Venture

Diversifying startups and VC power corridors

Comment

Image Credits: Klaus Vedfelt (opens in a new window) / Getty Images

Jennifer Fan

Contributor

Jennifer Fan is an assistant professor of law and director of the Entrepreneurial Law Clinic at the University of Washington School of Law.

Startups have a seemingly intractable problem: a lack of diversity. Despite research showing that diverse founding teams have a higher rate of return than white founding teams, one characteristic of startups remains relatively unchanged: the dearth of BIPOC and women founders, investors, board members and counsel in the venture capital (VC) ecosystem.

Why should we care? Venture capital has provided early funding for the most innovative and profitable companies of our time — Apple, Amazon, Google (now Alphabet), just to name a few. These companies have changed the way we live, work and play by impacting how we communicate, how we process information and how we buy goods. With approximately one-quarter of U.S. professionals employed by the high-tech sector — comprising about 5% to 6% of the total workforce, according to the U.S. Equal Employment Opportunity Commission — imagine how much more innovation could happen with more diverse individuals at the table who bring different life experiences and perspectives. We’re already seeing states enacting laws, and companies changing their practices, to help make this happen in the public company realm.

Many founders of VC-backed startups are white, male and Ivy League or internationally educated. Women-founded companies receive a fraction of VC investments compared to all-male founded companies. In 2020, women-led startups received only 2.3% of all VC money. As of June 2021, less than 20% of total VC deals went to a startup with at least one female founder.

When looking at BIPOC representation in the VC ecosystem, the numbers are even more abysmal. Three percent of VC investors are Black and 1.7% of VC-backed startups have a Black founder. The number of Latinx founders in VC-backed startups is even lower — 1.3%. Plus, only 2.4% of funding was allocated to Black and Latinx founders from 2015 to August 2020. And, on the startup boards of high tech companies, women hold a mere 8% of the board seats.

But the lack of diversity extends beyond who gets funding or who is in the boardroom; it is also a problem in the executive suite. In California, Asian Americans were among the least likely to be promoted to manager or executive positions, and less than 2% of high-tech executives are Black.

This lack of diversity in the VC ecosystem is a structural problem that has no easy solution. While some VC firms have begun allocating funds for training and mentorship programs, additional steps need to be taken.

For example, laws on board diversity have already passed in a few states, but they apply only to public companies and typically focus on gender diversity. The laws generally fall into one of three categories — they mandate, encourage or require disclosure of board diversity. In 2018, California led the way with SB 826, California’s board gender diversity law, which required public companies headquartered in California (irrespective of where they were incorporated) to have a minimum of one woman on each of their boards by the end of 2019. By the end of this year, the minimum threshold increases to two if the board has five directors and three if it has six or more directors. (In the statute, female is defined as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.”)

The law has already had an impact: Between 2018 and March 2021, the number of board seats held by women in such companies increased by a whopping 93.6%, but the law is currently being challenged in the courts.

While legislation regarding gender diversity on public company boards has been passed in certain states, even fewer laws address the issue of the lack of minorities on boards. Only 12.5% of the board members of the 3,000 largest public companies come from underrepresented ethnic and racial groups despite the fact that these groups comprise 40% of the U.S. population. Deloitte and the Alliance for Board Diversity reported data that Fortune 500 board seats were held by individuals identified as African American/Black, Hispanic/Latino(a), and Asian/Pacific Islander at the rates of 8.7%, 4.1% and 4.6%, respectively, in 2020.

In order to address this underrepresentation, California’s AB 979 requires that a public company headquartered in California has at least one director from an “underrepresented community” by the end of 2021, with the minimum number increasing by the end of 2022. That definition includes someone who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.

In addition to California, Colorado, Illinois, Maryland, New York, Pennsylvania and Washington have also enacted some type of board diversity measure. Connecticut, Hawaii, Massachusetts, Michigan, New Jersey, Oregon and Ohio have proposed legislation, too. 

Non-governmental initiatives are also being considered. As an example, NASDAQ proposed new listing standards to the SEC requiring disclosure of board diversity. Goldman Sachs announced that it would manage initial public offerings only for companies with at least one diverse board member.

These kinds of laws, however, may be difficult to implement in startups. In order to change the narrative on diversity in startups, change cannot be limited to the board but rather should have a multipronged approach focused on diversifying (1) employees in middle and executive management, (2) directors in the boardroom and (3) the VC firms and other funders.

With startups, board diversity mandates similar to the one passed in California would likely not work in the early stages given the size of these boards. However, creating a culture where diversity is prioritized can manifest itself in other ways.

How to build a diverse board

For example, limited partners who invest in VC funds could contractually obligate their general partners to consider diverse candidates for their firms as well as the board and management of any portfolio companies. VCs can also continue to diversify the limited partners that invest in their funds by eschewing their immediate networks and more actively reaching out to groups historically underrepresented in the startup ecosystem, such as HBCUs. In fact, some VCs are using diversity riders in term sheets to do just that. VCs also need to take a hard look at what type of questions they ask their BIPOC and female founders and consider how they may differ in ways that are detrimental to those historically underrepresented in startups.

We are missing opportunities to foster further innovation by not taking more concrete action to add diversity to the startup ecosystem. There is no magic bullet to address the lack of diversity in the startup ecosystem. However, there are steps that founders, VCs and limited partners can take to make strides in the right direction.

More TechCrunch

A Singapore High Court has effectively approved Pine Labs’ request to shift its operations to India.

Pine Labs gets Singapore court approval to shift base to India

The AI Safety Institute, a U.K. body that aims to assess and address risks in AI platforms, has said it will open a second location in San Francisco. 

UK opens office in San Francisco to tackle AI risk

Companies are always looking for an edge, and searching for ways to encourage their employees to innovate. One way to do that is by running an internal hackathon around a…

Why companies are turning to internal hackathons

Featured Article

I’m rooting for Melinda French Gates to fix tech’s broken ‘brilliant jerk’ culture

Women in tech still face a shocking level of mistreatment at work. Melinda French Gates is one of the few working to change that.

15 hours ago
I’m rooting for Melinda French Gates to fix tech’s  broken ‘brilliant jerk’ culture

Blue Origin has successfully completed its NS-25 mission, resuming crewed flights for the first time in nearly two years. The mission brought six tourist crew members to the edge of…

Blue Origin successfully launches its first crewed mission since 2022

Creative Artists Agency (CAA), one of the top entertainment and sports talent agencies, is hoping to be at the forefront of AI protection services for celebrities in Hollywood. With many…

Hollywood agency CAA aims to help stars manage their own AI likenesses

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

3 days ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

3 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data