Income Inequality is Bad for Startups…and VCs Should Be Pissed Off About It
VCs who don’t take an active role in helping companies solve for inclusion and wage inequality are acting against their own self-interest.
Today is Equal Pay Day and despite diversity efforts, not only are women often excluded from the hiring pool, but a recent Hired.com report on wage inequality makes it clear that even when women are hired, there is a persistent pay gap.
The report found that 63% of the time, men were offered higher salaries than women for the same role at the same company; and on average, companies offer women anywhere from 4% to 45% less pay for the same job.
And for women of color, the wage gap is even larger, with Black and LatinX women making 90 cents on the dollar compared to white men. Overall, Black tech workers can expect to make an average of $6,000 per year less than their white peers.
Bigger than raising another $100B+ SoftBank-killer fund, helping your portfolio companies solve hiring and wage disparity for women and other underrepresented groups could provide the biggest change to the founder landscape while also be the most self-serving thing VCs could do.
How, Sway?*
A common investor shortcut is, “if you did X at Dropbox, you have a higher probability of being able to do X at NewStartup”. But when women, people of color, and especially women of color are hired less often, they are penalized by this shortcut; and without the big company pattern to match against, investors will often misread a founder’s ability to execute.
An investor super-power should be the ability to recognize founder talent with non-traditional backgrounds (ie. without controlling for gender, school, previous companies, etc.). But in the words of my grandmother, ‘everybody ain’t able’ — most VCs don’t have these skills.
Investing partners at the top venture funds are still overwhelmingly white and male, which keeps their portfolios woefully homogenous and that homogeneity is likely to have already made them miss some big market opportunities. So with this smaller and less diverse pool of founders who have experience at “the right tech companies”, it forces investors to work harder and in most cases, it causes them to miss founders that they should be backing.
Furthermore, a career in tech provides an opportunity for employees to participate in the financial upside of a successful startup. When that financial opportunity is unevenly distributed — through hiring disparities, lower pay, and/or less equity — women and other underrepresented groups have a longer path to financial gain.
That kind of financial springboard is often what helps tech company employees move from great employee to promising founder.
But it doesn’t just impact the individual. Startups have been built on tech company employees who have done well becoming angel investors and providing important early capital for founders. You see where this is going, right? Fewer people who have experienced financial wins, fewer angel investors who can write early checks, less support for the overall entrepreneurial ecosystem. Add in the diversity element and when the group who has had the greater access to financial gains is fairly homogeneous, you see that homogeneity persist in the types of founders that they then write angel checks to.
Deep Pools vs Shallow Pools
All of this has a trickle down effect from venture capital investing partners to LPs (the people who invest in venture funds).
It is really hard to return a fund. Like, really hard.
So if you want to get a fund to a 3X or more return, then just as important as check size, follow-on capacity, target ownership, etc. is the depth of your founder pool.
Immediate deal flow is the surface of the water — which deals you can see and have access to today. But below that is tomorrow’s deal flow — where new founders are being cultivated and how close in proximity they are to your network.
Too many VCs have unnaturally shallow founder pools.
If we think about Future Founder Pipeline (your access to people who aren’t yet founders but are likely to be) as an important type of deal flow and an indicator of fund health, the importance of having access to founders who were able to cut their teeth at other companies in your portfolio becomes even more apparent.
Companies who have done the hard work of building an inclusive and equitable workforce have done some of your work for you. They’ve identified talent, provided a place for them to hone their skills, and given them the financial freedom to be able to start or join a new startup (hopefully one in your portfolio) in the future.
But when companies don’t do this, they make investors work harder because they choke your pipeline and keep your pool unnaturally shallow.
Fixing income inequality is the right thing to do
If venture capital investors are truly invested in — even if only for their own benefit — seeing more founders starting venture-backed companies, developing a more robust founder pipeline, and having more angel investors who can take on the early risk of funding startups, then fixing inclusion and income equality in your portfolio companies is the single most impactful thing you can do.
But even if you don’t feel like fixing it, you should at least be pissed about it.
