Impact of Diversity on Portfolio ROI

Arbor Team

California’s SB 54 (a venture capital diversity reporting law), state-by-state pay transparency laws (e.g., within New York, Illinois, and elsewhere), growing LP requests, and other recent compliance requirements have heightened conversations in the fund management space around data reporting for fair and equitable practices. Across the fund management ecosystem, GPs, LPs, platform teams, legal counsel, investor relations, and more are racing to understand best practices.

In other words, reporting data on diversity, equity, and inclusion (DEI) and HR is now shifting to become a need-to-have both in the United States and abroad.

Amidst the compliance drivers, it’s important to remember that this reporting lays down a foundation of transparency and accountability to fuel a more inclusive and equitable space for innovation. Time and time again, research has shown how this can make for stronger company revenue, capital efficiency, and ultimately investor returns.

Diversity can fuel company performance

DEI and HR reporting can play a critical role in increased ROI for funds.

Data clearly shows that 1) diverse teams perform well and 2) diverse teams are vastly underfunded in venture capital.

One recent deep dive into this topic comes from the New York City Economic Development Corporation’s (NYCEDC) Diversity in Venture Capital Report, released in 2023, which cites research from BCG, Harvard Business Review, Kauffman Fellows Research Center, among several others. The report overviews several data-driven research projects that shed light onto the connection between gender of founding team and venture capital outcomes:

Businesses founded by women delivered higher revenue—more than twice as much per dollar invested—than those founded by men, making women-owned companies better investments for financial backers. Source
Venture-backed companies led by women are more capital-efficient, achieving 35 percent higher ROI, and 12 percent higher revenue than startups run by men. Source
Women-founded companies in one VC firm’s portfolio outperformed companies founded by men by 63 percent. Source

Simultaneously, the data shows that startups founded by women or BIPOC founders still make up a tiny fraction of VC dollars deployed.

  • Pitchbook data shows that in 2022, companies founded by solely women represented only 2.1% of total capital invested.
  • Crunchbase data from 2015-2020 show that Black and Latinx founders received 2.4% of funding.
  • In more recent quarters, Crunchbase data shows that Black startup founders are allocated only about 1% of VC dollars in recent quarters, and that VC funding to early-stage Latinx founders is stalling after a temporary uptick in 2020 and 2021.  

In summary, data highlights both the business case for backing diverse teams, and the inequitable state of funding. VCs recognize diverse teams perform better, yet simultaneously aren’t investing in more diverse teams. This is a data problem; it is a critical opportunity for stakeholders across the venture ecosystem to measure these metrics and improve upon them.

With that in mind, more and more limited partners, general partners, and tech founders and workers are advocating for data transparency and accountability in the tech ecosystem.

As the legal and compliance landscape continues to evolve to center data transparency across workplaces, DEI and HR reporting has become increasingly mainstream. It’s important to recall the way in which this goes hand-to-hand with improvement in ROI.

About Arbor

Arbor is a people data platform that makes it easy to capture, analyze, and benchmark HR and DEI data. Built by investors for investors, Arbor Fund, our dedicated fund management product, is tailor-made to help investment teams keep up with today’s ever-changing regulatory landscape and the unique needs of portfolio management.

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