With all the unsettling news on the international stage, it’s easy to lose sight of some truly positive developments for underrepresented entrepreneurs in the U.S. While some business leaders have made great strides in establishing a more inclusive atmosphere for entrepreneurial diversity, large-scale changes are unlikely until investors feel the problem in their wallets.
However, it seems a spark has been lit that’s ignited the start of larger strides in startup diversity for entrepreneurs. Here’s what I’ve learned this year after interacting with and working to help promote entrepreneurs and businesses from diverse walks of life.
Lesson 1: There is no pipeline problem.
Contrary to what I’ve heard countless times from many investors across the country, there are plenty of excellent investment opportunities led by entrepreneurs who do not fit the traditional “white male Ivy League” founder profile. This spring, I worked with Backstage Capital on its Accelerator program to help diverse entrepreneurs in four cities: Detroit, London, Los Angeles and Philadelphia. Our goal was to support early-stage startups led by underrepresented founders, primarily women, people of color and the LGBTQ community. My team and I were flooded with responses. We fielded more than 2,000 applications in just six weeks and it proved difficult to narrow down to the 24 best investments.
It’s abundantly clear that people from all walks of life are starting companies at a faster rate than ever before. Specifically, black women are the fastest-growing entrepreneurial demographic in the U.S. Additionally, when given the chance, diverse startups outperform industry standards by 35%. In diversity is strength, but we have a long way to go to gain acceptance of this fact among investors and financial gate-keepers.
Lesson 2: Diverse investor groups bring home better financial returns than homogenous ones.
Investor research by Harvard Business School over the past year found that when fund partners shared a single educational background or ethnicity, they earned less than their more diverse peers. In terms of the smartest bets on IPOs and acquisitions, investor groups who went to the same university were 11.5% less successful. Investor groups that only included members from the same ethnic group produced 26-32% less value for their clients.
Lesson 3: The lack of representation among entrepreneurs is mirrored by the lack of diversity in investor groups.
The Harvard study reported that the number of women in venture capital is steady at about 8%, Hispanics at 2% and black investors at 1%. It’s reasonable to conclude that better representation should lead to smarter investments and more value creation for the economy.
Harvard Professor Paul Gompers explained why even investors who recognize the lack-of-diversity problem haven’t turned that knowledge into action, writing, “Most people aren’t bad people, but we have these internal biases to think that people who look like us are smart and capable.” The tendency of investors to rely on warm introductions from those already inside their networks further narrows the opportunity gap and enforces the status quo.
Lesson 4: Raising money from family and friends is not a real option for many underrepresented entrepreneurs.
Two out of every three entrepreneurs who applied to Backstage Capital’s Accelerator program had not raised any financing before contacting us. The common argument that underrepresented founders need to start by raising funds from private networks is inherently unfair given the state of income inequality in their communities.
As investor Andy Ayim pointed out, “Too often, I read about origin stories where they [traditional entrepreneurs] raised a ‘small’ $300,000 friends and family venture round. In contrast, I could barely raise $2,000 from my friends (if even that). Like me, my friends are grinding and living from paycheck to paycheck to provide for their family.” The quality of a startup’s value proposition should have absolutely nothing to do with how well off your friends are.
Lesson 5: Diversity-aware investment strategies beat the market.
For many years I’ve worked closely with my partners on bringing diversity and inclusion to life for the wider business community. I’ve personally seen their success at inclusive investment. This success has been mirrored by a select group of others outside of our immediate network, as well.
For example, in 2019, Kapor Capital, dedicated to “closing the gaps of access, opportunity, and outcomes for low-income communities and communities of color in the U.S.,” proved that their investments outperformed the market in terms of Internal Rate of Return (IRR) and Total Value to Paid In (TVPI) multiple. Along the same lines, Cross Culture Ventures saw the value of its fund’s portfolio grow by 2000% based on a strategy of backing a diverse group of entrepreneurs, prioritizing startups led by women and men of color.
Lesson 6: Community matters as much as coursework.
To provide the Backstage Accelerator companies with everything they needed to know to grow a successful startup, I put a great deal of sweat equity into assembling the smartest curriculum, covering everything from accounting to funding rounds to excellence in hiring practices. I also planned out the most efficient schedule of meetings between entrepreneurs and the investors most likely to support them.
To my surprise, I learned that supplemental critical work was getting done during breaks and informal discussions after scheduled meetings. Despite targeted workshops and mentor meetings set up during the Accelerator, entrepreneurs seemed to greatly value a sense of belonging to something bigger. They had worked for so long on their own against stacked odds that they energized simply in spending time with a community of people who understood their struggles. This was echoed by entrepreneurs participating in past Investor Day programs that I’ve run. The more the community grows, the stronger each member becomes.
It has been especially encouraging to see so many investors not only acknowledging the problem of widespread discrimination but also taking the next step to investing in startups by women, people of color, those in the LGBTQ community and more. Of course, as investment data shows, we still have a long way to go, but the nation is starting to move in the right direction.