Embracing Diversity in the Venture Capital Industry

I recently had a conversation with a (white male) VC fund manager (“VC” or “manager”) who had an impressive number of diverse founders in his portfolio. In the venture capital industry this is not very common, but sorely needed. When I congratulated him about the high-degree of diversity in his portfolio, he said “it wasn’t something they set out to do; it kind of just happened.” He was surprisingly nonchalant in his response, but to me it was a big deal because it’s just so rare.  

In a separate, unrelated occasion, I was talking to another VC who had a very diverse investment committee and I pointed it out (in a good way) that I rarely see diverse teams like his. And, oddly enough, he responded in the exact same way by saying “it wasn’t something they set out to do; it kind of just happened.”  

First, maybe they are both telling the truth and it wasn’t something they planned (who knows). Second, whether they planned it or not, it is a big deal and it should be celebrated and replicated. While these are just two examples, I’m hopeful that more and more people in VC are starting to understand the benefits of diversity. However, the data tells us we still have a long way to go to reach gender and ethnic-parity in the industry. 

According to researchers at Harvard Business School, “women have been less than 10% of the entrepreneurial and venture capital labor pool, Hispanics have been around 2%, and African Americans have been less than 1%” (1). Asians are the one minority class that have a much higher representation in the venture capital industry (15%) “than their overall percentages in the labor force (1). 

In another research paper titled “The Cost of Friendship,” the authors investigate “how personal characteristics affect people’s desire to collaborate and whether this attraction enhances or detracts from performance in venture capital” (2). This is called homophily. Homophily is both good and bad. It’s good because it’s often easier to communicate and work with people who think the same way, and it’s bad because it “may induce social conformity and groupthink that may lead to inefficient decision-making” (2). In any case, we should seek to avoid homophilic environments and decision-making processes because it’s been proven to erode performance in the long-term (2).  

In the VC industry, having a diverse investment team or diverse portfolio of founders is significant and we should figure out how to replicate it. Given how few women and people of color work in or receive investment from the VC industry, there is no way having a diverse portfolio or team happens by accident. There’s more to it than that! 

In the case of the first manager I spoke with, he said he believes that the reason they have a higher number of women and founders of color in their portfolio is because of their venture studio. A venture studio is similar to a startup incubator where experienced personnel work closely with early-stage, pre-revenue companies to help them get started.  

The network effects within the venture capital industry are deep and building inroads to the right technology or operations experts (and investors) can be difficult. As such, one of the important roles venture studios play is connecting entrepreneurs to resources and people they may have difficulty accessing otherwise. This particular manager sources some 80% of their investments from their venture studio, and as previously stated, it has helped them connect with talented groups of women and founders of color that previously had difficulty getting the attention they deserved.  

The good thing is that VCs are beginning to take notice and are actively trying to create a more diverse industry. For example, some VCs have started scout programs where they hire women and diverse individuals to find new companies from segments of the market that were previously overlooked. Also, albeit slowly, the number of women on VC management teams is increasing and more and more founders of color are being added to the top of the deal funnel. Organizations such as HBCU.vc are working with HBCUs to teach minority college students how to navigate the world of venture capital. Venture Forward is another organization working to remove the hurdles in the VC industry to “promote a stronger and more inclusive community.” I’m glad to see these things happening because it’s great for the industry as a whole. 

There’s an active dialogue happening right now in America about the benefits of diversity and no industry is exempt from participating. I understand that nothing changes overnight, but the problems won’t change themselves. I’m glad we’re having the discussion and I’m optimistic about the direction we’re headed.  

Cheers – KM 

References 

(1) “Diversity in Innovation” – Gompers & Wang (2017). 

(2) “The Cost of Friendship” – Gompers, Mukharlyamov, Xuan (2016). 

Photo by Clay Banks on Unsplash

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