Venture capitalists (VCs) play a vital role in shaping the future. Although the VC industry is a very small part of our economy, the symbiosis of ambitious founders and the VCs backing them is building companies that will define the future. Just look at the five largest companies in the US — Microsoft, Apple, Amazon, Alphabet and Facebook — all were VC-backed and all have had a massive impact on our society. Now, investors must focus on diversity.
Increasingly, the new generation of businesses are motivated to make a positive change in the world and it is investors’ duty to empower their ability to do so. Positive change comes in many forms: pushing technology to new limits, creating amazing user experiences, but also by building cultures that enable productivity, inclusion and creating equal opportunities for everyone. There is a large need to grow more inclusive business cultures as this will generate a more varied and innovative standard of business in the future. As it stands, the executive teams in most companies are still composed mostly of white males from wealthy families.
In this article, we’re going to give an overview of how investors can better support tech startups at the early idea stage and what benefit this will bring to the investment landscape and economy more widely. One of our views — a focus in this piece — is that there is an urgent need for more diversity and open mindedness in the investment community, amongst both founders and investors. The landscape must become more accessible to a wider pool of innovators to increase the number of great ideas in the world.
We will start by looking at the state of the startup investment landscape as it is today and explain how and why we need to shake it up, primarily by recognising that diversity of all kinds is key in generating ground-breaking ideas, before touching on the importance and benefits of investing in emerging markets.
Diversity in technology: The playbook of best practice
The investment landscape: Out with the old, in with the new
In Q1 2019, $75 billion was invested in almost 8,100 funding rounds globally, including 103 supergiant VC rounds (rounds in excess of $100 million). The venture industry continues to grow massively, although this is predominantly due to these large rounds, while seed financing is now seemingly in decline according to annual research from Mark Suster, a prominent thinker in venture capital. He argues that this is because after the initial boom of seed funding in the early 21st-century, VCs today prefer to make a “safer bet” with more mature deals. This means that it is getting more challenging for would-be founders to start a business if they don’t have enough capital in their own back pocket or great connections – this closes the door for less privileged founders, which unfortunately tends to include those from more diverse backgrounds.
However, you don’t have to be a VC expert to know that the lack of diversity in the tech world is in no way a new issue. Focusing on gender inequality as an example, 2018 research by TechCrunch reported that only 18% of all Silicon Valley seed funding found its way to startups with a female founder. Looking at all kinds of investment, only 9% of overall funding goes to organisations with female founders or CEOs. This figure is reflected in the UK where only £358.4 million worth of funding is going to female-founded startups, compared to the £3.6 billion which goes towards their male counterparts.
Without diversity, the startup investment landscape will only largely generate companies that solve problems for specific demographics. A significant 33% of today’s unicorn founding CEOs came from one of the world’s 20 top universities (these universities can cost up to $70K a year, depending on the university and the course), which is a strong reflection of the economic bracket that these unicorn-founders come from. This means not only that founders are going to look the same but they are also going to think the same, generating tech that they think is important but perhaps neglecting to produce solutions to problems that don’t touch their demographic.
Learning lessons from the unicorns: the tech phenomena
More diversity in both the investment and founder communities (as well as more of an open mind from investors more generally) will inevitably lead to new ways of thinking and more innovative solutions to problems.
Aside from more varied ideas, what value is there in generating diverse startups? First, McKinsey found that businesses with the most ethnically diverse executive teams were 33% more likely to outperform their peers on profitability. As well, companies with female founders, have a more balanced employee composition and management teams. As a telling example, at Birchbox, founded by Katia Beauchamp and Hayley Barna, the majority of the management team is female. Pick almost any other tech company, and the picture looks very different. A study from FundersClub also shows that companies with at least one female founder have twice as many female employees compared with startups with all-male founding teams — 48% versus 24%.
To bring more diversity into the early-stage startup founders, investors should actively look to hire more diverse VCs and should try to speak with and invest in early stage firms with more diverse founding teams.
UK tech experiences record first half $4.8BN venture capital investment in 2019
The fertile ground for investors in new markets
Taking this one step further, investors may find that meeting founders from new markets could generate fruitful investments and even lead to a chain reaction of innovative businesses cropping up in the market. For example, just look at how the Swedish tech landscape exploded because of the success of Skype. Many ex-Skype employees used their knowledge of technology and business acumen from their time at the company to generate their own independent companies. The ‘Skype Mafia’, as these entrepreneurs are known, have created over 40 companies, including Transferwise, Pipedrive and Chilango — in addition to the VC firm Atomico which has funded and helped grow another 145 companies. In doing so, the ‘Skype Mafia’ has supercharged the Swedish startup landscape.
Looking away from the west, investing in bright founders from developing countries can generate fast-growing startups that solve pressing problems, with an excellent financial return.
Our experience working in emerging markets is that they can be breeding grounds for fantastic ideas, perhaps because founders are facing significant problems on a daily basis that they feel personally empowered to solve. Case and point of this is an Indonesian startup supported by Antler, Sampingan. It is a task-based workforce platform connecting organisations with freelance employees in the country, it has made jobs more accessible to thousands of people. The startup recently secured $USD500,000 from Golden Gate Ventures and since it was founded, the company has on-boarded 20,000 agents across 140,000 projects.
Ultimately, investors that help to support early and idea stage firms contribute to the global economy, help create new employment and solve some of the world’s problems while generating strong returns for investors.
Investors must not only embrace diversity, but consciously look to “colour outside the lines” by hiring assorted VC talent and speaking with and investing in diverse founders in order to unlock brilliant business ideas. An additionally important and valuable strategy is investing in emerging markets: these relatively untouched areas will be brimming with brilliant business ideas. With the right co-founding team and a strong solution to a problem, investment along with sound mentorship are the key ingredients required for startups to grow. A small investment in the right business is like a flint, it will work as a tool that can spark a blaze of world-changing ideas which will materialise into successful businesses.