For several years, there has been a growing movement to increase diversity and inclusion in the tech industry. It kicked into high gear in October 2013, when Tracy Chou, then an engineer at Pinterest, called on tech companies to release employee demographic data. Chou started things off by reporting Pinterest’s engineering team’s gender diversity data.
Since then, tech companies have more willingly released their data. In 2014, Google released the industry’s first diversity report, showing it was 61.3% white and 69.4% male. Fast-forward to today and Google is 54.4% white and 68.4% male. Still not great, but an improvement.
Reporting diversity data is not the only task required of tech companies looking to foster diversity and inclusion. But examining this data internally and then reporting it publicly helps to hold these companies accountable. There’s also a saying in business: “you can’t improve what you don’t measure.” That applies here, too.
In general, tech companies are taking diversity seriously, but the same cannot be said for the venture capital industry.
Venture capital is not diverse, no matter which way you look at it. Whether it’s the partners themselves or the companies they invest in, there is a lack of diversity all around.
Many studies have shown that the VC industry is dominated by white men. A 2018 analysis from The Information, for example, found that just 1% of decision-makers at VC firms are black and only 1.5% are Latinx. Another analysis found just 1% of venture capitalists are Latinx and only 3% are black, according to Richard Kerby, a partner at Equal Ventures.
On the other side, of the 135 biggest firms in the U.S., just 1% of the founders they invested in identified as black, 1.9% identified as Latinx, 2.4% identified as Middle Eastern and 17% identified as Asian, according to a 2019 study by RateMyInvestor and Diversity VC. Additionally, just 9% of founders were female. In 2018, female founders brought in just 2.2% of U.S. venture capital dollars.
For black female founders, the number receiving funding is growing, but there were just 34 black women who had raised more than $1 million in funding in 2017, according to digitalundivided’s ProjectDiane report. The median amount of funding raised by black women is $0. That’s because the majority of startups founded by black women receive no money. Of the black women who raised less than $1 million in funding, the average raised amount is $42,000. In total, according to digitalundivided, black women have raised just .0006% of all tech venture funding since 2009.
Just as there is an expectation that tech companies will report employee demographics, venture capital firms should report the demographics of the founders they’re backing. Hard numbers might make it easier for firms to see where firms need to improve their outreach. That’s not to say that VCs should implement funding quotas, but it could be worthwhile to implement a Rooney Rule-type policy where each partner makes an effort to meet with a number of underrepresented people on a regular basis.
As many studies have shown, there is a financial incentive for investing in people of color and/or women. Companies in the top quartile for ethnic diversity at the executive level are 33% more likely to have above-average profitability than companies in the bottom quartile, according to McKinsey’s 2018 report, “Delivering through Diversity.” Essentially, the same goes for gender diversity, with companies in the top quartile for gender diversity being 21% more likely to have above-average profitability than companies in the bottom quartile.
Currently, there are very few firms that report any sort of demographic details about their portfolio. One of those firms is Kapor Capital, where 59% of its investments have a founder who identifies as a woman and/or an underrepresented person of color. Of its first-time investments, 34% of them have a founder from an underrepresented racial group. Meanwhile, there are firms that are focused solely on investing in people of color, like Arlan Hamilton’s Backstage Capital and Lo Toney’s Plexo Capital.
Perhaps this year there will be more of a concerted effort by venture capital firms to play their part in the advancement of diversity and inclusion in tech. The industry is ready for it.