In 2021, venture capital firms distributed a staggering $329.9 billion in the U.S., almost twice the previous year’s tally. Despite this substantial sum, only a minuscule amount was allocated to startups with diverse founders. For example, according to a report that reviewed 200 venture capital funds, only around 1.87% of the $31 billion held by those funds went to underrepresented founders and women.
Moreover, the same report found that VC-backed startup founders are mostly men (89.3%), white (71.6%), based in Silicon Valley (35.3%), and Ivy League-educated (13.7%). Furthermore, a paltry 1.9% of the total funds distributed in 2022 went to woman-founded companies, and about 1% were directed to Black-founded businesses.
How Inequality Limits Business
Ideas that don’t get funded aren’t heard. Imagine if we expanded the venture capital world to all seven continents, but only VCs in Asia were funded, and no VCs in North America were funded. We would have missed out on pioneering inventions like the iPhone and Google. Similarly, we are missing out on the perspectives and innovations of women and Black entrepreneurs.
Instead, men who are white, who make up only 30% of the population, are in control of 93% of venture capital dollars and make up 58% of venture capitalist investors. Meanwhile, women who are white, also making up 30% of the population, hold only 11% of partnerships and manage a meager 3% of venture dollars. Furthermore, the remaining 40% of the general population is only represented by 31% of venture partners, controlling just 4% of venture dollars.
We will never know what transformational advances could have been made by now if circumstances were different. Take, for example, Henrietta Lacks — the source of the hugely important “HeLa” cell line — a Black woman whose cells have been tremendously important for medical research. Applying a venture capital approximation, had Henrietta Lacks not been “funded,” if you will, our society would have lost out on many of the most groundbreaking medical advances in history.
The Staggering Consequences of Systemic Inequality
The Roman Empire faced numerous issues on the road to its decline. One of the contributing factors, however, was inequality. The growing wealth of the empire was not shared evenly among its citizens, creating a stark gap between those who had and those who had not. This is part of why this great empire fell, and the same danger exists today.
Venture capital is a significant source of wealth creation in our society. Many global tech companies have been backed by venture, and the success of those companies has created a tremendous amount of wealth for their founders, key employees, communities, and more. That’s why diversity in tech is so important in VC.
VCs are key drivers in the national economic ecosystem. As such, they have the power to increase access and opportunity for underrepresented entrepreneurs. The venture capital industry has the opportunity to help ensure the increased longevity of the American Empire by helping to arrest inequality of funding within the industry. Here are three ways VC leaders can make space for marginalized groups:
1. Go above and beyond.
At Ascend Venture Capital, we pride ourselves on a portfolio that is significantly more diverse than the industry average. Of our 17 portfolio companies, five are founded by a first- or second-generation immigrant, and eight are founded by either a woman, an immigrant, or a person of color. This is uncommon for venture capital firms that do not have specific mandates to invest in diverse founders.
Homogenous VC firms are leaving money on the table by not diversifying their portfolios. Gender-diverse teams generate 30% higher multiples on invested capital (MOIC) compared to homogenous teams. Moreover, companies with at least one woman or ethnically diverse founder generate over 60% in business value. This proves why diversity in funding startup founders is essential to value generation.
2. Apply a nearly founder-anonymous selection process.
In our process, we don’t even know who the founder is until almost the very end. We apply a nearly founder-anonymous selection process. We go through our criteria for selection. Are they building transformational proprietary tech? Does their industry need this tech to move forward? What’s their economic moat? Near the end of our due diligence process, we then ask, who is the founder and their team? But by this point, we have already established whether or not they’re a good fit.
For example, the New York Symphony conducted a unique experiment in the 1970s to address gender inequality. The orchestra had recently been accused of sexism and discrimination against woman musicians, so the music director decided to try a new approach: conducting auditions with a screen between the judges and auditioners. This innovative approach proved successful. Within just two years, the number of women musicians almost doubled. The idea of VC firms developing their own nearly founder-anonymous selection process can help them build more diverse investment portfolios.
3. Design for the least privileged and benefit everyone.
The “curb-cut effect” describes how curb cuts on sidewalks came about from a need to ensure those with disabilities — for example, people who use wheelchairs — could use sidewalks without the jarring transition from sidewalk to street. Transportation planners created curb cuts that eased that transition to a gentle slope. The unintended positive side effect was that, although curb cuts were designed for those with disabilities, everyone loved them: parents pushing strollers, cyclists, and even nondisabled pedestrians. The curb-cut effect instructs that when we design for one group, everyone benefits.
There are still systemic issues at play in the venture capital world that contribute significantly to disparities in accessing resources. But with greater awareness of these issues comes great potential for change centered around creating more equitable opportunities within entrepreneurship and society at large. When that happens, we all benefit.
Yinka Faleti is a partner at Ascend Venture Capital, a thematic venture capital firm in St. Louis that provides early-stage financial and operational support to data-centric transformational tech startups. Faleti focuses on generating capital for follow-on investment in portfolio companies that are thriving.