Diversity is still woefully lacking at most VC firms — and in the companies they back. Here are some ideas on how to change that from people who have done it.

Photo by Tim Mossholder on Unsplash

Representation of women and minorities is still woefully low in venture capital firms.

For women there has been some small progress. Around 26% of the investment professionals at US venture capital firms are female, according to figures from the National Venture Capital Association, up from just 15% in 2016.

The dial has hardly moved at all for black investors — they make up just 5% of investment professionals at US VCs. Asian investors make up around 22%.

This is despite the fact that studies have repeatedly shown that having diversity of thought among investment teams  — and diversity in the startups they invest in — results in better performance.   

“The data supports that by having diversity, equity and inclusion for founders and teams, you can actually do better. That’s why DEI matters at the end of the day,” says Sanjiv Parikh, managing director of Avanta Ventures, the investment arm of insurance company CSAA.  Avanta has included diversity, equity and inclusion clauses into its investment documents for the past six years, ever since it was founded. They stipulate that all their companies have a DEI mandate and that this is discussed at the board level.

Founders from different life situations and backgrounds are often excellent at spotting those opportunities that others don’t see, says Susan Viscon, vice president and executive director at Path Ahead Ventures, a fund and accelerator that backs founders of colour working in the outdoor space.

“I have one founder that I’ve worked with, Gloria Hwang, an Asian woman who has an incredible helmet company, called Thousand Helmets,” she says. “People sometimes think about diversity as being niche or building just for a community. But her helmet is a great example of somebody who’s thinking about an urban environment, versus people who were just thinking about road cyclists on 50 mile rides on the weekend. She’s really changed what is happening in that space and has grown a business to be really successful, because there was a void of who was thinking about the urban cyclist out there.”

Gloria Hwang at Thousand Helmets spotted a void in the urban cycling market

Some investors, such as Charles Hudson, founder and managing partner at Precursor Ventures, have built a whole business around finding and backing people who have been overlooked by the mainstream VC industry, finding, in the process, the undiscovered gems.

But building diversity, equity and inclusion into your investment practice doesn’t happen by itself. We asked Viscon, Hudson and Parikh, as well as Trina Van Pelt, senior managing director at Intel Capital and head of the company’s diversity, equity and inclusion efforts, for their advice on how to do this well. These are some of the insights they shared on our recent webinar: Navigating DEI: Making diversity work for CVCs.

1. Build your own investment team for diversity

“We’ve been pretty intentional in trying to build an investment team that creates pathways into venture for people who don’t normally get the opportunity. We’ve always had a majority, if not exclusively, female, and mostly female women of colour investment team,” says Hudson. He believes there is no shortage of people from diverse backgrounds who would make good investors.

“There’s tons of investment talent out there. In those communities, they just need the opportunity to demonstrate their skill and abilities,” he says.

Even if your own investment team might be less diverse than you’d ideally like, CVC units can tap into some of the diversity that might be present in their parent companies. Van Pelt says, for example, that at Intel they have a programme where they embed Intel experts into the portfolio companies to help them. Between 50% and 60% of these experts tend to come from diverse backgrounds, says Van Pelt.  

2. Rethink your networks and get into some new communities

Investors sometimes say that they have no objection to backing startups led by women or minority founders, but they just aren’t seeing them. If this is happening, you need to revise what networks you are joining. Becoming part of a diverse community is one of the best ways to get a varied deal flow.

“We are working with communities. We have quite a few communities that work on participation, so it might be Black Girls Do Bike or Latino Outdoors, working with those communities to get the word out about what we’re doing so that their reach can also bring people in,” says Viscon.  

“You have to be in the flow of that community, not to just be transactional, but to show up each and every day over a long period of time, so that we build trust,” says Parikh.

“Three to four times a year, we’re reevaluating our own networks.  Sourcing is the lifeblood of a venture funding.  We’ve become very intentional about where we’re spending our time, our energy, our resources, and our capital,” he says.

3. Drop the warm introduction requirement  

Many VCs will only speak to founders if they get a “warm introduction” or personal recommendation from someone they know. The trouble with that approach is that it can keep their networks pretty narrow.  

“One of the big decisions we made early on was that we would actually build a team of people whose primary responsibility was to respond to people who applied through the website, because not everybody will have the fortune of having a warm introduction to us,” says Hudson.

The Precursor Ventures website has a section where anyone can contact them with a pitch. This approach takes a certain amount of resourcing, admits Hudson. There are two interns and one full time person whose job it is to ensure that all the cold submissions receive an answer within two weeks. The team can get 1,200 cold submissions a month, and this is increasing by 10% every month. But, says Hudson, the quality of the startups getting in touch is steadily increasing too, so there is value in this open approach.  

4. Investors can do a lot to encourage diversity at their portfolio companies.

“It’s not just at the point of investment,” says Van Pelt. “We also think about how we expand diversity at the leadership stages over the lifecycle of our investment. It’s pushing for diversity at board levels, like making sure that we’re continuing to have a diverse slate of candidates for the management team. We very much focus at the leadership level, because that sets the tone and culture for the overall firm.”

5. If you want people to take diversity seriously, measure it (and link it to bonuses)

“What you choose to measure is the behaviour that you drive,’ says Van Pelt. She acknowledges that it can be difficult to measure the behavioural side, but Intel Capital does look at what both individuals and teams are doing on this.

“At the individual level, what are you doing to help drive diverse deals? Are you expanding the kind of opportunities [you are finding]? Or are you continuing to bring the same things from the same networks,” she says.  

“At an organisation level, we have direct numbers that we are tracking on a quarterly basis, and overall basis,” she says, adding that achieving these goals has an impact on people’s bonuses.   

6. Investors need to be held more accountable for diversity

DEI legislation is a confusing area. On the one hand, the US Supreme Court has recently ruled against affirmative action policies, a move which may stifle companies ability to consider racial diversity in hiring. On the other, the state of California is requiring all VC firms to disclose the race and gender of the founders of the companies they back.

So far, a lot of the work that VC investors have done on DEI is entirely voluntary, and many of our panelists felt that companies needed to be held more stringently accountable.

“There’s a lot of work still to be done. The progress has not been nearly as impactful as it needs to be,” says Parikh. “Some of the things like measurement, let’s be honest, don’t really have any teeth today. We measure some of these things for ourselves, we don’t report them publicly. We ask our portfolio companies to have diverse slates of candidates for all of the open slots that they do have. But is there any recourse or repercussions rather, if they don’t? There aren’t today.”

Hudson says the LPs and funders of venture capital firms could be the ones that do the holding to account, directing money away from those companies that are only paying lip service to the diversity concept, and putting more into the ones that are genuinely having an impact.

 “I really hope that the firms that are actually making a difference get more access to more capital and that the people who are only claiming to have an interest in doing this are held accountable for the results,” he says.

There was much more nuanced advice in the full webinar discussion, which you can watch here:  

This webinar is part of GCV’s The Next Wave series of webinars. We run a webinar on the second Wednesday or every month, alternating between advice for CVC practitioners and deep dives into specific investment areas. Our next webinar will be Reaching for the sun: Is it time to invest in fusion on December 13. Register here to secure your place.

Maija Palmer

Maija Palmer is editor of Global Venturing and puts together the weekly email newsletter (sign up here for free).