Investing In Diversity: Busting The Pipeline Myth

Partner, COO at Tangelo in Silicon Valley, helping companies grow revenue. Underestimated entrepreneur author: From Ideas to Revenue Streams.

Why aren’t there more startups led by women, LatinX or Black and Brown founders? Why is representation so sparse for diverse professionals in the tech world? Often the most common answer you’ll hear from investors and tech execs is this: “There just aren’t enough qualified candidates in the pipeline.”

In fact, one form of the pipeline myth is just what Facebook’s chief diversity officer, Maxine Williams, went on record to address a few years ago: “It has become clear that at the most fundamental level, appropriate representation in technology or any other industry will depend upon more people having the opportunity to gain necessary skills through the public education system.”

The truth is the breakdown is not with supply but demand. Kauffman Fellows clearly laid out the case last month in diversity research compiled over the past 20 years. A few of their most significant findings are:

• Among startup executives, Black and LatinX leaders are underrepresented by 82% and 85% respectively, compared to the working age population in the U.S. 

• When they do find funding, ethnically diverse founding teams return on average 30% more capital to their investors than white-only founders.

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• About 97% of Fortune 500 firms do not make their diversity data available to the public, so it’s hard to estimate the real picture, but the group only contains three Black CEOs.

• For companies that do report their data, ethnic diversity in leadership is positively correlated to higher profitability, measured by EBIT (earnings before interest and taxes).

Diversity in the C-suite matters so much because corporate culture follows leadership. It’s unrealistic to expect middle managers to make commitments to diversity if executives don’t lead by example. 

At the biggest tech companies, for example, diversity in hiring has stagnated or decreased over the past five years. At Apple, Facebook, Google and Microsoft, the workforce remains predominantly white and male as it has been since its first diversity reports in 2014. 

In the startup world, the situation is marginally better because the investment community recognizes the problem. Goldman Sachs CEO David Solomon has even gone so far as to announce, “Starting on July 1st in the U.S. and Europe, we’re not going to take a company public unless there’s at least one diverse board candidate, with a focus on women.” While that may amount to little more than virtue signaling, the real change will come when investors start questioning their own assumptions. 

In my work with Backstage Capital and nontraditional entrepreneurs over the past 10 years, I’ve heard many variations of the pipeline myth, even from well-intentioned investors who insist that diversity is a top priority. Their argument goes along the lines of this: “Statistics are one thing but the financials just aren’t there. I’ll be the first one to invest when I see a winning business model.”

The reality, though, is that the dominant “winning business model” is simply a rehash of who has been funded in the past. Consider that just over 77% of VC-backed founders are white males, while 91% of VC decision-makers are white men. That sort of circular reasoning leads to an economic dead-end when fragile global markets are badly in need of new ideas.

Meanwhile, nontraditional leaders face far tougher scrutiny because they don’t fit the old world model. In my experience, hiring and investing decisions often turn on emotional connections, which is precisely where cultural and group identities tend to clash. 

Despite all the evidence on why a commitment to diversity not only is the right thing to do but makes good business sense, many investors and hiring managers still operate under the influence of confirmation bias and habits that they don’t even acknowledge. Confirmation bias is the natural tendency to believe only facts that fit our worldview and discredit those who challenge us. 

Research from Stanford and a host of similar studies have found that even when people can see for themselves that certain beliefs have no basis in reality, they “fail to make appropriate revisions in those beliefs.” If facts won’t make a difference, what will? In my experience, herd mentality beats reason any day. 

More investors and tech executives should question their assumptions.

This involves some deep self-examination of what may not feel like inherent biases at first. Another important measure is hiring a diversity and inclusion officer to review company processes and integrate themselves in company interactions. Key when investing in such personnel is making their work a full-force, company-wide effort that’s supported from the top down.

If hiring additional personnel is not in scope right now, a proactive first step in challenging your assumptions and confirmation biases is to write down hiring and investment vetting questions prior to meetings — and have HR review them with you. For a more in-depth reflection, try videotaping yourself in a mock interview, or if permitted, an actual interview, and review this with a professional. You may be surprised by how many nonverbal cues of bias you are emitting.

In 2020, we are finally close to a tipping point, with the rest of the industry poised to follow, not because it’s the right thing to do but because diverse teams are the new standard.


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