been left out of the conversation. While VCs have paid lip service to #MeToo and Black Lives Matter, not much progress has actually been made. This a social justice issue, thus, more external pressure needs to be applied to VCs.
We need to broaden the diversity conversation. When it is in focus, diversity is often limited to gender and, especially in the US, ethnicity. We need to widen the conversation to include other dimensions of diversity including educational background, socioeconomic background, disability, mental health, sexual orientation, and others—and, most importantly, shine a light on intersectionality, in order to understand the complex interconnections of being excluded in multiple ways.
Data doesn’t drive change. While we see the need for data (and more precise data at that) to push the industry to embrace DEI, data so far hasn’t made a difference. In fact, data is not something that VCs have historically paid too much attention to in their decision making—“gut feeling” is the strong driving factor. What is key to inspiring change, as even economists have recently picked up on, are stories. This is the main focus of this book: first-hand accounts, best practice examples, and case studies.
Ripple Effects in Startups and Tech
The 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).
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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.
Evidence of Slow Change
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.
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.
A catastrophic cocktail of the coronavirus pandemic, its resultant recession, and the advent of war in Eastern Europe has sent shockwaves through the global economy in a three-year onslaught that has shaken the world into a state of economic insecurity surpassing that of the Great Depression of the 1920s. The crisis has shone an often uncomfortable yet incandescent light on the systemic inequities embedded in the global economy. Those most affected by these inequities have consistently belonged to the most vulnerable communities: lower-income and ethnic households, and those with lower levels of formal education. Disparities in access to support, inadequate health care provision, and undue strain placed on mothers and caretakers have become too-common penalties for those without access to the wealth, education, and employment required to shield them from the downturn.
Securely sheltered from this economic insecurity are those nestled among the world’s ever-growing list of billionaires. According to the Forbes billionaire list, seven of the world’s top ten billionaires in 2022 are the founders of venture-backed technology companies. Musk, Bezos, Gates, Ellison, Page, Zuckerberg, and Brin are household names. They epitomize the archetypal white male entrepreneur the world has come to associate with world-changing innovation and outstanding venture success. These entrepreneurs create tremendous wealth of their own, which they in turn invest in other venture-backable businesses: the Silicon Valley flywheel. A significant number of the US’s 735 billionaires have amassed their fortunes through entrepreneurship and the creation of venture-backed companies.
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