National public attention has appropriately shifted focus toward race inequality. Efforts to promote inclusion along lines of race and gender are at new heights today, and there is a pervasive sense that greater inclusion of minority voices in spaces of power and leadership can bring in perspectives that are necessary to building a better and fairer economy and country.
Venture capital and startups are not separated from these conversations. The innovation ecosystem is one that could both benefit considerably from greater diversity and also desperately needs it. Today, only eight percent of VC investors are women. Hispanic people make up only two percent of VC investors, and Black people make up less than one percent. This doesn’t just indicate opportunity is being offered to a rarified group of individuals; it also signals that startups and VCs could be far more productive and innovative.
Research consistently shows greater diversity along lines of gender and race is linked with better productivity, firm longevity, and stronger modern workplace culture. Here are some major findings:
Diversity correlates with more innovation
- A major study conducted by the Boston Consulting Group found that companies with more diverse management teams have 19% higher revenues due to innovation. In order to reach this conclusion, the researchers isolated firm data for changes in revenue relative to diversity over time. They found that an increase in diversity (gender, nationality, ethnic, and racial) was matched by a corresponding increase in innovation revenue.
- Another study by McKinsey found that companies that have higher degrees of racially and ethnically diverse employees have a 35% performance advantage over companies that chiefly valued homogeneity and a “cultural fit”. Racially diverse executive teams provided an advantage of 35% and 33% more long-term value creation over the least racially diverse companies. The study found that companies are also more likely to retain the best talent and successfully target consumer preferences.
Gender diversity is particularly impactful
- Gender diversity seems to be particularly important, especially among executive teams. A major study by the National Bureau of Economic Research looked at female participation in VC firms. They found that senior partners who had more daughters than sons were more likely to hire women. And the increase in the number of women represented in a VC firm substantively improved deal and fund performances.
- McKinsey’s diversity study also analyzed the effects of gender representation on a company and found that female representation in executive boards had a particularly strong effect on generating above-average profitability. Greater female representation correlated with positive effects on firm performance even among companies in the top quartile.
These micro trends mirror macro trends
- A report by The Brookings Institution showed that a percent increase in the number of college-educated immigrants in the US produced between a roughly 12 to 27 percent increase in patenting per capita. Other research by economists at the National Bureau of Economic Research found that 25 percent of GDP growth from 1960 to the present day is a direct consequence of greater employment representation of white women and Black Americans of both genders.
- Research by the economist Raj Chetty of Harvard shows that the opportunity to become an innovator is often consolidated primarily among the children of high-income parents. A major report he produced shows that low-income students lack the investments that allow them to become innovators. This is why the highest achieving math and science students from low-income households have as high a likelihood of becoming an innovator as the lowest-achieving math and science students from high-income households. In total, “kids born into the richest 1 percent of society are 10 times more likely to be inventors than those born into the bottom 50 percent”. Chetty concludes that greater attempts to target underrepresented groups can help uncover tens of thousands of lost innovators. That has implications for firms and for the US economy as a whole.
Beyond productivity, culture is changing
- Young people increasingly value diversity in the workplace and corporate responsibility generally. A 2018 report by Deloitte showed that 74 percent of millennials believe that their company is more innovative when it has a culture of inclusion. The majority of them said they look for diversity in companies when seeking employment. Deloitte concludes that, in addition to the effects of diversity on productivity and innovation, it can also attract a wider pool of talent among young people.