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article imageVC firms should diversify to improve financial performance

By Lisa Cumming     Jul 8, 2018 in Business
A Harvard University study on diversity's effect within the venture capital industry, focusing on measures of financial performance, has found that having diversity on a team improves a VC firm's overall fund returns, among other things.
Findings from a Harvard January 2017 study on diversity in innovation, conducted by Paul A. Gompers and Sophie Q. Wang was featured in the July-August issue of Harvard Business Review, where the story specifically focused on the hard financial gains that diversity can bring a company.
The 2017 research focused on women and ethnic minorities working within VC firms and working as founders of VC-backed startups.
The HBR article argues that "diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns." Partly because of homophily, a "desire to associate with similar people." While homophily can bring "social benefits", the article reads, it "can also lead investors and firms to leave a lot of money on the table."
According to the 2017 study, only 8 per cent of VC investors are women, 2 per cent are Hispanic, and fewer than 1 per cent are black. This, combined with the fact that VCs are more likely to partner with people who share their gender, race, educational background, previous employer, and have a degree from the same school means that "VCs tend to keep teaming up with those who share their traits."
According to HBR, "the more similar the investment partners, the lower their investments’ performance." This, in an industry where "nearly three-quarters of VC firms have never hired a woman in that role."
But, according to HBR, when VC firms hired 10 per cent more women, they saw a "1.5% average increase in overall fund returns each year and had 9.7% more profitable exits."
To "reap diversity's benefits," HBR recommends that founders make diversity a higher priority, recognize hiring biases, and expand their network, both social and professional, to include contacts from differing backgrounds.
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