If you ask any VC or executive the attributes they look for in great founders, the phrase “data-driven” will be one of the first things you hear. As a CEO, we also expect our executives and team members to make data-informed decisions when possible. One of the superpowers of Silicon Valley is its penchant for data – it is one of the strongest prerequisites for action here. And although I’ve experienced first-hand some investors and operators in the tech industry who want a more diverse workforce because “it’s the right thing to do”, what we really should be saying is “it’s the data-driven thing to do”.
Because the data is crystal clear: diversity leads to stronger performance.
I learned these diversity concepts before founding Incredible Health, and applied them while building products that make Incredible Health not only the place where nurses find jobs, but also where they advance their careers. It is also one of our secrets to successfully hiring excellent tech talent for our team from other top companies.
As a tech community, to really change the extremely slow diversity trajectory we are currently on, we need to first understand what the data is telling us. And then, we need frameworks to take action.
This essay aims to provide both operators and investors with both.
Let’s start with the data:
Companies with more diverse management teams have 19% higher revenues due to innovation, and 9% higher EBIT margins, detailed in this BCG study.
McKinsey reports detail that companies in the top-quartile for gender diversity on executive teams were 21% more likely to outperform on profitability. Companies in the top-quartile for ethnic / cultural diversity on executive teams were 33% more likely to have industry-leading profitability. There’s also a huge penalty for opting out of diversity: companies in the bottom quartile for both gender and ethnic / cultural diversity were 29% less likely to achieve above-average profitability.
Harvard Business Review highlights that diverse teams make decisions 2X faster, with half the number of meetings, primarily because they are more prone to re-examine facts and keep discussions objective. Their decisions deliver 60% better results because they focus more on facts.
This study by the Kauffman Fellows dismantles the “pipeline” excuse: while diverse STEM graduate numbers continue to rise, that’s not translating to more employment in tech. In addition, using Crunchbase data the report describes white founding teams and white executive teams raising venture capital more often. However, when diverse founding teams do successfully raise, they tend to raise 60% more than white founding teams, particularly in late-stage rounds.
Diverse founding teams have higher returns when cash is returned to investors, detailed by this Kauffman Fellows report. Historically, diverse founding teams earned a 3.26X median realized multiple on IPOs and acquisitions, compared to a 2.50X realized multiple for white founding teams: a 30% increase. Ethnically diverse startup founding teams provide higher returns to investors.
There’s countless more academic papers and research on this topic; the items above are just a small sample.
How do diverse teams deliver better results (higher revenue, higher profitability, and higher returns to shareholders)? Short answer: Better and faster problem-solving.
Individuals with different backgrounds and experience see the same problem in different ways, and come up with different solutions — cognitive diversity. That increases the odds that one of those solutions will be a hit. In a fast-changing environment like the technology industry, with high stakes and intense competition to innovate, the responsiveness that diverse teams enable ensures the company is better positioned to adapt. Enriching your team with individuals of different genders, races, ages, and more is key to boosting your company’s intellectual potential and likelihood of achieving your mission. Biases can be kept in check because there’s a higher chance of questioning assumptions that hinder innovation and growth.
I experienced this first hand in product development and marketing at Incredible Health. Our team is highly diverse in age, gender, race, political views, and experience. Consider that we built our product for US-based nurses, 20% of which identify as minorities. Nurses in turn care for a diverse patient population. Therefore, when we built our first-of-its-kind Continuing Education (CE) product into Incredible Health’s apps, where nurses across the country can complete fully accredited online CE courses for free (instead of paying $240M out of pocket every year) to maintain their licenses, our team knew we’d have to provide a wide range of courses. It wasn’t enough to only provide general courses like Heart Failure for example, but also led to us including courses for specific populations like Nurse’s Role in the Opioid Epidemic, Caring for HIV/AIDS, and Delivering LGBTQ Culturally Competent Care.
At this point in the history of technology, where smartphone penetration in the US and other countries is over 80%, and businesses are adopting technology more rapidly than ever before, nearly every team is building and marketing technology products for a highly diverse population. It’s a competitive advantage to have a diverse team that reflects your user base. They can recognize user problems and needs earlier and avoid blindspots. For example, they can address the trust and safety of specific user cohorts that feel unfairly targeted, or use more culturally sensitive marketing language that is suitable for a wider range of communities. They can more easily empathize with a diverse user base and question assumptions more thoroughly, as we build and grow the next generation of products from social networks to business workflow software.
Ask yourself this memorable question the NFX partners explain to their portfolio on why diverse teams have stronger performance: “Imagine you need to lecture on a topic to a group you don’t know. In which scenario would you prepare more and deliver a better lecture – when you know the group is all of the same opinion as you and will gladly accept your view, or when you know that they have different opinions? In a company, it’s exactly the same. More diverse teams lead to more thinking, more preparation, and more points of view, which creates far better companies.”
Most importantly, 2020 has accelerated and made it crystal clear that customers expect more, and this is now table stakes. There is zero tolerance for culturally insensitive Juneteenth app filters, housing marketplaces that discriminate, community networks that enable racism, or unfettered violent rhetoric aimed at specific groups. Your customers, especially those under age 40, expect more and are saying it with their dollars. In a recent Deloitte survey of Gen Z and Millennial respondents, both groups reported that “they won’t hesitate to penalize companies whose stated and practiced values conflict with their own.”
Another competitive advantage of diverse teams: Winning the war for talent and avoiding “diversity debt”.
Investors asked me how we’ve hired a team at Incredible Health of engineers and sales reps with strong track records of accomplishment and 10+ years experience each. They also ask how we managed to successfully poach talent from Facebook and other top tech companies even before our Series A. Your company’s success is driven by the speed and quality of your talent, and the competition for tech talent in the Bay Area, and the US in general, is intense. Our huge mission, the founders’ network, rapid growth, top tier clients, and top tier investors certainly helped attract top executives and team members.
However, when beating competing job offers, and attracting a wider range of applicants, the makeup of our diverse team has been a critical competitive advantage. It’s easy to poach from Facebook when they, like much of the tech industry, consistently have terrible diversity metrics year over year. It’s easy to beat the competing offer from another top startup because their team is homogeneous whereas ours is diverse. The team they meet through our interview process signals and definitively proves that everyone is welcome at Incredible Health.
The data on the preferences of talent under age 40 is clear too. The same Deloitte survey referenced above found that the majority of millennials give a “great deal” or “fair amount” of importance to gender and ethnicity diversity when considering what companies to work for.
Teams that are slow to diversify accumulate “diversity debt”, a concept similar to “technical debt”. By choosing the quick and easy approach of building a homogenous team at first, it is increasingly more difficult to fix later because most talent prefers not to join homogenous teams.
So if you’re a team leader, how do you hire and retain a diverse team?
I’m a big fan of frameworks that can be implemented fast, in order to make rapid progress to building a heterogeneous team. Building an inclusive, diverse, and high functioning team is a long-term commitment, but here is a 4-part framework to get started:
Part 1: Make diversity and inclusion an objective / goal
Startups are chaos, particularly those that are rapidly growing. It’s the CEO and leadership team’s responsibility to drive focus, and a key tactic to do so is through a narrow set of OKRs or goals. For example, an objective is “build a team that reflects our customer base.” If it’s not an OKR, then it’s not a priority. By including diversity as an objective, that drives accountability and focus, and encourages teams to come up with creative solutions and resources to achieve the goal. This objective can also be part of the performance evaluation of hiring managers. For early-stage CEOs, you are the Chief People Officer, and the buck stops with you.
Part 2: Diversify your HR / Recruiting team ASAP
It dramatically helps to ensure those that are doing the hiring – whether it’s the founders in the early days, the hiring managers, and eventually the HR and Recruiting teams – are diverse. They have access to a more diverse network, have the knowledge of different sources of talent and can have more nuanced perspectives when evaluating talent. For example, they’re connected to Black software engineers with computer science degrees from Georgia Tech, have access to Black engineer meetups and communities in the Bay Area, or have an established track record of hiring diverse talent.
However, even if the makeup of your HR team is not diverse, then at a minimum grill them on their diverse network and diverse sourcing during the interview process. This team controls who gets through the front door, and carefully designs the interview process to reduce bias and increase hiring on merit – so don’t underestimate their critical role in hiring a diverse team. Even beyond hiring, a diverse HR team can be more empathetic or understanding of diverse employee issues that arise even after team members are hired.
Part 3: Start hiring for diversity as early as possible, and avoid diversity debt.
Diversity debt, like technical debt, occurs when you build a homogenous team first because that’s easier and faster, and then it becomes increasingly more challenging to diversify later. Studies show that diverse candidates, and talent of all backgrounds who are Gen Z and Millenials, are less likely to join or consider your company because the existing team is homogenous. Therefore, the best time to build a diverse team is from the very beginning, because it becomes increasingly more challenging as you grow. As described earlier, it’s a competitive advantage to have a diverse team, especially a diverse executive team, because it begets a consistently heterogeneous team and wider applicant pool for the rest of your company’s history. So start as soon as possible.
Part 4: Make sure your entire team believes they belong.
Creating a work environment where diverse teams can thrive is critical to attracting and retaining a diverse workforce. For example, construct and run meetings in a way where everyone is heard. Set clear agendas. Circulate written documentation and ideas beforehand. Reward individuals’ “obligation to dissent” so teams arrive at the best ideas for customers and company goals, instead of the best ideas for egos or seniority.
Generous family leave for parents with newborns, legal support for immigrant work visas, and flexible work schedules, enables a wider range of team members to excel at work too. Some of these policies and norms are not financially feasible when it’s just 2 or 3 founders working away in an apartment in the earliest days. However, once there’s revenue or funding, these norms should be re-examined, implemented, or modified to enable a diverse team to succeed.
The elephant in the room: Fundraising and Diversity
At this point in history, the abysmal statistics for funding women and people of color are well known. For example, less than 1% of venture capital goes to black founders, despite the ample evidence that diverse teams drive business results. So if you’re an investor or operator of any background navigating this structural bias in the technology industry, how do you think about this topic and make a positive impact to reduce bias?
I’m not a professional investor, I’ve only done a few angel investments personally and as a Sequoia Scout. However, I’ve raised over $17 million in capital from top tier investors in Silicon Valley for Incredible Health, across our seed and Series A rounds in the last couple years, so I’ll offer some nuanced perspectives:
If you are a female or PoC founder, then start with my detailed guide for how founders can successfully raise from top tier investors. The one additional tip I would add for any founder in these specific cohorts is psychological: You know the statistics show structural bias exists. Take a moment to acknowledge it, accept it, and then rapidly move on because dwelling on it will only cost you time and energy that’s already in short supply. Assertiveness, confidence and ambition are critical to a successful fundraising process. Your counterparts (and competition!) in other cohorts are not wasting a single ounce of mindshare on bias, and neither should you.
Also, your target investor list should have clear criteria to help you succeed in the long term. One additional criterion can be focusing on investors that have already funded diverse teams, highlighted in NFX’s Signal product.
For the tech investing community at large, it’s helpful to highlight some specific examples of investors who have made rapid progress in diversity, as evidenced by the companies in their portfolios, and their track records of returns. Seeing real-world examples and KPIs is a key way I’ve understood what’s possible and what the bar is as an operator, so a similar technique can be used to see what’s possible in investing in diverse teams.
Please note this is a non-exhaustive list, and stems from my experience getting to know these investors, some of whom are Incredible Health investors, or investors I got to know well while building our company:
Jeff Jordan (Andreessen Horowitz)
Let’s start with a titan of the venture capital industry: Since taking OpenTable public as CEO, Jeff is frequently on the Forbes Midas List, and has driven massive returns for a16z. Jeff is a board member at Accolade, Airbnb, Incredible Health, Instacart, Lime, Lookout, OfferUp, Pinterest and Wonderschool. Notably, he led a16z’s investment in our company Incredible Health, Wonderschool (Chris Bennett), and Cadre (Ryan Williams) – all of which have black CEOs, and has historically invested in black founders, LGBT, women, and more. Jeff met me through NFX in 2017, and led our Series A in 2019.
I asked him recently what’s his secret to investing without bias, and what enables him to successfully do it whereas his industry peers lag behind. His answer: “When I’m making a new investment, I’m looking for the elusive founder/product fit – the idea that this founder is the only one on earth that can solve this specific problem. Problems are as diverse as people – so it would be a pretty limited viewpoint to think that only one type of person or background can solve all the world’s problems. I have learned that I never know anything about a person until I spend enough time to really know them. Once I invest the time, skin color, preference and all the rest become invisible. In investing, I think this is my key competitive advantage — true knowledge of people. I’m also looking for entrepreneurs who can overcome obstacles to will their idea into existence. Many diverse founders have already (at least partially) proved their ability to do this by getting all the way into the VC pitch room.”
Bill Gurley (Benchmark)
Bill is another titan veteran of venture capital, consistently on the Forbes Midas List, and drives huge returns for his LPs. Zillow, Uber, Stitch Fix, Nextdoor, Solv, Marco Polo, Instawork, and Good Eggs are some of the companies he’s led investments in. Notably, Stitch Fix (Katrina Lake), Nextdoor (Sarah Friar), Solv (Heather Fernandez), Marco Polo (Vlada Bortnik), and a company in stealth (Meredith Harris) have female CEOs.
I asked Bill how he’s been able to invest in female or a diverse set of founders, whereas his industry peers have lagged behind. His answer: “While I am thrilled to have the opportunity to work with such a diverse set of founders and CEOs, I didn’t arrive at this outcome as a result of a direct objective. So in retrospect, I would suggest that ‘absence of bias’ is the likely key. Gender and race are not part of how I find or evaluate founders or companies, so I end up with diversity in my portfolio.”
James Currier (NFX)
James has built 4 companies, had multiple exits, and he’s one of Silicon Valley’s leading experts in growth, network effects, and marketplaces. NFX also has a diverse portfolio that includes Incredible Health. The role of a seed investor like James in breaking the bias that pervades this industry cannot be underestimated. The NFX partners were our earliest investors. James mentored and coached me in skills like fundraising and network effects, and most importantly shared his extensive network of trust that he built over 20 years. His role in my professional development was critical to our success to date. Experienced seed investors and former CEOs like the NFX partners who take the time to mentor and teach diverse founders are crucial, not only to impart knowledge and skills, but also because they are important and trusted feeders to larger funds in the venture ecosystem.
James’ take on investing in diverse founders: “First, I have a clear focus and checklist for what I look for in founders that can be found across all demographics and are important in early-stage entrepreneurs. They include things like character, speed, thinking in a data-driven way, and having something to prove. Second, I acknowledge that I do have biases, so I’ve built counter biases in favor of diverse founders into my thinking, our processes and our software. For example, if it’s a Black founder, that triggers our counter bias methodology to make sure we haven’t missed something. My Partners – and everyone at NFX – participates in this way of thinking.”
Jess Lee (Sequoia Capital)
Jess Lee has been a partner at Sequoia for the last 3 years, and has been a tech operator for over a decade. She’s also backed female founders at Sequoia, such as Katherine Ryder at Maven and Amira Yahyaoui at Mos. Jess found me through Female Founder Office Hours, organized by a non-profit she co-founded: All Raise. All Raise has a huge mission, but what many miss is that it has done wonders for diversifying the deal flow of the investors involved, and helped them find phenomenal companies.
Jess’ secret to consistently investing in female or diverse founders is that she was a female founder herself and experienced investor bias firsthand. She built a startup targeted at women (fashion app Polyvore), pitched to many rooms of all-male VCs, and had to resort to theatrics to convince people that women’s fashion was a worthy category. That gave her a positive bias for underdogs and fighters. In her own words, “Startups are an irrational endeavor because the odds are so against you. The kind of person who keeps fighting, despite the system being somewhat rigged, is exactly who I want to back.”
James Joaquin (Obvious Ventures)
James has been a CEO/founder of 7 companies, helping lead them to IPO (Xoom) or successful acquisitions by Apple, Kodak and AOL. As a co-founder of Obvious, he invested in Miyoko’s Creamery (Miyoko Schinner) and in Beyond Meat, one of the most successful IPOs in 2019. James met me through NFX in 2017 and led Incredible Health’s seed round and joined our board. His team has explicitly called out their continued desire to hire diverse investors, and fund diverse founders: “World positive, leading companies are diverse companies.” James pioneered the World Positive term sheet, and required we send him our mission and values before wiring our seed capital.
I asked what’s his secret to investing in diverse founders. His response: “Investing without bias is a human impossibility since we all carry unconscious biases around with us, so that’s even more reason to build a methodology to counter it. First, remember the data – diverse teams deliver better business outcomes. Second, celebrate the founders’ distance traveled. A founder who has faced more adversity in life is better prepared to tackle the myriad challenges of a startup versus a founder of privilege. Third, founder-market fit matters; have they ‘worn the shoes’ of their customers. Leadership teams should match the diverse set of consumers they serve.”
Charles Hudson (Precursor Ventures)
Charles is one of the OG diverse investors, investing in diverse founders long before it was required. His portfolio closely resembles the ratio of diversity in the US population. His notable early-stage companies with female or diverse founders include Finix (Richie Serna), Carrot Fertility (Tammy Sun), Noyo (Shannon Gogin), Runa (Courtney McColgan), Fuzzy (Zubin Bhettay), Squad (Isa Watson), and Incredible Health (Iman Abuzeid). “The fact that my investing team is black, and we have an established track record of funding female, black, white, and/or latinx founders, attracts even more diverse founders to us every week.”
How do you make rapid diversity progress when investing?
If you’re an investor reading about the investors above, and you have a largely homogenous portfolio, or struggling with low returns, what are you waiting for? If you have a couple wins under your belt, and are looking for the next set, what are you waiting for? The prominent examples above show the mindset and execution to fund diverse founders is not only doable, but it’s part of the data-driven approach to higher returns. Here’s a 3-part framework to put the data into action:
Part 1: Make diversity a priority, an OKR, and measure it.
The next 20 years in tech are unlikely to look like the last 20 years – your returns depend on finding diverse founders, founders with highly unique perspectives and insights. In the same way you rapidly ramped up your understanding and network in cryptocurrencies, fintech, SaaS and other “hot” opportunity areas, you can rapidly ramp on diversity too. For example, track and modify the diversity of the founders in your deal flow, your team, and your referral sources to result in a growing number of female, black or latinx CEOs in your portfolio.
Part 2: Build a bigger tent to fix your sourcing, and help your CEOs.
One tactic that every investor cited above has is an expansive national network that is diverse – specifically scouts and “referrers”, executives, and subject matter experts – a huge tent. This helps CEOs in their portfolio hire diverse team members, but also heavily expands and diversifies their deal flow. For example, I met Mike Smith, President and COO of Stitch Fix through Jeff Jordan, and Mike subsequently referred excellent talent to me.
Expand your network so at a minimum, you’re connected to the major hubs and connectors who already have an established network of diverse founders. BLCKVC is one place to start, another is investors that have already funded diverse teams, highlighted in NFX’s Signal product.
From 2020 onwards, you’re expected to support your portfolio companies with diversity, so it’s best to rapidly make progress inside your VC firm too. Hiring diverse investors is a key shortcut to building a bigger tent too.
Part 3: Remove or counter the bias in your diligence process.
I’ve gone through the full diligence process of the best of the best Series A funds in Silicon Valley. It felt unbiased, highly process-oriented, and rigorous. It included evaluating our vision, market, product, team, founder-market fit, speaking to customers, understanding the founder’s story and traits that enabled success in the past and will propel the future, business metrics, backdoor references and more. Heuristics like “two white guys from Stanford” are sloppy and haphazard, and have the potential to continue hindering future returns if companies are evaluated in this unsystematic way.
We are coming to terms with what we have or have not done right in tech in relation to diversity. Regardless of how we all got here, today is our new starting line. We all want to win. Data is one way Silicon Valley has won this far, and it’s the way we can keep winning. The data is clear – diverse teams win.
Let’s lead into the future with data, and make diversity more than just a statement we proclaim.
Let’s make it an action we take.