If I had a dollar for every time I’ve heard a VC say that they need to do better on diversity, I’d have raised my next fund. If this sentiment is genuine, it is rarely translated into action. Our sector and the companies we back are indisputably homogeneous. Data suggests we’re going backwards on diversity. In 2022, only 1% of VC investment was raised by women-only founding teams, down from 3% in 2018. Entrepreneurs with disabilities are a staggering 400 times less likely to receive VC funding. And funding for Black founders fell by a huge 45% in 2022.
Why, if so many people are committed to doing better, are things getting worse?
I believe it’s because too many investors persist in their steadfast commitment to a misguided investment formula. One that dictates that, to find and back great companies, you must only back the founders who fit the mould of those who came and conquered before. Those who have the time and financial freedom to give their startup their relentless, unceasing attention. Those who look and sound reassuringly like the VCs making the investment decision.
I also believe that there’s a persistent perception problem about what inclusive investing means. When I speak to some investors, their assumption is that there must be a trade off with performance. They assume that the founders building companies that target underserved groups must be less ambitious. They assume that funds investing inclusively are willing to compromise on generating best-in-class returns, alongside meaningful positive impact. I have had investors explicitly say to me that funds can either have impact, or generate returns. Not both.
I don’t believe this is true.
These misunderstandings pit success against inclusion. Even if they aren’t saying it out loud, these investors see diversity commitments as a watering down, a distraction, a box ticking exercise. It’s an ideology that has been proved wrong time and again – non-homogenous teams have a 30% higher multiple on invested capital. Likewise, research suggests that diverse founders are better set up to weather an economic downturn.
Nevertheless, these misunderstandings stubbornly persist.
We think it’s high time to reframe this thinking. We believe a commitment to backing ‘alpha’ ideas and founders can coexist with a commitment to inclusion, with the latter actively improving the former. This approach, which we at Ada Ventures are calling “Inclusive Alpha”, describes an investment strategy’s ability to beat the market using funds derived from an inclusive infrastructure and investing approach.
We’re reclaiming the ‘alpha’ term and working to meaningfully wed it to the values of genuine inclusion and diversity; both in sentiment and in how we find and fund founders.
If VCs want to continue sourcing and backing the best ideas, they need to embrace a new approach. One that creates an ecosystem in which all founders can thrive, no matter their background. Otherwise, investors will continue to miss out on companies led by women, by parents, by people of colour, by people with disabilities, by people from diverse socioeconomic backgrounds. Right now, the majority of investors are all fishing in the same, minuscule pond of talent. It’s a bonkers, blinkered approach which has led many a firm to struggle in the current downturn.
I reject the premise that it’s hard to find diverse founders to back. The evidence doesn’t bear this out, nor does our lived experience at Ada. Over the last three years we’ve backed 38 new companies. 70% of Ada Portfolio companies have one underrepresented founder, with 49% having female founders and 43% having non-white founders, making our portfolio many times more diverse than the average UK venture fund (although we still believe we’ve got far to go).
We’ve developed over 16 processes to make this possible, including our Scout and Angel network and our support with 40 hours of back-up childcare for founder parents. Around half of the companies that approach us for funding have a female founder and the scout network made up of over 70 scouts sources 10x more all-female teams than the benchmarks and 6x more all black teams. Whilst we recognise that this is still nowhere near enough, we’ve got evidence-based blueprints we’re keen and willing to share.
There’s not a lack of diverse talent. There’s a lack of VCs willing to look for it.
We think the Inclusive Alpha approach can change this – unlocking a new era for venture that brings rewards for all and ushers in a fresh mindset that finally unsticks the stubborn mentality that governs who gets funded.
Next time I’m at an event, I don’t want to hear another VC express an aspiration for better inclusion. I want to hear about how they actually achieved it.
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