The Association Between Diversity, Venture Capital, and Profitability

20.5.2021

Shahar silis

20.5.2021

Shahar silis

Peter Drucker famously said, “If you can’t measure it, you can’t manage it.” He was utterly right. Goodwill and having a social agenda are excellent – but they don’t mean much on the ground. For change to occur, we must be clear about the situation and identify the reasons for the problem at hand.

Let’s talk potential. The sort you can quantify.

According to a McKinsey study published earlier this year, bridging the gender gap in the high-tech industry in the US will lead to an added revenue of about 12 milliard dollars to the economy by the year 2025. Bridging the racial gap and increasing the participation rate of African American individuals in the workplace will potentiallyresult in 2 Milliard dollars in revenue. And what about the kingdom? Although the UK’s high-tech sector accounts for 10% of the general workforce and is worth over 200 milliard sterling pounds, only about 15% of its employees are of diverse backgrounds, and women account for only about 20% of the workers, compared to 49% in other sectors. There is tremendous potential here – bridging the gaps and enlisting quality workers of underrepresented populations will lead to an 11% increase in global economic growth by the year 2030.  

Here is why I don’t discuss the local industry (Israel’s) Statistics –  

Most organizations don’t measure data relating to underrepresented populations in their workforce, and those that do, don’t share the data, which presents an obstacle to improvement. This is where Power in Diversity comes on the scene – to collect, measure, discuss the importance of measuring diversity data and encourage more organizations and companies to jump on the wagon of increasing diversity and inclusion in the economy. We work on a diversity index for the ecosystem, which will serve as a broad standard and help each company understand the necessary steps for improvement compared to the competitors in the market. Additionally, soon, we will publish the first comprehensive report that integrates data from hundreds of start-up companies and includes fascinating insights about the industry and suggestions for practical steps towards change.

Ok, we get that diversity is good for the economy.  But what is the connection to venture capital funds?

VC firms are a dynamic force in the industry. They set the tone, are responsible for the next unicorn, and determine which product will change our lives. In practice, their decisions directly influence creating value, employment, and the growth potential for small start-ups that strive to change the world. Whereas the venture capital industry favors progress and innovation in technology, the workforce of the invested companies is highly specific in terms of demography and background. Essentially, populations such as women, Orthodox Jews, Arabs, and other underrepresented minorities are less likely to exist as salaried employees or investors in the ecosystem. Apart from the social factor, a diversified ecosystem produces “win-win” outcomes. Diversity increases the creativity of an organization. A diverse organization is also far more competitive in product and profitability.

Supporting evidence

A report by KPMG about the relationship between diversity and profitability asserts that diverse management teams are 21% more likely to increase profitability.  

Also, gender-balanced organizations perform better and have an income rate that is about 41% higher than organizations with a homogeneous workforce in terms of gender. In addition, ethnically and racially diverse organizations are 35% more likely to perform better economically. As for growth and exposure to new markets, a study published by Harvard Business Review found that diverse organizations are 70% more likely to enter new markets. 

Furthermore, in 87% of the work teams understudy, diverse work teams performed better in reaching business decisions than homogeneous work teams.  

What needs to be done

For the industry to reach its full potential and maximize innovation, impact, and profitability, companies need to prioritize and allocate resources to hire quality talent of diverse backgrounds. Also, investing in entrepreneurs of diverse backgrounds is essential and will significantly advance the issue at hand.  Funds must assess where they are in terms of diversity and what steps they must take to help their portfolio companies overcome obstacles and hire talent that is underrepresented, as well as identify worthy entrepreneurs of diverse backgrounds.  

Some necessary steps

1)  Measure the pipeline and the diversity of portfolio companies

2) Set goals for advancing diverse populations and increasing the diversity dialogue

3) Recruit more individuals of diverse backgrounds for higher-level positions  

4) Provide free consultation to entrepreneurs from diverse backgrounds  

5) Instill diversity in the culture of growing companies

Companies should Join the diversification effort and put diversity and inclusion at the forefront. They should seek consultation and reach out to social organizations and NGOs that will help them locate quality diverse individuals.

I reached out to Dr. Galit Deshe, an expert in the issue of diversity and the Professional Director of Power in Diversity. Below is a list of the strategies she communicates to organizations while working with them, directly or via the Mindstart program:

1) Think of the motivation behind your active participation in advancing diversity and inclusion. Why did you become involved? Some organizations promote equality, while others focus on improving performance and participation in the diversity dialogue. Either way, identifying the source of your motivation would help you design a model and steer you towards the proper course of action.

2) Know your needs: firstly, you should identify the most pressing challenges and “aches.” Where do they arise in the three pillars (people, produce, and business development)? 

For example, do you experience a significant shortage of employees and difficulty recruiting quality individuals? Is there an excessive resemblance between your employees and managers? Choose one or, at the most, two challenges and focus on these challenges.

– It’s critical to create an inclusive culture before setting diversity recruitment goals: a significant internal process will result in a solid infrastructure for an inclusive culture and help the organization start the diversification process. An inclusive culture doesn’t expect people to adjust but creates an agile-enough environment for varied approaches, backgrounds, experiences, and languages. Only then can goals and measurable objectives be defined and tied to positions, roles, management, and work conditions. 

– View the process as a valuable tool for creating an outstanding organization and not as one which is “nice to have.” It is essential to implement diversity, inclusion, and equality and create a corporate culture that accentuates creativity, flexibility, innovation, and knowledge. – Go beyond the contribution to society. I spoke of the importance of identifying your primary motivation; nevertheless, an organization-wide implementation will only be successful if it is tied to your company’s goals and objectives, products, business model, and ecosystem. This connection will increase your employees’ “buy-in” and improve overall motivation.

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