The Changing Face of Venture Capital

The last couple of decades have seen a marked increase in the concern for ensuring diversity. We have witnessed the shift in attitudes from ‘allowing’ diversity, to actively seeking to create a ‘diverse workforce’. However as is the case with certain buzzwords, a ‘diverse workforce’ can remain an abstract if not elusive concept that is fraught with misconceptions, especially when it comes to increasing diversity in a boardroom.

Recent events and their social reactions like with the Black Lives Matter movement have forced everyone to introspect and examine their part and duty in ensuring a more just society. VC firms have not escaped this scrutiny and now more than ever, homogenised hiring practises are being questioned. In light of this, Pitchbook hosted a panel discussion with various professionals from private markets on what is the role of investors in addressing these concerns.

 

Tracking the use of the word ‘diversity’ over time using Google’s Statistical Analysis tool ngram

This graph on the word use trend of ‘diversity’ was reflective of the participating companies. Speaking of his commitment to reaching more entrepreneurs through a more diverse investment team- Barry Eggers, founding partner at Menlo Park-based Lightspeed, stated that his team has gone from being mostly white men to now including 10 female investors and three black investors.

Another speaker Lisa Lambert (president and founder of National Grid Partners and former head of Intel Capital’s diversity fund) raised a very interesting point: the importance of making your values clear. If women and people of colour feel that ‘the door is open for them’ then they will receive applications from people who were hesitant or who may have otherwise felt unwelcome.

Encouragingly, the panel was in agreement that the perception that a diverse hire may lead to unqualified candidates held no truth. As you may be aware, traditionally, the ‘benefits’ from a diverse team were thought to be factors that were ‘harder to measure’ like collective accuracy, more innovation, reaching a wider audience etc. However, as this report by the Harvard Business Review proves after examining tens of thousands of VC investments, diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. Yet this is clearly not something that has achieved recognition as only 8% of VC investors are women. Out of those women, fewer than 1% are black. A somewhat surprising finding of the HBR report was the ‘daughter effect’.

When a firm’s partners had a higher proportion of daughters, the likelihood that a female investor would be hired went up significantly. And this reaped results too as the report further shows that VC firms that increased their proportion of female partner hires by 10% had on average – a 1.5% spike in overall fund returns each year. They also had 9.7% more profitable exits. Keep in mind that only 28.8% of all VC investments have a profitable exit.

Hopefully, as consensus (and the evidence) on the benefits of a diverse investment team is strengthened there will one day be no need for specific initiatives or pledges that aim to fix underrepresentation. These practises would be recognised for what they are economically sensible, fair and most importantly, common sense. They would be deeply ingrained in the way companies hire and operate. We are nowhere near that day today but we do have the very real opportunity to get there.

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