Innovation: What’s Diversity Got to Do with It?

Diverse leaders and employees are a key to success.

In 2018, a consortium of 46 VC firms began participating in Chicago Blend, a joint initiative designed to foster diversity and inclusion in the Chicago entrepreneurial ecosystem. Its first project entailed collecting data to establish the demographics of both the VC firms and their portfolio companies. What they found about Chicago-based startups is somewhat unsurprising: while there is better than average gender diversity in their management teams, both the executives and investors skew whiter than in the US startup scene overall, which is whiter and more male than the US population.  

But with this baseline data, Chicago Blend and its 46 VC supporters hope to identify and support initiatives to change this mix-—both in the portfolio companies and the VC firms. Diversity initiatives have sprung up all over the startup landscape to identify, encourage, support, and fund female, LGBTQ, and underrepresented minority founders—initiatives including BLCK VC, All Raise, Backstage Capital, SheSays, Backing Minds, and Yes VC, to name a few.

Why try to increase diversity?

For decades, studies by consulting companies, nonprofit organizations, and academics have demonstrated a correlation between companies that have greater gender and racial diversity in management and on boards and improved business performance. However, correlation is not causality, and these studies have been criticized for failing to account for the myriad variables that affect company performance but are completely separate from diversity.

More recent research has begun to focus on the impact of diversity on innovation. In 2013, the Center for Talent Innovation, a nonprofit think tank, surveyed 800 employees at more than 40 companies to capture data about the kind of diversity found there and to analyze metrics including risk-taking, innovation, and market growth. The study defines two types of diversity: inherent and acquired. Inherent diversity includes traits such as gender, race, age, disability, sexual orientation, and religious and socioeconomic background, while acquired diversity means having some combination of a global mind-set, military experience, language skills, gender smarts, social media savvy, and cross-functional knowledge. The researchers find inherent diversity is instrumental in helping a company discover and meet the needs of a diverse customer base, while leadership teams with acquired diversity are significantly more likely than teams with nondiverse leaders to act on innovative ideas from diverse employees. In fact, the data suggest that homogeneity actually stifles innovation.

Employees from companies with both dimensions of diversity say that their colleagues are 90 percent more likely to take risks and 72 percent more likely to challenge the status quo. They are also 45 percent more likely to report that their company improved its market share in the previous 12 months and 70 percent more likely to report the company captured a new market in the same time period. 

Where’s the diversity?

A demographic study finds that while there is better than average gender diversity among management teams at Chicago startups, the city’s entrepreneurial ecosystem skews whiter than the nationwide startup scene overall.

◉ White | ◉ Asian | ◉ Hispanic | ◉ Black | ◉ Others

Deutsch 2019

A 2018 study by Boston Consulting Group surveyed 1,700 companies in eight countries, looking specifically at diversity on management teams, and defining innovation income as revenue derived from products and services launched within the previous three years. It finds that companies with above-average management diversity reported that 45 percent of annual revenue was innovation income, compared with 26 percent for companies with below-average management diversity. The data also showed that small changes in team diversity related to national origin, industry background, gender, and career path had meaningful impacts on innovation income. 

A survey by Techstars, a leading startup accelerator, of nearly 700 founders of technology-based startups also connects diversity to innovation. Seventy-two percent of the founders surveyed said that building a diverse employee base was either very important or extremely important to them. The survey asked what the benefits were to having a diverse staff, and the No. 1 answer, given by 81 percent of the respondents, was that it “enhances creativity and innovation.” While 61 percent of respondents claimed to be very involved in promoting diversity at the company, only 12 percent had five or more women and/or minorities on their tech teams. If diversity is so important, why have so few of these companies achieved even this level of it?

No lack of talent or interest in entrepreneurship

When it comes to innovation entrepreneurship—defined as trying to bring new products and services to market, generate millions of dollars of revenue, and create dozens to thousands of jobs—founding companies need skilled people on management and technical teams, and most likely the candidates for these jobs have a higher-than-average level of education. In the United States, women receive half of all science and engineering bachelor’s degrees, 46 percent of science and engineering master’s degrees, and 42 percent of MBAs—while nonwhite people receive roughly 40 percent of all these degrees. And, while 15 percent of MBA students not classified as underrepresented minorities (mainly white and Asian) say they may start a business after graduation, 21 percent of Hispanic students and 30 percent of African American students say they are considering entrepreneurship.

It’s about commitment and investment

The challenge facing the startup and VC world is to do more than simply say diversity is important. Fundamentally, it’s about implementing real changes to marketing, hiring, training, compensation, and retention policies so that companies actively and intentionally reach out to and engage this educated, entrepreneurially minded, and diverse population.

Racial diversity in the higher-ed pipeline

The share of nonwhite students pursuing science, engineering, or MBA degrees suggests there’s no lack of diverse talent or interest in the startup scene.

◉ White | ◉ Asian | ◉ Hispanic | ◉ Black | ◉ Others

Deutsch 2019

The Techstars study identified some best practices that have been implemented more frequently in companies with greater diversity on their technical teams. These so-called diversity leader companies, compared to companies with less diversity on their tech teams, were more likely to have standardized the interview process, to advertise and recruit in media that target diverse audiences, and to offer both professional development and parental leave. 

“I am asked all the time, ‘How can we get more diversity in our employee base?’” Chicago talent guru Grant Zallis, founder of IAR Consulting, an executive-search firm focused on helping growth-stage companies build great teams, told me in a conversation. He gave me his reply:

I tell them three things. First, you need to know why you are trying to [increase diversity]. It has to be rooted in the company mission. Hiring for diversity is hard—it takes longer—and when the going gets tough, you have to have a good reason to keep going or you will give up. Second, define diversity for yourself. Is a white gay male a diversity candidate? Someone over age 55? What about someone who grew up in a severely economically challenged environment? There are a lot of ways to be diverse. If you can’t articulate “why” and “what,” you have no hope of being successful in the goal of building a diverse team. 

Last is to be very public about diversity being part of your mission and actually demonstrate your commitment in your messaging and recruiting activities. Venture capitalist, overhaul your website if it is all a bunch of white dudes in suits. Founder, have you made it really clear on your website and in your marketing materials that diversity is important?

Once your messaging is clear, it is about building a pipeline. Recruiting is just like a sales funnel. In sales, you start with a large set of opportunities to get to a couple of closed deals. It’s the same with recruiting for underrepresented classes. Your effort to hire for diversity starts when you build the top of the recruiting funnel—ideally you want a pool that is 70 percent diverse. That means spending time and energy actually identifying those candidates and reaching out to them instead of waiting for them to apply. Look into professional networks that are specifically focused on the candidates that you are targeting. Developing meaningful relationships with these groups takes time and effort. It can’t just be one-off requests that are transactional—you have to invest!

In my conversations with Chicago venture capitalists and founders, it seems some of them are putting their money where their mouths are. Their comments to me illustrate how they are thoughtfully defining what they mean by diversity:

“Diversity to us is diversity of perspective. There are some obvious types of diversity that are visible to anyone, race and gender being the most obvious. But there are lots of other forms of diversity too—religion, education, sexual orientation, economic, geographic, etc.
—Troy Henikoff, Managing Partner at MATH Venture Partners

“I believe having as much variance of ideas, looks, beliefs, orientation, and backgrounds as possible in the room fosters best outcomes. Best outcomes come from seeing all perspectives, having all the right information, to make correct decisions that truly represent the community. It’s like an asymptote, where we never see the best decision made unless we continue to increase diversity.
—Kyle Swinsky, CEO/Cofounder of AMOpportunities

Their comments also illustrate how they are taking concrete actions:

“Gender diversity is not something I have ever put energy into at our company; I think [because we have] a female CEO, more women gravitate to our applicant pool, and as a result, our company is roughly two-thirds women today. . . . The only measure I have specifically taken to add more diversity in the more traditional buckets is to engage a recruiting firm that specializes in black candidates when we have open roles.
—Jennifer Fried, CEO/Cofounder of ExplOrer

“We have language in our term sheets that strongly encourages HR policies that are inclusive, something I think is not common.
—Jason Heltzer, Managing Partner at Origin Ventures

“We recently had the privilege of showing our support of ChickTech, a women-in-tech nonprofit that empowers women to stay in tech and encourages girls to join, as a sponsor of the career fair at its conference in Chicago.
—Brian Clark, CEO/Founder of Ascent

“For our portfolio companies, we are currently focused on gender diversity on our boards. This is not for a lack of other diversity problems to solve, but it is a focused start. We are focusing on the board level because it’s where we have the most direct influence and we also believe that it trickles down more accountability to diverse hiring. It’s much harder for a CEO to explain why the past six senior hires they made are all white men when the board they are explaining to is NOT all white men.
—Guy Turner, Managing Director at Hyde Park Ventures

And they are putting diversity at the core of their cultures:

“Hiring is just one piece. We align our culture and operations to attract the diversity we seek. We ensure our hiring includes variance of channels at all career levels. Different locations and different messaging increase the pool and the uniqueness of candidates. And getting more diversity in management is always a priority, so we develop all people within the company, giving equal opportunity to advance.
—Kyle Swinsky, CEO/Founder of AMOpportunities

In one display of such core commitment, coupled with a large expected return on investment, several local VC firms actually invested in the Mom Project, a startup specifically focused on helping women remain in the workforce by matching them with employers committed to supporting working parents.

Chicago Blend’s ongoing data collection efforts will reveal if, over time, Chicago’s venture and startup communities will be able to diversify, and what impact that will have on innovation coming from the US midwest.

Waverly Deutsch is clinical professor at Chicago Booth and the Polsky Director of the UChicago Global Entrepreneurs Network. 

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