Suraj K. Gupta is President & CEO of Rogue Insight Capital, an investment firm focused on supporting diversity, innovation and social impact
Venture capital and private equity have been growing asset classes for decades. As more investors seek returns in a low-rate environment and as more wealth managers look to invest in alternatives to public equity, we have seen an explosion in venture-backed companies. In fact, annual VC funding increased by 4.4x from 2013 to 2021—going from $22B to $96B.
Over the years, the calls on more support for diversity in the VC and PE world have increased substantially, as females and visible minorities raise a tiny fraction of VC funding. While 77% of VC dollars go to companies with white founders, less than 10% of VC dollars go to women founders and less than 1% go to Black founders. Despite the consistent rhetoric around supporting these groups, little has changed.
The unfortunate reality is that the social and ethical obligations our society faces to support everyone equally has not been enough of an impetus to drive change. Although investors are discussing the problem, they are not changing the way they invest.
The Inherent Problem At The Top
The majority of the North American population includes visible minorities and those who do not identify as male, and yet founding teams from these demographics raise less than a quarter of available venture capital. There are various societal factors that create biases contributing to this problem, and one perpetuating factor may be the diversity of those making investment decisions.
VC firms have made progress in hiring and promoting more diverse employees, but capital decisions are being made by a homogonous group. White men represent 30% of the population, 58% of all VC investors and manage a staggering 93% of VC dollars. White women represent 30% of the general population, but they only represent 11% of venture partners managing just 3% of the wealth. The remaining 40% of the general population are represented by 31% of venture partners and manage just 4% of the wealth.
Homogenous VC firms are leaving significant value on the table. Studies have shown that venture firms with at least one female founder generate 9.7% more profitable exits. While we should not assume that investors are overly supportive of founders that share their gender or ethnicity, a systematic bias can be created when a powerful group of people is not representative of the demographics of the overall population. If we increase the number of females and visible minorities in investment decision-making positions, we will move the needle toward having more funding invested into diversity.
The Value We Are Losing
Many VC firms have performed exceedingly well over the years. This may beg the question: Is there a financial incentive to change how they invest? This question can be answered with a resounding yes.
No matter how you slice it, diverse teams outperform homogenous teams, and the numbers back this up. Teams that are diverse by gender and ethnicity generate 30% higher MOIC (multiples on invested capital) compared to homogenous teams. Companies with at least one female or one ethnically diverse founder generate over 60%+ in business value.
When considering exits in the VC/PE world, the returns from diverse teams are an incredible degree higher than those from homogenous ones. Ethnically diverse founders enjoy an average exit multiple that is 30% higher than those of solely white founding teams (3.26x vs. 2.5x). This gap becomes even more pronounced when we consider diversity in the C-suite. Ethnically diverse C-level teams have an average exit multiple that is 64% higher than their solely white counterparts (3.31x vs 2.02x).
This is not to say that white founders have a lower propensity for success than other groups. It demonstrates that a diverse mix of founders and executives is crucial to building a truly great organization. When you have a group of people from different backgrounds, ethnicities and genders, you have a group that is much more representative of a company’s potential customers and stakeholders, which means you have a much higher likelihood of successful engagement with these stakeholders.
History has shown us countless examples of homogonous teams failing due to a lack of consumer understanding. BMW infamously offended its Emirati customers with a commercial that inappropriately featured the UAE national anthem. HSBC Bank expanded globally with its “Assume Nothing” slogan having been incorrectly translated to “Do Nothing” in several countries. KFC launched in China only to find out that “Finger-Lickin’ Good” had been translated to “Eat Your Fingers Off.” While these are funny anecdotes, they point to the unfortunate truth that the teams leading these international expansions were unlikely to have included local employees or executives who could have easily flagged these costly mistakes. These three firms spent tens of millions of dollars to address these errors—a cost that could have been avoided with a single, local salary.
Making Equality The Reality
While we have a lot of work to do, the problem we are facing is fundamentally fixable. If we continue the trend of improving diversity amongst investors, increasing awareness around the need to support diverse founders and demonstrating that diverse teams outperform homogenous ones, the market will help us address this problem.
Venture capital and private equity firms have a financial duty to their investors to endeavor to maximize returns, and yet these same firms are continuously ignoring the holy grail of investment. I launched Rogue Insight Capital to address these exact issues. Rogue was co-founded by myself and my sister Reetu Gupta, and we figured that if we could generate best-in-class returns by focusing on diverse founding teams, we could force the industry’s hand.
There is a gargantuan financial incentive to invest in diverse teams—one that we are proving exists every single day at Rogue. We have a glaringly obvious competitive advantage in the investment world, and I am waiting for the day when this advantage disappears because the ecosystem begins to give diverse founders the credit, focus and funding that they deserve. That day is coming, and together we can all make equality in the investing world a reality.
