Achieving higher ROI through inclusive innovation

Recent evidence shows that inclusive startups and investors perform better:

  • Companies with a female founder performed 63% better than those with all male teams, according to one portfolio — diverse founders, often underestimated by mainstream finance, deliver a higher ROI and unlock new market opportunities
  • Strong social / environmental practices boost returns 1%-2% annually, among large public companies, in part due to how such practices de-risk a portfolio
  • African American buying power tops $1 trillion, demonstrating the potential of reaching underserved markets
  • Latino are starting businesses 17% faster than the rest of the population, demonstrating the entrepreneurial potential of an inclusive ecosystem

Yet only 11% of venture capital partners are women, and only 17% of VC deals include women on the founding team.

A recent study points to some gender-specific challenges that contribute to these disappointing levels of equity, including increased pressures to seek traditional jobs: Women, minority, and foreign-born entrepreneurs more often need to provide for siblings or children than their white male counterparts. As a result, they may face a shorter runway to profitability, a lower threshold for failure, and simply no option to “fail fast and fail often.”

The number of gender- and race-specific efforts to close the entrepreneur gap is rapidly proliferating, with 48 gender-lens funds according to a recent study. Efforts span the startup lifecycle, from idea-stage educational efforts to seed-stage incubators to investment vehicles. They each promote different interventions, without commonly reported measures of success.

In-depth reports on diversity in VC each use different criteria (investments in female founders, female partners, VC raised by female-founded companies) making any industry-wide or longitudinal benchmarking difficult — and thus stymieing concerted change efforts. While there are efforts to track gender participation, racial inclusion is not as commonly tracked.  And there is no consensus about how to measure progress, e.g,. founder / management diversity, racial equity in investments / valuations, etc.

The value of consistent disclosures can be seen in public markets. Shared frameworks for Environmental, Social, Governance (ESG) measurement and commitment to annual disclosures have enabled 2,000 major investors to incorporate such factors into their strategies. However, there has not yet been as much progress in venture capital or high-growth-potential startups.

Lean startups are simply not equipped for the intensive reporting suitable to large companies.

We need new ecosystem measures. For example, disclosing accelerator admissions rates could help diagnose unconscious biases in applications and admissions.

By defining consistent, voluntary measures of inclusion across startups, entrepreneur supports, and investors, we could allow the  market to measure — and overcome — the gender and race barriers to entrepreneurial success.