The Holy Grail of Venture Capital


Suraj K. Gupta is President and CEO of Rogue Insight Capitalan investment company focused on supporting diversity, innovation and social impact

Venture capital and private equity have been growing asset classes for decades. As more investors seek returns in a low-interest rate environment and as more asset managers try to invest in alternatives to public stocks, we’ve seen an explosion in venture-backed companies. In fact, annual VC funding increased 4.4x between 2013 and 2021—going from $22 billion to $96 billion

Over the years, the call for greater support for diversity in the VC and PE world has grown significantly as women and visible minorities raise a small portion of VC funding. While 77% of VC dollars go to companies with white founders, less than 10% of VC dollars go to female founders and less than 1% to black founders. Despite the consistent rhetoric around supporting these groups, little has changed.

The unfortunate reality is that the social and ethical obligations facing our society to support everyone equally have not been enough incentive to bring about change. Although investors discuss the issue, they do not change the way they invest.

The inherent problem at the top

The majority of the North American population includes visible minorities and those who do not identify as male, yet founding teams from this demographic raise less than a quarter of the available venture capital. There are several societal factors that create biases that contribute to this problem, and one perpetuating factor may be the diversity of those making investment decisions.

VC firms have made progress in hiring and promoting more diverse employees, but capital decisions are made by a homogeneous group. Representing white men 30% of the population, 58% of all VC investors and manages a whopping 93% of VC dollars. White women represent 30% of the general population, but they represent only 11% of the venture partners who control only 3% of the wealth. The other 40% of the general population is represented by 31% of the venture partners and controls only 4% of the wealth.

Homogeneous VC firms leave significant value on the table. Studies have shown that venture firms with at least one female founder generate 9.7% more profitable exits† While we shouldn’t assume that investors are overly supportive of founders who share their gender or ethnicity, systematic bias can arise when a powerful group of people is not representative of the demographics of the overall population. As we increase the number of women and visible minorities in investment decision-making positions, we will move the needle to more money invested in diversity.

The value we lose

Many VC companies have performed extremely well over the years. This may raise the question: Is there a financial incentive to change the way they invest? This question can be answered with a resounding yes.

However you break it up, diverse teams outperform homogeneous teams, and the numbers confirm this† Teams that are diverse by gender and ethnicity generate 30% higher MOIC (multiples on invested capital) compared to homogeneous teams. Companies with at least one female or ethnically diverse founder generate over 60% of business value.

When considering exits in the VC/PE world, the efficiency of various teams are an incredible degree higher than those of homogeneous. Ethically diverse founders enjoy an average exit multiple that is 30% higher than that of exclusively white founders (3.26x versus 2.5x). This gap widens when we look at diversity in the C-suite. Ethically diverse C-level teams have an average exit multiple that is 64% higher than their all-white counterparts (3.31x vs 2.02x).

This is not to say that white founders have a lower propensity for success than other groups. It shows that a diverse mix of founders and executives is critical to building a truly great organization. If you have a group of people from different backgrounds, ethnicities, and genders, you have a group that is much more representative of a company’s potential customers and stakeholders, meaning you have a much higher chance of successfully engaging with these stakeholders.

History has shown us countless examples of homogeneous teams failing due to a lack of consumer understanding† BMW infamously insulted its Emirati customers with a commercial misusing the UAE’s national anthem. HSBC Bank expanded globally with the slogan “Assume Nothing” mistranslated to “Do nothing” in several countries. KFC was launched in China to find out that “Finger-Lickin’ Good” had been translated to “Eat Your Fingers Off”. While these are funny anecdotes, they point to the unfortunate truth that the teams leading these international expansions were unlikely to have local employees or executives who could have easily spotted these costly mistakes. These three companies have spent tens of millions of dollars addressing these errors — a cost that could have been avoided with a single local salary.

Making equality a reality

Although we have a lot of work to do, the problem we face is essentially solvable. If we continue the trend to improve investor diversity, raise awareness around the need to support different founders and demonstrate that diverse teams outperform homogeneous teams, the market will help us address this issue.

Venture capital and private equity firms have a financial obligation to their investors to seek maximum return, yet those same firms constantly ignore the holy grail of investment. I launched Rogue Insight Capital to address these exact issues. Rogue was co-founded by myself and my sister Reetu Gupta, and we thought that if we could generate the best return by focusing on diverse founding teams, we could give the industry a hand.

There is a huge financial incentive to invest in diverse teams – one that we prove every day at Rogue. We have an obvious competitive advantage in the investment world, and I’m waiting for that advantage to disappear as the ecosystem begins to give various founders the credit, focus and funding they deserve. That day is coming and together we can all achieve equality in the investment world. Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?