Report VC Community drinks May 10th 2023

Three steps towards a more inclusive ecosystem in venture capital

Don’t miss investment opportunities by improving the diversity of your firm with these three actionable steps

The second VEECEE event of 2023 was hosted by community partner Amazon Web Services. AWS plays an important role in the ecosystem as a provider of technical solutions – many companies run on their cloud – but also provides business services to many companies. Anna C. Mallon, Senior Startup & VC Business Development Manager acted as the host of the session. It is her mission to help investors and entrepreneurs in their path to growth. One of the key issues she identifies in this process is diversity and inclusion: how do we, as a community of investors, make sure that people from underrepresented groups get proper access to funding and support?

The fact that the startup ecosystem has diversity challenges hardly bears mentioning, with the emblematic fact that only two percent of VC funding goes towards female entrepreneurs. This is a persistent and universal problem across most markets and ecosystems. Research shows this funding gap time and time again, curiously coupled with the fact that mixed or female led teams appear to perform better and that female founders are more efficient with the provided capital. Other factors besides gender representation show the same patterns.

Biased questions
To tackle this thorny problem with the Dutch VC’s, AWS had Lily Xu come over from the US. Xu is the Underrepresented Founder Programs Lead and helps people from different backgrounds to find their way in the startup and venture capital ecosystem from AWS. Xu was previously an entrepreneur in the beauty space herself and led, after her exit, the accelerator program for the American beauty retailer Sephora, working with 65 female founded companies.

Xu started her presentation with the cluster effect, pointing out that many VC’s tend to group around certain hot deals, founders or markets. These tend to be constricted to a narrow basis, with strong geographical preferences and an overrepresentation of people who graduated from schools like Stanford and Harvard. This happens also because many VC’s come from these backgrounds and tend to invest in people like them. But, as Xu points out in a reference to Disneyland, the longest lines aren’t necessary for the best rides. Investors should, in her view, pay more attention to the diamonds in the rough, meaning companies founded by people from underrepresented groups.

An insightful part of her presentation dealt with a topic that’s the subject of current research at the Harvard Business School: the difference between the way male and female founders are questioned by investors. We tend to think that this sexism clusters around openly sexist and awkward questions like ‘how do you combine running your business with raising your kids’, but in practice the differences are far more subtle. Xu cites the research of professor Laura Huang, who classifies VC questions in the categories of promotional and preventative, or, questions that are framed in a positive way and tend to leave room for the entrepreneurs to expand on their case and questions that are framed in a negative way and are aimed at identifying risks and obstacles.

To give an example, it’s the difference between: ‘how would you convince customers of the value of your product’ and ‘are you sure you can reach enough people in this tough market’. The differences are small, but meaningful and the research shows that women get far more preventative questions than men. These lines of inquiry force underrepresented founders far more on the defensive and allow them less space to convince investors of their proposition. The research shows that this happens even with the same pitch decks and pitches, and that female investors tend to show the pattern too. The identification and elimination of these subconscious biases is in the end what matters most: Xu encourages VC to mind their language when probing entrepreneurs and frame their queries in a promotional way.

Bedouins
After Xu’s presentation two people with extensive experience in diversifying the ecosystem shared their experiences with the audience. Erica van Eeghen works for the Borski Fund, a Dutch investor that partners with female-lead teams. An interesting point she raised was that in her quite privileged network the basics of investing or raising capital are very rarely mentioned, as they are assumed to be common knowledge. This automatically forms an intimidating barrier to people from different backgrounds and is something to keep in mind when expanding your network.

Guy Spigelman works for Amazon Web Services specializing in startups in the health care and life sciences sectors, but previously ran a successful accelerator for underrepresented groups in Israel. He asked the audience what counts as underrepresented in the Netherlands, and one interesting answer that cropped up is that people without a university degree are rarely reached here, since the ecosystem is focused strongly on universities.

Although there was much more to be said on the topic at some point the program had to move on to a more cheerful part of the evening – drinks! In her closing remarks Mallon encouraged the audience, despite the sometimes quite emotional tone of the tough conversations about diversity, to also see diversity as an important and exciting business opportunity to expend your pool of investment opportunities and improve the performance of your portfolio companies.

Three actionable steps to improve the ecosystem diversity

– Analyze your communication towards founders: how are you framing your questions and are you asking the people from different backgrounds the same kind of questions?

– Open up your network to people from underrepresented groups.

– Appoint more diverse leaders on investment teams.

 

Click here to view the photos of the VeeCee Community drinks. Hope to see you next time!