Diversity is Profitable

By Miriam Rivera

Diversity is Profitable image

Diversity drives the economic engine

While female founders may be forced to overcome stereotypes to win the respect and trust of investors, customers and sometimes even their own team, working moms often face tougher hurdles than their single counterparts. Men may be hesitant to ask for meetings on weekends or holidays because they perceive women who have families as “off” the clock. Investors may signal they are worried about lifestyle issues involving family. Worries that don’t happen where male executives are involved.

I have faced this as the head of my investment firm Ulu Ventures, because my partner, Clint Korver, is also my husband. Sometimes male VCs have been hesitant to ask me for a call or meeting on Saturday because we’re a “family business”. While work/life balance is important, it’s also important to overcome stereotypes about how women work. As an investor, I do what needs to be done for our business and our entrepreneurs. A phrase I use often is, “I’d be happy to…” And I mean it?—?if an action increases our entrepreneurs’ or Ulu’s set of opportunities.

Assumptions Hard to Dispel

People assume so much about what working mothers will or won’t do and often don’t bother to ask. While working as the head of commercial law at Google several years ago, our team was called upon to work on a “make or break” the company deal. A trip was to be made over Easter Sunday and I wasn’t initially included in the travel plans. A white male mentor advised me to assume my authority to go and I did. Without prompting by my manager, I asked which flight I needed to book to arrive with the team.

The night before the trip, I’d been up until 2am making Easter baskets and discovered the other working mother on the strategic partnership team had done the same. It was critical to be with our colleagues to be a part of Google’s “A Team”. We also felt it was important to have the company acknowledge the sacrifice that is required of leaders of all genders to build a great company.

Do What It Takes to Build Your Business

Silicon Valley has the unconscious or learned belief that success requires constant availability and contact. Being there is important no doubt, but knowing what’s most important leads to greater overall success and personal fulfillment. Despite the challenges of hyper-growth and young children, my career advanced most quickly after I become a mother. It gave me a perspective that encouraged me to do what needed to be done and quickly so I could enjoy precious waking hours with my young children.

In order to help Google grow, I did almost every legal function before replacing myself with more experienced attorneys in those areas, re-engineered contracting processes to allow us to achieve historic revenue velocity, reviewed 5000 resumes and hired a badass team of about 150. Fifty percent of the team were women. Among my hires were the first General Counsels of DropBox, Twitter, Pinterest, Coursera, Creative Commons, the first LatinX Deputy General Counsel of Reddit, the first African American women to serve as VP Legal at YouTube, the CEO of Huffington Post, a billionaire Midas Touch VC (with a few more of us taking our shot now), two deputy CTOs of the USA, and the first woman ever to run the United States Patent and Trademark Office. Many of these amazing leaders were mothers and/or the children of immigrants from Asia, the Middle East, and Latin America.

You Have to Earn Idiosyncratic Credits

Sometimes you don’t get the opportunity to prove your commitment. Before Google, I was a woman co-founder of an enterprise software startup. I had a child on Friday and returned to work Monday. Soon after I was asked to leave my startup; one of the directors I considered a mentor, said if I were having his grandchild, he’d prefer I’d stay home. Did it matter that staying home was never something I aspired to do?

At Google, initially, I couldn’t get VPN access to our network because the 25-year-old founders shared the belief that you needed to be onsite as much as possible to build cohesion and communication. If I needed to work late, and my husband was traveling for work, I carried my child to the office and put her to sleep on a couch. As I built my career, it wasn’t unusual for the IT support group to come to my house to fix my IT problems under such circumstances.

Cashing in Credits

Later, I used my idiosyncratic credits to create an informal leave policy for the mothers on the Google Legal team. I offered any new mom up to 6 months leave at her discretion although only 3 months were offered by the company with pay. This was difficult to implement because of our workload and I sometimes grumbled about not having all hands on deck. But we never lost a new mom during my tenure despite the meteoric growth of the company and the long hours. Later, the data from my team helped support the company’s official leave policy and was scaled company-wide. Some of the rock stars I describe in this article were women who benefited from this policy and Google benefited from their longevity and commitment to the company.

Adam Grant in his book Originals says leaders earn “idiosyncratic credit” by standing for something and earning respect and even affection. Perhaps it shouldn’t be necessary to earn credit by doing much more than your colleagues. But pioneers in a range of sectors have earned credit through their example. In sports, Serena Williams epitomizes the pioneer who uses her earned credit to help those who come behind her. She’s the best woman player of her generation and the 14th best player, man or woman, of all time. She’s a strong advocate for pay equality and for equal recognition as an athlete on the world stage. Only five months after a very difficult childbirth she returned to competition. She’s faced criticism but earned the respect and affection of fans and naysayers alike throughout her career by never giving up. I’m not saying it’s the only way to succeed, nor the least painful, but it’s the one I’ve seen work best for diverse leaders.

Diversity may be the current buzz word for “the right thing to do”, but investors and founders still tend to put it low on a list of priorities. It seems mind boggling when a growing body of research demonstrates diversity drives America’s economic engine and makes businesses more profitable.

Diverse teams tend to be more productive

Diversity is profitable because teams with different experiences, skills, and backgrounds are more likely to effectively solve problems than teams who are homogenous. Hiring people like yourself can be more comfortable but a diverse team tends to be more productive. An updated McKinsey report reveals that firms in the top quartile for racial diversity are 33 percent likelier to have better financial results. While those in the top quartile for gender diversity are 21 percent likelier to have stronger performance compared to average companies.

Small steps make a difference

A small amount of diversity can make a big difference in the bottom line. According to research by Paul Gompers and Silpa Kovvali published in the Harvard Business Review, venture firms that increased female partner hires by 10% saw a 1.5% spike in overall fund returns and 9.7% more profitable exits. That’s impressive given that less than 29% of all VC investments result in a profitable exit.

This isn’t to suggest firms should hire a token woman to improve performance. What aligns best with limited partners’ economic interests is investing in diverse investment teams uncovering large, underserved markets that are best served by diverse entrepreneurs. Todd Kimmel of Montage Ventures recently told me that he looks for “entrepreneurs who are outsiders to an industry but insiders to a problem” in that industry. Design thinking calls this insider status, “empathy”. Outsiders to an industry don’t have to be new to an industry. They’re often there working as colleagues but bringing new perspectives that challenge the way things have always been done. Sometimes they’re outsiders because of immutable characteristics like gender, race, class, or life experiences; sometimes because they bring new or interdisciplinary training.

Changing demographics lead to outlier opportunities

Traditional VCs might miss this distinction because VC demographics reflect the composition of the USA in 1965, not 2019. Finding new problems being solved by those who operate as outsiders/inside for the enterprise of today and tomorrow is more likely to lead to outlier opportunities. For example, a recent Stanford Latino Entrepreneurship Initiative study indicates that in 2015, the GDP produced by Latinos in the United States was $2.13 trillion, larger than the GDPs of India, Italy, or Canada. This is one example of a diverse group that is fueling entrepreneurial corporate formation in the US and represents a massive opportunity to expand the U.S. economy.

The proof of the pudding is in the eating

At Ulu, we see firsthand how diversity can drive profitability. In Fund I, two LatinX entrepreneurs returned nearly the entire fund. One of those founders was a first generation college grad who sold Krux to Salesforce for over $1b. And in Fund II, we are seeing similar results. Women CEOs at firms like Zum and Guild Education are outperforming and receiving follow-on investments from top tier VC firms like Sequoia and RedPoint.

Sourcing from diverse teams and professional networks increases the diversity of our pipeline. We then use data and decision analysis to make our investment decisions which has proven to reduce cognitive bias. 27% of our portfolio companies have a woman CEO and 8% have a LatinX or African American CEO as of June 30, 2019. Over 80% of Ulu’s portfolio companies have a historically under-represented group (HUG) on the founding team.

BetterUp, an Ulu portfolio company co-founded by a first generation college grad Latino, just raised more than $100m. We look forward to potential IPOs among any of our founders, most of whom are still white males. Nearly every startup is a David vs. Goliath story, but some are also the American dream made possible because of Ulu’s seeding opportunity for HUGs.

LPs can shift VC behavior by voting with dollars

When we were raising Fund II 4 years ago, diversity was not a significant topic of conversation with LPs. Now we see often they are very concerned to use the wealth they manage to reflect the interests they have more broadly. For example wealthy individuals, women billionaires such as Melinda Gates and others, are using their money to help change which entrepreneurs receive venture capital and who builds companies in America.

Other institutional investors, like pension funds and foundations, are realizing they need to have managers who are investing in diverse communities because often the people who created the wealth they manage are diverse people. Foundations in particular addressed equity in society largely through grantmaking and ignored the impact of the equity of the allocation of endowment assets. Now many are recognizing change is required.

As LPs from pensions, foundations and those who manage the endowments of education and religious institutions begin making it clear they want more diversity in their investment choices, it will impact how VCs view their investment strategies. LP shift VC behavior by voting with their dollars.

Deal flow and personal networks

Deal flow and access to diversity can make a huge difference in where venture capital goes. Diverse managers often have greater access and deal flow due to the likelihood they’ve engaged in longer term “investments” within a particular community. As a woman and a minority, I’ve always been a member or active in mainstream organizations in professional areas of my focus (the National Venture Capital Association, the American Bar Association in law, or the Modern Language Association when I pursued a master’s in Latin American Literature. However, I’ve also been affiliated with women’s and minority groups in those same professions starting in high school through the present day. I’ve developed professional networks that are different and deeper than a VC who hasn’t made such commitments to these communities. Investors without connections and familiarity with these networks may not see opportunities that I do. Also entrepreneurs give preferential access to investors who have closer ties and are committed to their communities.

Does Diversity Really Make us Smarter?

As noted in an updated 2014 Scientific American article, diversity empowers science and innovation and the ensuing technology powers economic prosperity. As an investor, I see how diversity can make us smarter because we are less likely to have blind spots when we are looking at a problem with multiple lenses. Different backgrounds and skill sets on a team make the members more likely to see opportunity. Also a more diverse team has a wider array of networks, and the amount of information they have related to a given problem in society or in the world of business that needs to be solved is deeper than if only affluent white men scope a potential market opportunity,

It Can Be Uncomfortable

Margaret O’Neil, a professor at the Graduate School of Business at Stanford, has written about diversity on boards. She explains that diversity may not generate a sense of “kumbaya” in an organization. Diversity can be uncomfortable and such feelings can be hard to overcome. People may not have the same level of ease in their relationships as they do with those who are more similar to themselves. Not having a shared framework can often lead to greater conflict. Instead of actively and consciously addressing uncomfortable feelings, many teams avoid the elephant in the room. This loss of comfort may be worthwhile because it can lead to more dynamic teams, greater emotional growth for individuals and better financial outcomes.

Seeing is believing

Experience working in diverse teams that outperform and function well drives change. Consider Google in its early years. When I joined the company in 2001, I was impressed by a team that included three women and 3 immigrant VPs out of a group of 13. Moreover, the first General Counsel hired was African American and the first CFO was Cuban American. The different life experiences these folks brought to the table made for a rich and dynamic approach to solving problems. I gained a lot of respect for how differences and even conflict can encourage teams to use critical thinking, prepare more thoroughly, seek to be more effective in their arguments, and lead to better judgement calls in the face of limited information.

4 Steps to Boost Diversity in the VC World

Venture firms can take four steps to boost diversity in their own ranks and in their investments:

  1. Hire a diverse staff within the partnership itself, including people of color and women as investment partners. Their diverse networks will broaden the opportunities and connections of the firm. At Google, other law departments often asked how we created such a diverse team at Google Legal. That diversity was directly correlated with the first three hires in the team being minorities.
  2. Firms can also promote diversity in their networks by helping the advancement of minorities in the broader community. For example, Andreessen Horowitz has set up a program at Stanford University’s Rock Center for Corporate Governance to help women and minorities learn the skills needed to get their first board positions. Such efforts will produce a generation of board members that will be ambassadors for the VC firm, helping partners connect with diverse investment opportunities.
  3. Internships and fellowships can also boost diversity. True Ventures, for example, has set up its True Entrepreneur Corps. It brings college students from across America to the Bay Area for internships. The program embraces diversity, has gender parity and encourages applications from trans women, genderqueer, cis-gender and non-binary people.
  4. Finally, as a VC, you can exhort the companies you invest in take to diversity seriously and promote inclusiveness. Firms wondering where to start, could connect with Project Include, a non-profit promoting diversity in technology. Kapor Capital requires its portfolio firms to sign a “Founders’ Commitment” that sets diversity and inclusion goals and measures quarterly progress against those targets. As Kapor partner Freada Kapor Klein says, “it’s easier to set the right culture at a startup than to try to fix a lack of diversity in a firm employing thousands of people.”

At Ulu, we believe that focused sourcing in underserved and underestimated markets will continue to drive superior returns for investors. Small steps towards what can ultimately be a big payoff.