Silent gaps and blind spots: How far have we really come in investing in diverse founders?

In the past few years, there has been plenty of data, evidence, and attention to investing with a diversity, equity, and inclusion (DEI) lens. And undoubtedly, there has been much progress. Last year, for example, two gender lens investing (GLI) pioneers, GenderSmart and 2X Collaborative, joined forces to make GLI mainstream. The 2x Global Community of Practice now accounts for billions in gender lens investments and is supported by certification, standards, and deal-sharing platforms.

Meanwhile, especially on the other side of the Atlantic, racial equity has stirred a tsunami, forcing VCs, private equity firms and asset managers to have an honest look at a thoroughly unjust system. Today, powerhouses such as BlackRock or Morgan Stanley know that the wind is blowing from another direction and are busy analysing the progress of their DEI strategies.

So far, so good, one might say. Yet while there is a strong case for the impact and performance of diverse founders, real progress in their access to capital is still lagging. Why? Some investors complain that they can’t find suitable candidates to implement their DEI strategies. Founders, on the other hand, are not necessarily comfortable with being exposed as the first of their kind and put into a specific diversity box. Mutual trust seems to be an issue. This raises the uncomfortable question of what is wrong on planet DEI. Did we forget to analyse the root cause of the problem? Do we need to make the silent gaps louder and the blind spots much more visible? For the experts in this year’s Impact Fire Talk no.3, the answer to both questions was clearly “yes!”.

While there is a strong case for the impact and performance of diverse founders, real progress in their access to capital is still lagging.

The discussion organised by FASE in September was as multifaceted as it was candid. Leanne Mair (left), founder and CEO of Benefactum Consulting, was very transparent about her belief in the imperative for organizational transformation: “Investors have to rethink how they define and measure risk based on the profile of the founder,” she said. “There is an implicit definition of success and of a risk-free benchmark that is dominating investors’ decision-making today.”

Her fellow expert Pablo Santaeufemia (right), co-founder and CEO of Bridge for Billions, couldn’t agree more. After years of running programmes to empower pre-seed, incubation-stage entrepreneurs to thrive, he knows how important it is to build bridges for more innovation and supply founders with rare social capital. “When I started my company, I had no relevant network,” he remembered. “But I received scholarships and could speak the kind of language that investors like to hear. That doesn’t happen for many other founders out there.”

• Read more from FASE's Impact Fire Talks: 'Deep impact – or just managing risk? Pathways from ESG to investing for system change'

Asked about ideas for action by moderator Stefania Quaini, who brought her own intense experience from managing Angels4Women, the first female business angel network in Italy, the experts identified two imperatives to address the diversity dilemma:

1. Change the power structures in investment processes

When working with venture capital and private equity funds with a gender lens, Mair was often asked how to ensure that women are included without compromising on the quality of investments. A founder of a social enterprise herself, she learned a lot from her first-hand experience in fundraising. “Because of my background and education, I was able to answer many investor questions. But not everyone knows how to put together a pitch deck or has a coach. If founders don’t understand the investors’ questions or feel inadequate by the way these questions are being asked, there is a clear bias to who gets access to the room.”

If founders don’t understand the investors’ questions or feel inadequate by the way these questions are being asked, there is a clear bias to who gets access to the room.

The other problem she saw was the impatience of investors when trying to find diverse talent. “Investors need to start doing community outreach as early as possible. This will cultivate a sense of security and lower the barriers,” she pointed out. In her experience, diverse founders want to be really seen, although they have a different education or background. This requires investors to change the lens with which they view them – and this is the tricky part that can’t be ignored.

For an investor committed to DEI, it will thus be essential to scrutinise all aspects of the investment process from sourcing to exit – and change the power structures within. Questions such as who sits on the investment committee, who is on the board of directors and how exactly deals are being structured go a long way to add this kind of transparency, the experts in the session agreed.

2. Look left and right of the investment bridge

When accelerators come to work with Bridge for Billions, Santaeufemia often hears that they can’t find enough female founders. Yet for him, it all comes down to levelling the playing field for those who don’t have the social capital, network, and education. “Socio-educational diversity is the quietest and most dangerous gap in my eyes. And I don’t see it being focused on.”

When his team is scouting founders, they collaborate with local partners, who really understand the specific landscape and help the entrepreneurs speak the language of investors. But he knows that for some innovations to become investible businesses, the system needs to adjust first. One adjustment, for example, is to have a much longer time horizon. “We need to think about sustainability in really long terms, otherwise system change won’t happen. And we need to look left and right of the investment bridge and build new ones because most of them are broken.”  A central building block for new bridges is the investors’ tolerance of risk. In his view, investors need to jump more out of their comfort zones: “Don’t wait for diverse candidates to come to you – it’s not enough to be patient. You must actively reach out and connect to those who are beyond your known space.”

Don’t wait for diverse candidates to come to you – it’s not enough to be patient.

Are we still trying to drive outcomes, or achieve equity impact?

The intense discussion made clear that there is a need for both, transparency, and the acceptance of specific realities. “A bias is an aspect of an individual. We can never get away from the fact that people have biases,” Mair summarised the sentiment in the room. “We can only collaborate to achieve a process that creates the necessary transparency around these biases.”

Achieving equity for founders will thus require much deeper interrogation – and a move away from the focus on outputs and outcomes to a much more profound equity impact. “In my point of view, it is a matter of culture: We need to first start building the market before we can see a strong, diverse and high-quality deal flow,” Quaini (left) wrapped up the session. “This includes having the right legislation that helps create this abundance.”

As always, there seem to be no shortcuts when it comes to systems change.

Christina Moehrle is a freelance communications advisor working with FASE among others; this feature was produced in partnership with FASE. 

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