Diversity in the Venture Capital Industry is Slowly but Surely Taking Shape

February 19, 2021 by Susan Paige

When looking at the data for investors and funded startups in the venture capital industry, it’s not hard to see the lack of diversity throughout the years and into today. Why is this a phenomenon that is seemingly hard to break for the VC field? That depends on whom you ask, but there are some trends that stick out, indicating a deeply rooted issue. This isn’t for lack of trying. In fact, there has been a recent rise in initiatives to solve this very issue. Can VC firms shake up diversity and move toward a more inclusive environment? It will take a collective effort, but it is entirely possible.

Based on a Siloed Network

In 2021, one would think that diversity and inclusion are at the top of every business’s list of goals. However, there are still industries out there that are based on a very niche network. Venture capital happens to be one of those industries. As with every shift, there are those industry-changing leaders. As a Managing General Partner in the San Francisco Bay Area, Patrick Chung of Xfund is a prime example of a more forward-thinking investor. Partners and funding recipients like him are becoming more and more commonplace, giving us a glimpse into a brighter, more inclusive future for venture capital. The process includes working to weed out the traditions that tend to make this industry an echo chamber. VC firms recognize more than anyone that echo chambers don’t spark new patterns of thought, and what is venture capital without innovation?

From its inception, however, VC funding has relied on tapping networks that only include companies or investors that come from specific communities, backgrounds, and locales. Examples of these include Stanford University startup incubators and Silicon Valley startups. VC firms are used to picking their fish from those pools, and if you aren’t in one of them, you are statistically overlooked. When something isn’t broken, it’s said not to fix it. However, this often puts industries in silos, perpetuating biases that leaders may or may not be aware of.

Recognizing Unconscious and Conscious Bias

The first step to change is to recognize the problem. If VC industry tradition relies on the same sources time and time again, nothing will change. Even with specialized VC firms popping up and disrupting the field, the major players are perpetually isolated by the tendency to still pick from the same batch every time. Whether they are choosing VC partners or startups that need funding, those in the industry are taught to look in those well-known spaces first. This is what the industry was based on from the start, and the effects are still trickling into the current practices. What can VC firms do to change this? What are they already doing?

How Can Venture Capital Diversify the Industry?

There are a number of VC firms that are beginning to tap into sources that are more diverse in the first place. A plethora of initiatives in the space are now working toward closing the race and gender gaps. Here are some communities that are starting to be welcomed into the VC arena, whether that’s as an investor or funded startup:

  • Female
  • Asian
  • African-American
  • Hispanic and Latinx
  • LGBTQ+
  • Lower socioeconomic status
  • Founders without degrees from Ivy Leagues
  • First-time entrepreneurs

As outlined above, the disparity also applies to everything from sexual orientation to startup founders that aren’t serial entrepreneurs. It isn’t enough just to focus on race and gender, although that is a great start. While the problem isn’t automatically fixed, there is now more awareness. There are dedicated diversity-focused VC funds, but other major VC firms are taking notice of the societal shift, too. Diversity in senior leadership offers benefits for the VC firms that choose to employ this practice. Diverse decision-makers lead to higher chances of business success and rates of employee performance.

VC is Breaking the Mold

The positive effects of diversifying investors and startups are not lost on VC firms. After all, the best ideas arise from thinking outside of the box. They have known this for years. It takes humility to recognize your own biases, and it takes time to mitigate the negative effects they might be having on inclusion efforts. Just because it is difficult doesn’t mean it isn’t possible.

The advantages are clear. Both VC firms and startups would benefit from greater diversity. The industry is working toward this, with seed funding dedicated to diverse groups. The major players are taking note, but the methods of achieving wealth are so intrinsically ingrained into society that it will likely take more than simple recognition.

White, male, Ivy League-educated people make up a large percentage of VC partners. This is just a fact. While they aren’t expected to give up their seat on the proverbial throne, there are steps that they can take to mitigate the silo effect in future years.  For starters, records and reports of diversity initiatives should be mandatory and public. It may take years to fully adopt new guidelines, but the VC field is on the right track.

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