February 16, 2021
If you ask any VC or executive the attributes they look for in great founders, the phrase “data-driven” will be one of the first things you hear. As a CEO, we also expect our executives and team members to make data-informed decisions when possible. One of the superpowers of Silicon Valley is its penchant for data – it is one of the strongest prerequisites for action here. And although I’ve experienced first-hand some investors and operators in the tech industry who want a more diverse workforce because “it’s the right thing to do”, what we really should be saying is “it’s the data-driven thing to do”.
Because the data is crystal clear: diversity leads to stronger performance.
I learned these diversity concepts before founding Incredible Health, and applied them while building products that make Incredible Health not only the place where nurses find jobs, but also where they advance their careers. It is also one of our secrets to successfully hiring excellent tech talent for our team from other top companies.
As a tech community, to really change the extremely slow diversity trajectory we are currently on, we need to first understand what the data is telling us. And then, we need frameworks to take action.
This essay aims to provide both operators and investors with both.
Let’s start with the data:
Companies with more diverse management teams have 19% higher revenues due to innovation, and 9% higher EBIT margins, detailed in this BCG study.
McKinsey reports detail that companies in the top-quartile for gender diversity on executive teams were 21% more likely to outperform on profitability. Companies in the top-quartile for ethnic / cultural diversity on executive teams were 33% more likely to have industry-leading profitability. There’s also a huge penalty for opting out of diversity: companies in the bottom quartile for both gender and ethnic / cultural diversity were 29% less likely to achieve above-average profitability.
Harvard Business Review highlights that diverse teams make decisions 2X faster, with half the number of meetings, primarily because they are more prone to re-examine facts and keep discussions objective. Their decisions deliver 60% better results because they focus more on facts.
This study by the Kauffman Fellows dismantles the “pipeline” excuse: while diverse STEM graduate numbers continue to rise, that’s not translating to more employment in tech. In addition, using Crunchbase data the report describes white founding teams and white executive teams raising venture capital more often. However, when diverse founding teams do successfully raise, they tend to raise 60% more than white founding teams, particularly in late-stage rounds.
Diverse founding teams have higher returns when cash is returned to investors, detailed by this Kauffman Fellows report. Historically, diverse founding teams earned a 3.26X median realized multiple on IPOs and acquisitions, compared to a 2.50X realized multiple for white founding teams: a 30% increase. Ethnically diverse startup founding teams provide higher returns to investors.
There’s countless more academic papers and research on this topic; the items above are just a small sample.
How do diverse teams deliver better results (higher revenue, higher profitability, and higher returns to shareholders)? Short answer: Better and faster problem-solving.
Individuals with different backgrounds and experience see the same problem in different ways, and come up with different solutions — cognitive diversity. That increases the odds that one of those solutions will be a hit. In a fast-changing environment like the technology industry, with high stakes and intense competition to innovate, the responsiveness that diverse teams enable ensures the company is better positioned to adapt. Enriching your team with individuals of different genders, races, ages, and more is key to boosting your company’s intellectual potential and likelihood of achieving your mission. Biases can be kept in check because there’s a higher chance of questioning assumptions that hinder innovation and growth.
I experienced this first hand in product development and marketing at Incredible Health. Our team is highly diverse in age, gender, race, political views, and experience. Consider that we built our product for US-based nurses, 20% of which identify as minorities. Nurses in turn care for a diverse patient population. Therefore, when we built our first-of-its-kind Continuing Education (CE) product into Incredible Health’s apps, where nurses across the country can complete fully accredited online CE courses for free (instead of paying $240M out of pocket every year) to maintain their licenses, our team knew we’d have to provide a wide range of courses. It wasn’t enough to only provide general courses like Heart Failure for example, but also led to us including courses for specific populations like Nurse’s Role in the Opioid Epidemic, Caring for HIV/AIDS, and Delivering LGBTQ Culturally Competent Care.
At this point in the history of technology, where smartphone penetration in the US and other countries is over 80%, and businesses are adopting technology more rapidly than ever before, nearly every team is building and marketing technology products for a highly diverse population. It’s a competitive advantage to have a diverse team that reflects your user base. They can recognize user problems and needs earlier and avoid blindspots. For example, they can address the trust and safety of specific user cohorts that feel unfairly targeted, or use more culturally sensitive marketing language that is suitable for a wider range of communities. They can more easily empathize with a diverse user base and question assumptions more thoroughly, as we build and grow the next generation of products from social networks to business workflow software.
Ask yourself this memorable question the NFX partners explain to their portfolio on why diverse teams have stronger performance: “Imagine you need to lecture on a topic to a group you don’t know. In which scenario would you prepare more and deliver a better lecture – when you know the group is all of the same opinion as you and will gladly accept your view, or when you know that they have different opinions? In a company, it’s exactly the same. More diverse teams lead to more thinking, more preparation, and more points of view, which creates far better companies.”
Most importantly, 2020 has accelerated and made it crystal clear that customers expect more, and this is now table stakes. There is zero tolerance for culturally insensitive Juneteenth app filters, housing marketplaces that discriminate, community networks that enable racism, or unfettered violent rhetoric aimed at specific groups. Your customers, especially those under age 40, expect more and are saying it with their dollars. In a recent Deloitte survey of Gen Z and Millennial respondents, both groups reported that “they won’t hesitate to penalize companies whose stated and practiced values conflict with their own.”
Another competitive advantage of diverse teams: W