Prioritizing diversity is more than a social cause to champion, it also helps grow your business. Multiple studies show that companies with diverse teams perform better and deliver higher returns.
McKinsey’s research on delivering growth through diversity describes the upside: Companies in the top quartile for gender diversity on their executive teams are 15% more likely to experience above-average profitability compared to companies in the fourth quartile. Companies in the top quartile for ethnic and cultural diversity achieve 33% higher profitability than their less diverse peers.
As a venture capitalist, it’s critical that you prioritize diversity as part of your portfolio management strategy. You need to understand the opportunity to make a change, evaluate where your team measures up, and make sure to have a continuous conversation.
Understand the benefit of change
In a whitepaper titled “Why Homogeneous Teams in Venture Capital are Bad for Business,” investment firm WestRiver Group presents multiple data points that help underscore the great opportunity offered by diversity in venture capital investing. Three key takeaways include:
- Diverse founding teams create more innovation and better business outcomes and lead to superior performance over the long-term
- The venture capital investment teams most likely to fund diverse founders also tend to be diverse.
- Diverse investing teams correlate with better returns for investors, and multiple studies directly note the negative effects of homogeneity on individual investment exits and overall fund returns.
Put simply, your venture firm needs diversity across your investing partners and its portfolio companies. More diverse teams understand and respect different perspectives, different problems, and different needs, all of which map to valuable opportunities throughout your network. Limiting your investment decisions to one demographic can lead to expensive missed opportunity costs.
Evaluate where your firm measures up
There are severe diversity gaps in venture capital that need to be addressed. According to BLCK VC, a nonprofit that supports Black investors, only 3% of venture capital investors are Black; and, only 2% of venture capital partners are Black.
In terms of gender, according to research by Women in VC, the world’s largest community of female venture investors, of all U.S.-based VC partners, only 5% are women and only 2.4% of founding partners are women. This type of pervasive inequity drives the greatest opportunity cost to VC firms. Venture capital firms that lack diversity also lack the same quality in their network and miss connections to key opportunities.
The makeup of your firm is inextricably linked to performance outcomes. As a venture capitalist, you should conduct a diversity audit of your firm and portfolio and assess how you are doing. Awareness and transparency are great first steps for bringing meaningful accountability for change to your firm.
As your team grows and diversifies, you can also use Affinity Analytics to track and review diversity initiatives in your portfolio. Custom dashboards can help track founder diversity so you can monitor and visualize who your team is investing in.
Continue the conversation
Frederik Groce, a partner at Storm Ventures and cofounder of BLCK VC, recently shared that, although most venture firms are still trying to figure out a structured diversity plan, investors are starting to have conversations about diversity in a much more detail-oriented and productive way than ever before.
Alejandro Guerrero, Senior Partner at Act One Ventures, launched a Diversity Term Sheet Rider to enable better access to wealth in venture capital for underrepresented communities. His goal is to change the venture landscape by bringing more diverse investors to every deal. In his words, Guerrero says the objective of the Rider is to pause the deal-making process and think about who isn’t in the room.
Fortunately, Guerrero has made the Rider available to venture firms. In a podcast aptly titled ‘Diversity Riders’, Guerrero interviews John China, President of SVB Capital. China explains how we are at an inflection point in venture capital—at a point where prioritizing diversity will become mainstream in time.
Listening to Guerrero speak with passion about the Rider, it’s not surprising that more than 50 firms now include the Rider in their term sheets, including Fifth Wall, Plexo Capital, and First Round Capital, to name a few. These firms have pledged to bring people from diverse communities into deals as co-investors, to place diversity at the forefront of the deal-making process.
If your north star as a venture capitalist is higher ROI, the strong correlation between diversity and financial performance should compel you to put diversity first. If you haven’t yet committed to prioritizing diversity, start today. Understand the opportunity, evaluate where you measure up, and continue the conversation.