The state of the VC industry further proves the relationship between diversity and profitability

Relationship between diversity and profitability

HBR recently posted a really interesting article that we wanted to share with you. Written by Paul Gompers and Silpa Kovvali, The Other Diversity Dividend takes the diversity conversation to the next level using the venture capital (VC) industry as a “lab rat”.

The VC industry is one of the least diverse in the world. Only 8% of VC partners are female, less than 2% are Hispanic, and less than 1% are black. In fact, these firms are the perfect example of homophily in action, with many preferring to hire from a very small pool of talent by selecting partners based on where they went to school.

We already know that diversity boosts profitability, and this research is further evidence.

A clear example of the relationship between diversity and profitability

The great thing about VCs is that you can very clearly see the impact each partner has on the firm’s bottom line. They have flat structures and every investor is a decision maker. We can also identify diversity easily in terms of “endowed traits” like gender and ethnicity and “acquired traits” like school and work history. Using this information, Paul Gompers examined thousands of VCs and tens of thousands of investments.

Diversity significantly improves financial performance

Gompers found that most VCs tend to partner with people of the same gender, race and even school history. He also found that, the more similar the investment partners, the lower the investment performance. For example, the success rate of acquisitions and IPOs is 11.5% lower on average when VCs partner with people who went to the same school as them. And it’s 26% to 32% lower when they partner with people of the same ethnicity.

Why is this the case?

A lack of diversity leads to a lack of creativity

We found it interesting that the projects selected by the VCs were all equally promising when chosen. It’s only when the investors help shape strategy, recruitment and other efforts that the quality of decision-making and performance are affected.

Homogenous VCs aren’t as creative as diverse collaborators when it comes to dealing with competition and other challenges.

Gompers found that VCs, while nearly three quarters of VC firms have never hired a female partner, those that hired 10% more females benefited from 9.7% more profitable exits. This is an impressive figure since only 28.8% of all VC investments result in profitable exits.

If you have a chance, the full article is well worth a read. You can find it here.

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