By Suzy Strutner, managing editor at Grow Wire
⏰ 5-minute read
A recent report suggests venture capital funding goes to startup teams that share certain characteristics, adding to what we already know about homogeneity among VC firms themselves.
Previous research shows that most startup founders are male and that males are also more likely to seek venture funding.
The new report’s authors -- as well as some stakeholders themselves -- recommend that founders, VC firms and their investors work with teams from backgrounds different than their own.
Sometimes it takes a data dive to uncover the true nature of what’s going on in your business or industry.
In the VC industry, new research suggests that venture capital dollars tend to go toward founding teams that look similar in terms of gender, ethnicity, location and education. The findings add to what we already know about diversity in venture funding, most of which pertains to the firms themselves.
After presenting their findings, the authors of this new research recommend that VC firms make an effort to hear pitches from diverse teams and that their investors, or LPs, seek diverse firms to work with. They also suggest that founders focus on recruiting diverse teams -- in terms of gender, ethnicity and more -- to build a more inclusive startup world.
Granted, recruiting a diverse team might be easier for female founders than for males. But it’s likely worth it regardless, because research shows that diverse teams do better financially. Startups with at least one woman on the founding team perform 63% better than those with all-male leadership, per a 2015 study from First Round Capital. And racially-diverse companies tend to outperform industry norms by 35%.
Here's what the researchers found.
This new research report comes from RateMyInvestor and Diversity VC, who analyzed all publicly available data on U.S. VC deals (from Seed to Series D+) from the past five years. The researchers determined the top 135 U.S. firms by number of deals, then examined each firm’s investments. All in all, they examined nearly 4,500 deals involving more than 9,800 founders. They found that:
91% of founders at VC-backed startups are male.
77% of founders at VC-backed startups are white.
42% of VC-backed startups are based in Silicon Valley.
27% of founders at VC-backed startups attended an Ivy League university.
Image credit: "Diversity in U.S. Startups" by RateMyInvestor in partnership with Diversity VC
As charted above, the researchers found commonalities between founding teams that received VC money in the last five years.
“The typical founding team across these 4,475 companies was a two-person, all-male, all-white, U.S. university-educated team residing in Silicon Valley,” the report reads.
We decided to seek out more research on the topic.
Here’s what we found.
Most startup founders are white males.
It makes sense that mostly white males receive VC funding, because they indeed represent most founders. For every 10 male entrepreneurs worldwide, there are seven females, according to the Global Entrepreneurship Monitor. Another report concluded that women own 39% of small businesses in the U.S. Finally, another survey registered just 227 black, female startups in the U.S. in 2018 while somewhere around 77,000 new startups launch every quarter.
Males are more likely to seek funding than their peers.
Male founders are not only more plentiful than female ones but also more likely to seek financing for their businesses. Research cited in a 2018 Score report found that 34% of male founders sought financing compared to 25% of females. This jibes with research conducted by American Express, which also concluded that women entrepreneurs are less likely to seek and obtain financing.
VCs aren’t a particularly diverse group, either.
Dealing with the data
Statistics suggest there’s homogeneity in both startups and the VC firms that fund them.
“It’s the natural human failing of cliquishness and short sightedness,” said Steve Young, an early employee at Facebook and current tech startup advisor. “... One problematic thing that comes up fairly often is a frat-house atmosphere develops at a startup where it’s five guys who’ve known each other forever on the founding team, or a VC firm where you have powerful people who are used to having everything their way. And I think that kind of atmosphere is bad and people need to fight against it.”
“It’s the natural human failing of cliquishness and short sightedness."
The RateMyInvestor report suggests that founders should work to create a more diverse startup ecosystem, which will in turn drive more diversity at VC firms and in the companies that get funded.
As a founder, “Treat diversity as a core part of your hiring process, not as an afterthought,” the report recommends. And “If you are unable to find diverse full-time team members at the early stages, put together an advisory team which brings a more balanced set of input.”
(Here, “diversity” refers to a mix of genders, ethnicities, educational experiences -- i.e. an Ivy League vs. state university -- and even hometowns.)
Granted, founding a company comes with the immense strain of getting it off the ground, no matter the cost. For that reason, both the researchers and Young said the burden of enforcing diversity also falls on VCs.
“As a founder, you’re often under a whole lot of pressure, so you’re probably not going to prioritize [diversity] unless someone’s holding you accountable,” Young said. “VCs could say, ‘All my portfolio companies need to check diversity metrics in order to get funding.’”
Meanwhile, the individuals and groups who invest into VC funds can do their part by choosing to work with firms that prioritize inclusion, he added, echoing the report's suggestions.
“As a founder, you’re often under a whole lot of pressure, so you’re probably not going to prioritize [diversity] unless someone’s holding you accountable."
Melissa van Kluyve is an associate at Clocktower Technology Ventures. She said that upon entering VC from the male-dominated consulting world, she didn’t feel that being a woman posed any barriers to success. But that doesn’t mean the gender ratio isn’t unequal in most VC firms and startups -- or that her firm isn’t working to change those statistics.
“The majority of partners [in VC] are male, and they often fund founders they know through their prior work, school and social networks,” van Kluyve said. “As a result, founding teams are often male-heavy. Clocktower is intentional about hiring and funding women.”
“The majority of partners are male, and they often fund founders they know. ... As a result, founding teams are often male-heavy."
Today, Clocktower’s team is nearly half women. The firm hosts meetups for both female VCs and founders, to facilitate connections which it hopes will in turn grow the female contingent in both sectors, van Kluyve said. It’s also hiring females with the aim to promote from within.
“Diversity shouldn’t just be at the founder or VC level; it should be at all levels of the ecosystem,” van Kluyve said.
Organizations that support diversity in VC and startups
Numerous organizations support diversity -- of gender, race and more -- in VC and startup culture, making it easier for key players to take action if they want to increase diversity.
Founders for Change, for example, is a founder-focused organization that aims to increase diversity in startups. The group includes executives from famous tech startups like Dropbox, Lyft and Airbnb who have all sworn the same pledge:
“I believe in a more diverse and inclusive tech industry. I am dedicated to having a diverse team and board, and when I have a choice of investment partners in the future, the diversity of their firms will be an important consideration."
The organization recommends that founders create an equal opportunity statement and hire purely based on skill. They say that starting this early in a company's lifespan is best, because diverse team members will attract hires like themselves.
There are also numerous VC firms that focus solely on diverse founders, like the Female Founders Fund, which invests only in female-led startups, and Backstage Capital, which focuses on women, LGBT founders and founders from a range of ethnicities. Organizations including the Silicon Valley-famous All Raise and Diversity VC are dedicated to ensuring these funds grow and that more diverse individuals are hired at old-guard VC firms, too.
Meanwhile, startups and firms themselves can act as agents for change, van Kluyve said. Founders can hire diverse teams, and firms can do their part by hearing pitches from companies that serve diverse customer bases. These types of startups don’t always have diverse founders, she added.
“There are a lot of founders trying to solve problems for underrepresented groups," van Kluyve said. As a VC, “You’re taking an ROI hit by not giving these founders a chance. ... And if you do, you can find great opportunity by funding companies that are going to be serving large customer segments that don’t have solutions.”
The bottom line
Research tells us that diverse startups perform better financially. It also tells us that VC money goes disproportionately to non-diverse teams, likely because startups in general aren’t diverse, and those that are tend to seek VC funding less.
Stakeholders who want to see more balance must realize that the process won’t be simple or quick. Experts say it’ll take work on the part of founders, VCs and investors to change the diversity quotient in the VC ecosystem.