The competitive edge of a diverse founding team

The competitive edge of a diverse founding team
Let's not be allergic to the idea that sometimes the nuttier the team, the better the product.

The lack of diversity in the startup ecosystem has been well-documented. Of course, diversity can be viewed through many different lens: geography, gender, religion, socio-economic status, among other variables we can throw into the mix. Let's define it simply as: founders who are non-white, non-male or non-US born.

The statistics are pretty glaring, on both sides of the table: the founders who are trying to build companies and the investors whose capital is an important source of oxygen for company formation. Less than 3% of VC funding goes to female-led startups;  2% for teams with at least one Black founder. On the VC side, you see similar results: 15% of partners at funds are female; less than 4% are Black. These figures fall well below the representation of these groups in our overall population.

A silver lining: these numbers are improving over time, albeit more slowly than most of us would like. It's a shame, not just for reasons of right and wrong, or equal opportunities for all, but also because – it's bad business. For instance, it is estimated that more than 50% of unicorns (startups valued at a minimum of $1B), have a founder who's an immigrant. Out of curiosity, I went back to review 40+ startups that I've worked with over the past decade. What I found from this sample group is that the ROI of diverse teams, where at least one of the founders meets our definition of diverse, is 3x higher than the baseline.

Is that happenstance? I don't think so. I believe there are several intrinsic, and practical, reasons for such over-performance:  

Diversity promotes broader thinking: Great founding teams are problem-solving machines. Having a founding team with a wide range of life and work experiences, and varied perspectives, tends to create constructive dissension and likely, out-of-the-box thinking. Markets move quickly and can render operating playbooks stale in a flash. Startups that can identify, analyze, act and adapt nimbly, and do so repeatedly, win over time. Group-think creates blind posts and can act like the Grim Reaper looming in the background.  

Less access requires over-performing: An important part of building a successful company is by leveraging people relationships. The more pipes into the "startup establishment" a founding team has, the wider the network to be able to bounce ideas off of, try a product or ask for money. Many founders, and especially diverse founders, do not have early, or easy, industry access, requiring them to prove things out even further to gain conviction from new relationships. In startup speak: arriving at more proof points yields a more viable and fundable business.

Less capital spurs efficiency: On a related note, diverse founders usually have fewer options as it relates to capital access, as supported by the figures above. Naturally, under these circumstances, a founding team needs to resort to being extra resourceful with cash, and to try to achieve more with less. This is a critical factor since most early-stage startups wither away because they run out of money before they find product/market fit and a locked-in business model. A scarcity of capital has a way of sharpening focus on value-creating, company-sustaining activities, increasing the likelihood of success.

The business and personal mission become one: There's nothing more powerful to a founding team than feeling like all the cards are stacked against them. Call it the chip on the shoulder or "us against the world" mentality, but the character-building that is spurred by facing additional environmental challenges fuel the persistence required for long-term business-building. The more closely that founders are identified with their businesses, and these struggles, the more moxie they tend to muster to overcome them.

Like in other areas of our society and culture, there is plenty of work ahead to level the playing field for startup founders. As we all try to do our part to help democratize the industry, nothing will accelerate diversity faster than promoting the strength of the business case. As they say, the proof in the pudding (with perhaps a few M&Ms on top, for good measure).

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Jamie Larson