Equity, Diversity and Inclusion

Here’s how to improve diversity in startups

A woman walks by a group of men discussing at NATO headquarters in Brussels, Belgium, October 4, 2018. REUTERS/Francois Lenoir - RC1B5EFDF920

Europe has the lowest gender parity for entrepreneurs across all regions. Image: REUTERS/Francois Lenoir

Deepak Krishnamurthy
Chief Strategy Officer, SAP
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This article is part of: World Economic Forum Annual Meeting

Innovation has always been about generating good ideas by challenging the status quo with new viewpoints. That is why diversity is fundamental to the sustained success of any innovation ecosystem. Promoting diversity in entrepreneurship and technological innovation can deliver greater economic and societal value.

As society experiments with new technologies such as artificial intelligence (AI), we must be careful to ensure that our own individual biases do not taint the data we use to train AI algorithms. Training data must accurately represent human viewpoints from the global population, so that AI can augment humans ethically, safely, and fairly.

Today, examples abound that demonstrate the need for diversity in the training of AI. For example, 45% of ImageNet data, which is commonly used to train computer vision algorithms, comes from the US and only 3% comes from China and India together. This is a problem when you consider that China and India together represent 36% of the global population and the US only represents 4%.

But diversity doesn’t just lead to better technology, it leads to better business and financial results. On average, companies with more diverse leadership teams report almost 20% higher revenues from innovation.

More specifically, within the startup ecosystem, numerous studies have found that diversity in the leadership ranks yields a better return on investment for investors and better exits for entrepreneurs. One such study showed that, over a five year period, for every dollar of venture capital invested, female-led or female-cofounded startups generated 78 cents of revenue, while male-led startups only generated 31 cents.

It’s not an equal playing field for women and minority entrepreneurs

The startup ecosystem, especially in the B2B technology space, has not been inclusive. Consider these facts:

Only 13% of US venture capital (VC) funding went to founding teams that have at least one woman.

7% of all funds raised by European VC-backed companies went to founding teams with at least one female founder.

⦁ Across both the US and Europe, approximately 2% of VC funding went to all-female founding teams.

Many of these issues arise from the fact that fewer than 20% of software developers are female. There needs to be a structural change in the STEM education model to attract more female developers, which would result in more aspiring female entrepreneurs. In the near term, there is an opportunity to improve the state of women and minority entrepreneurs.

Change must happen in three impact areas

The startup ecosystem needs to better nurture inclusive entrepreneurship by driving change in three inter-related areas:

1. Improving access to VC funding for women and underrepresented minorities in technology

Although there has been increased focus on VC investments to women and minority-led startups with the advent of dedicated funds for these under-represented entrepreneurs, inclusive investment is still not standard practice for the industry. Across the board, VCs should proactively increase funding to diverse founders as there is clear evidence that diverse teams outperform non-diverse teams. More than anything, investing in women and minorities is a better business bet.

2. Creating an inclusive community of mentors

Mentors provide entrepreneurs with role models and resources for addressing their most critical strategic and operational challenges. Mentors also provide valuable advice to founders on how to articulate the value of their ideas for the VC audience and how to raise money effectively.

3. Injecting diversity into the leadership of accelerators and venture capital organizations

For VCs, having a diverse leadership team that’s managing both investment and growth enables a culture of diversity and inclusion that permeates everything they do. With a more balanced VC management team, much of the unconscious bias that has impacted the industry will disappear on its own. In the US, only 8% of VC investors are women, and racial minorities are also underrepresented in the funder community: only about 2% of VC investors are Hispanic, and fewer than 1% are black. VC firms need to be proactive in embedding a culture of diversity and inclusion in their management teams.

By addressing these three areas, governments, businesses, and societies can better connect under-represented entrepreneurs to the resources they need to be successful in starting and growing business ventures.

SAP.iO is paving the way for inclusive entrepreneurship

Corporates can lead the way in addressing the current diversity and inclusion opportunity in the startup ecosystem. The recently announced SAP.iO No Boundaries initiative is an example for how private sector organizations can scale inclusive entrepreneurship by organizing around these three impact areas:

1. Improving access to VC funding

SAP.iO Fund has committed to invest up to 40% of its investible capital in women and minority entrepreneurs. This ensures that there is a consistent focus on identifying and investing in these entrepreneurs aligned with the goals of the fund.

2. Scaling mentor networks for underrepresented entrepreneurs

SAP.iO will scale its focus on inclusive entrepreneurship in the accelerators it operates globally. SAP.iO Foundry NYC was established last year to exclusively focus on women and minority founders and has just kicked off its second cohort. SAP.iO Foundry Berlin will dedicate its spring cohort in 2019 to focus on inclusive entrepreneurship.

3. Injecting diversity into the SAP.iO Fund and Foundry leadership

Diversity has been a core value at SAP.iO from the outset. Three out of four of SAP.iO’s Foundry accelerators are led by a diverse group of women. Over 50% of the broader SAP.iO team are either women or minorities. With this diversity, it is no coincidence that 30% of the startups invested and accelerated by SAP.iO have also been led by women or under-represented minorities.

With these initiatives, SAP is creating a one-of-its-kind forum for inclusive innovation in Europe and globally.

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The views expressed in this article are those of the author alone and not the World Economic Forum.

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Equity, Diversity and InclusionEconomic Growth
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