Diversity Bias in Startup Programs
In the Nordic countries, one of the most gender-equal regions of the world, 88% of venture capital funding goes to male startup founders. Coincidentally, 87% of senior venture capital partners (investment decision-makers) are also male. And it makes sense. Investing in startups is all about eliminating risks, so why not pick founders that look and speak like you did yourself, 25 years ago? Let’s not forget, funding systems that prioritize one type of founders eventually breeds that same type of founders. In the US, Black and Latinx people make up 30% of the population, 20% of the entrepreneurs, but only 3% of venture-backed companies.
The problem is, the world has changed. “Talent is everywhere, opportunity is not” said Leila Janah, the late founder of Samasource, who created 50,000 jobs in underserved communities. When startups are sourced and selected for economic development programs and innovation grants, organizers often default to having investors “help” them select the right founders, even though a startup’s value generated in society may be entirely different than an investor’s return on its equity.
A few years ago, an economist from École Polytechnique did a study on 20,000 startups that went through hundreds of startup programs. The team correlated their scores during the selection process to the eventual outcome years later. Were they successful? Had they fundraised? Did the team grow? The result was staggering: Even though there was a correlation between selection and outcome, they showed that the principle of selection was a major factor. The startup cohorts that fared the best came from those programs that employed proper arms-length selection processes and worked to eliminate unconscious biases. At the other end of the scale, those that were done by a few people in a room, similar to venture capital decisions, showed sub-par performance several years later.
Today we know that entrepreneurial spirit and drive transcends all borders of society. Thanks to dramatic technology improvements over the past 10 years, founders in remote parts of the world can build and scale global businesses with millions of customers. Single parents can start and build businesses from home, without leaving their kids out of sight. In a truly global ecosystem, purpose-driven founders can launch startups with little prior experience or available resources. And thanks to a global flow of information and technology, capital increasingly finds its way across borders. Even UNICEF now runs a global cryptocurrency-based fund, investing in impactful founders improving the lives of children across the planet.
Optimizing for diversity should not be that hard, actually. First, you have to communicate differently from the venture capital industry. Think about what drives your demographic, where they spend their time, and let them know your process is different. A great example of this is Pharrell Williams’ $1m Black Ambition Prize that rolled out in a variety of channels and were picked up in places like The Daily Show and Vogue. Second, you have to design the process to avoid implicit biases, including your intake of applications, screening process, and a proper arms-length distributed evaluation process, where diversity is built into the expert evaluator pool. Finally, once you pick the right startups, make sure your program enables and includes mentors, advisors, and investors from outside venture capital, since that is where true economic value is eventually created by the right startups.
The venture capital industry has been under fire for years with its lack of diversity, both in investment teams and the founders they fund. It is time for the rest of the ecosystem to follow suit and start eliminating biases when choosing startups. Governments must put in place transparent best-practice selection processes when startups are evaluated for grants. Foundations should start relating (and documenting) their selection principles to future startup impact. Even in large companies, when working with entrepreneurs and startups, it is time to stop acting like venture capital firms, and start choosing startups based on strategic value to the rest of the “legacy” business. We are a few years away from shareholders, voters, and donors all demanding such transparency, and today we finally have the tools to get this problem right.
Torsten Kolind is CEO & Co-Founder of YouNoodle, a startup sourcing and evaluation platform based in San Francisco. Leveling the playing field for entrepreneurs is a personal mission to most of the highly diverse global team. They are working around the clock to support bold startup programs improving access to entrepreneurship opportunities. Besides the Black Ambition Prize, YouNoodle also supports initiatives such as Tommy Hilfiger’s Fashion Frontier Challenge, and MEDA’s Million Dollar Challenge for Minority Entrepreneurs.
