by Loralyn Mears, PhD
Diversity, equality, and inclusion: DE&I poses a real problem. What if the stats don’t change? That’s a billion dollar exam question that few people dare to raise. We, as a society, are collectively caught up in the incremental gains because under-represented groups have finally gotten on the radar with an agenda that nods towards social justice – but that’s not good enough. We need to shift towards diversity with intention and to overhaul companies so that they become learning organizations. Let’s explore the current statistics as the first step in raising our awareness so that these data can inform our future behaviors.
There’s been an uprising – or two – or five. Although the movement towards equality has been around for a long time, it first catapulted into the global spotlight more than 50 years ago via the visionary, Dr. Martin Luther King. Since then, there has been some progress but there’s certainly room left to improve. Given the 2020 public outcry towards racial transgressions caught on film, social justice is no longer a movement. It’s an unalienable right. Civil liberties aren’t the focus of this blog, but the newly awakened consciousness of equality has ignited a firestorm which is inextricably linked to the exam question I’ve just proposed.
Flipping the question around, what can we do to change the statistics? Each of us can be better and do more as white allies and that begins with raising our consciousness; asking ourselves if we could be doing something more, something different. A key aspect is augmenting our understanding through difficult conversations where we learn as much about ourselves as we do about the other cultures that we’re connecting with. Only then can we support efforts that level the playing field for marginalized groups. And we can certainly decry efforts that make any group less than another; perceived or realized. Diversity with intention needs to become our collective rallying cry. I know that I can do more and am personally committed to a path of personal development in combination with supporting efforts that enable others to have more, do more and be more.
The gap is widening
Last Autumn, The Growth Warrior released its second annual, “State of the Underdog Report 2020” which is a comprehensive analysis of underdog (aka “under-estimated” or “diverse”) founders and their access to capital to fund their businesses. Diverse founders include Black and Brown, LGBTQ, differently-abled, Indigenous, non-Ivy League grads and “old” entrepreneurs over 45 years of age. Founders within these communities are struggling to get their startups funded.
Curious, I wanted to know why, so I asked the company’s founder, a serial tech entrepreneur and a woman of color, Promise Phelon, why diverse founders weren’t flourishing. Was it access to capital or something else? She answered,
“Research shows that the gap is widening. There is tremendous upside potential for investors – but only if the barriers holding diverse entrepreneurs back can be overcome. The catch? A lack of diversity within the investor class stands in the way, not the access itself.”Promise Phelon, founder The Growth Warrior
Only 2% of Venture Capitalists (VCs) are Black executives at the partner level and only 8% are women. Of the more than 1,000 VC firms established in the US, there are fewer than 200 individuals (not firms) who are Black or Latinx. A staggering 74% of VCs do not have a female (cis- or trans-) at the executive level. I asked Mark Roberge, Senior Lecturer at Harvard Business School and Managing Director at Stage 2 Capital, where entrepreneurship fits in the DE&I story. He said,
“Entrepreneurship should be a contributor to equality, rather than a detractor from it. We need to continue to rethink the dissemination of knowledge, capital, and talent to make the gift of entrepreneurship accessible to all.”Mark Roberge, Senior Lecturer at Harvard Business School and Managing Director at Stage 2 Capital
Blacks start new businesses with an average of $35 thousand compared to White founders who begin with an average of $80 thousand. In today’s COVID era, Black-owned businesses are closing at nearly three-times the rate of White-owned businesses (41% vs. 17%). And then there’s the coronavirus susceptibility and mortality rate differences correlated with unequal access to healthcare … but that’s a topic for a future post.
An encouraging stat to share to make things less bleak is that there are now 38 women at the helm of a Fortune 500 company – that’s an all-time high – and that number recently rose to 39 with Jane Fraser becoming the CEO of Citigroup. But how much education and awareness effort has it taken to achieve a 8.2% representation, which was only a paltry 6% just a few months ago? I’ll leave that there to sink in for a moment.
Is there really an upside for investors?
Oh, yes! It’s easy to be dismissive and argue that investors know their markets (and a good idea when they see one). They’ll be the first to recognize if there’s an opportunity for money to be made, and, if there is, they’ll open their checkbooks. Maybe they’re not seeing any good ideas from women or people of color?
Baloney! That’s just not true. Unconscious bias has finally become mainstream in our vernacular. It’s more than just a term – it’s still a reality for those who are not white male, Ivy League founders who typically pitch in front of older versions of themselves. Many venture capital funds tout how much of their portfolio is spawned by Ivy League founders, leading some to call it “mirrortocracy.”
Ivy League graduates, regardless of color, seem to have better luck. They secure, on average, 40% more capital than their non-Ivy League graduate counterparts. VCs’ portfolios typically have 26% of their companies founded by an Ivy League graduate.
From the entrepreneurs’ perspective, there is a whole new class of scrappy founders emerging from the rubble of a global pandemic poised to launch new businesses. In fact, business is booming: last year, over 804,000 businesses were launched in the US alone, up more than 12% from 2018. But the people funding new ideas don’t always like these new founders. That said, there are an increasing number of progressive angel and venture capitalists (VCs) who see beyond color and their privilege; they are allies to diverse founders. And successful diverse founders are committed to “sharing the wealth” offering numerous channels for investment, mentorship and business access. Specifically, VC funds established by Black executives invested $370 million (that’s an “m” and not a “b”) into businesses with at least one Black co-founder to garner 0.8% of total VC monies. Among the LGBTQ cohort, only 30% of founders who identify as female were able to raise $750 thousand dollars or more. My point is that these are sizeable gaps that have yet to be closed.
But here are a few encouraging stats. 2019 marked an all-time high for monies raised by businesses with at least one female co-founder: $3.3 billion. To put that in perspective, that’s still only 2.8% of the total $137 billion deployed by the venture industry for investment in US-based businesses, but it’s a significant jump from 2.2% in 2018. Before we get excited about a half percent increase, the corollary is that all-female teams raised only a tenth of that 2.8%.
Unfortunately, the ripple effect of the pandemic appears to be hitting women the hardest, largely correlated with the challenges of managing home school, childcare, eldercare – and trying to work from home in the middle of all the chaos. The result has been a 31% decrease in funding for female founders, setting 2020 levels back to numbers we saw in 2016-17. But we’re all optimistic that the year-over-year increases observed over the past few years will resume once the pandemic releases its clutches on “normal life.”
The Unicorn Count offers more proof that it’s worth investing in diverse founders. Last year, women (as founders or co-founders with a male counterpart) broke another record, birthing 21 unicorns, up from 12 the year before. Today, 40% of US businesses are owned or co-owned by people who identify as female. Those businesses collectively generate $1.5 trillion in annual revenues – yes, that’s a “t.” Businesses owned by BIPOC (Black, Indigenous, or People of Color), spur $387 billion each year and employ 2.2 million people. LGBTQ community members own 1.4 million US businesses which annually generate $1.2 billion – clear signs that show there is money to be made by investing in diverse founders.
Back to the exam question
So, with all these upside potential statistics and encouraging metrics regarding the progress that women and people of color have made in terms of business success, you’re probably thinking, “Damn, that’s pretty good!” Indeed, it’s progress. But we have to look at the bigger picture.
If you want to place a bet, you need to first consider the odds.
Here are some sobering data: as a startup, only 0.91% secure an angel investment; fewer than 0.05% secure VC funding. The joy continues with these statistics: over 92% of new startups fail, 75% of VC-backed companies fail and less than half of those see their 5th anniversaries. Starting a business is a risky venture to be sure, but the odds are clearly stacked against the underdogs who dare to dream. Probing on why that is, I questioned Phelon why the statistics are the way they are. She mused,
“Look beyond the numbers: marginalized populations have been conditioned to take ‘no’ for an answer. ‘You are unlikely to succeed’ is a mantra that has been engrained over decades. Driving change requires drastic transformations in: 1) the mindset of diverse founders – they need to be reconditioned and trained to become successful; and 2) how investors make funding decisions – which obviously needs to be overhauled to impact who they fund.”Promise Phelon, founder The Growth Warrior
With the current odds, a founding team comprised of persons of color has less than a one-in-a-million shot at securing VC funding. You may as well play the lottery with those numbers. And if that’s the current best that we can do after decades of rallying, discussion, awareness and an increasing willingness to recognize the disparity, we’re in trouble. Yes, there are finally numbers trending upwards to the point where diverse founders, including female founders, actually have some representation on the graphs, but we have to consider what it’s going to take to actually move the needle.
At this lumbering pace, we also must be honest and refrain from asking the exam question: what if the stats never change? Instead, we all need to be asking ourselves, “What can I do to change them?”