The Power of Diversity

Executive Summary:

A steady stream of evidence has emerged since 2013 indicating that when startup teams and venture investing teams embrace differences of gender, race, ethnicity, educational background, and/or professional experience, these heterogeneous teams are correlated with better financial outcomes than homogeneous teams.

This white paper, “The Power of Diversity: Why Homogeneous Teams in Venture Capital Are Bad for Business,” synthesizes proof points published across the financial services industry by established banks, consulting companies, investment firms, venture capital partnerships, industry associations and academic institutions, all of which had invested in the kind of robust, thorough analysis that defensibly and objectively informs and supports financial decision-making. A pattern has emerged:

• Diverse founding teams create more innovation and better business outcomes, and result in superior performance over the long-term, including overall financial performance,(1, 2, 3) valuation increases, (2, 4) and multiples on invested capital (MOIC) when companies are acquired or go public(5, 6, 7)

• The venture investing teams most likely to fund diverse founders also tend to be diverse, as indicated by data on gender-diverse investing teams(7, 8, 9, 10, 11)

• Diverse investing teams are correlated with better returns for investors, and multiple studies directly note the negative effects of homogeneity on individual investment exits and overall fund returns.(1, 7, 11)

In 2018, WestRiver Group (WRG) began forming a venture partnership based on the guiding principle that diversity drives better financial outcomes. Founder Erik Anderson approached each partner with a question: “Ninety percent of global financial capital is allocated by men. Shouldn’t half of the world’s intellectual capital—women—also be at the table?” Two years later, WRG’s equity investment team is, by design, gender-balanced, with additional dimensions of diversity represented as well, including race, ethnicity, educational background, industry experience, functional expertise and personal networks.

Since our partnership coalesced around diversity as a core value, a global pandemic,(12) a U.S. recession,(13) and the murders of George Floyd, Breonna Taylor, and uncounted others(14) have resurfaced how systemic racism and sexism continue to steal lives, dreams, and economic opportunity.(15) The ongoing, disproportionate suffering and inequality experienced by most Black Americans has forced a reckoning for the VC community.(16) As described in further detail below, even as venture capital has generated more economic and employment growth in the U.S. than any other investment sector in recent decades, (17) sources estimate the number of Black and Latinx investors at just 3% of venture capitalists,(18) respectively; only 1.8% of venture-backed founders are Latinx and 1% are Black.(18, 19)

“Diversity, in fact, is not only a moral obligation; it is a fiduciary one—leading to fewer losses and better performance,” wrote the authors of a 2019 Illumen Capital – Stanford SPARQ study.(20) How, then, in the best interests of venture clients—private individuals, family offices, and institutional investors such as college endowments, foundations, pension funds and corporations— do we fix an industry so profoundly homogeneous?

WRG formed a diverse partnership of experienced investors and c-level operators specifically to win at what we do. As this white paper shares, we know from experience how well diverse teams work, and we see how our intentionally diverse partnership already has expanded our pipeline, potential for fund performance and deal flow. As investors, we are excited to find so many data demonstrating the financial value created by diverse leadership; As citizens, we believe these data chart a path to a more equitable world.(21)

WRG plans to update the URL https://wrg.vc/diversity biannually with sourced findings; we welcome inquiries regarding new sources of information. To reflect our values, WRG commits to collecting and sharing data in a way that applies a more inclusive and intersectional lens to diverse leadership in investing (see “3. Conclusion…” below). With this overview, we hope to find collaborators who will invite us to join your conversations, as we invite your comments and suggestions.

Curated by Lisa Stone, Senior Advisor, September 21, 2020. Last Update: September 21, 2021.

** Add rest of the diversity papers here**