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Diversity Debt Vs Technical Debt

Which Is More Costly To Your Startup?

If you want to serve the customers of tomorrow you need diversity inside your business today.

I recently listened to a great interview on The Twenty Minute VC podcast with Phin Barnes. Phin Barnes is a Partner at First Round, one of the most successful early-stage funds with a portfolio including Uber, Square, Warby Parker, HotelTonight and GOAT to name a few. On this episode, Barnes discusses all things VC, but the one topic that really stood out to me was about the element of hiring for diversity in tech startups and how it’s core to VC returns. Barnes firmly believes that someone's life experience impacts their worldview shaping the way they think about identifying the problems, needs of a customer, and product creation. Barnes states:

“To be successful and to have the insights that you need in order to generate the returns that VCs are pursuing all of us need to wake up to this idea that the very largest companies over the next decade are likely to be founded and led by people who don’t look like the people of the last decade.” — Phin Barnes

I deeply agree with his statement. The pool of racially and gender diverse founders is growing. Diverse founders are new market creators and diverse audiences are disproportionately served. In the podcast, Barnes continues to frame the discussion around diversity debt and technical debt, and why the payback period isn’t created equal for both. Below are excerpts from the conversation between Barnes and The Twenty Minute VC host, Harry Stebbings:

Technical Debt

Technical debt are shortcuts you take as an engineering group where you know you’re building something that at some level of scale will no longer work. The performance will decline with some level of stress on the system, yet you believe that the cost of making something bulletproof with some level of demand is not worth the benefit today because you’re so far as a company from achieving that scale and your system able to withstand that level of demand. So you take on technical debt, hope to find Product/Market fit and as your company grows you also have engineering resources applied to pay back technical debt and building systems that will perform under appropriate scale as the company grows.

Barnes is essentially saying that the highest cost of technical debt is rebuilding the product from scratch. The debt is understood and can be planned for while also onboarding more capable employees. The payback becomes cheaper at scale. However, diversity debt isn’t so clearly understood and can be more costly.

Diversity Debt

With diversity debt, the initial employees and the founding team have an outsized influence on the culture of that company and the long tail that the influence will have on the company as the company scales. I think the reality is when you take on diversity debt, meaning hiring for diversity and underrepresented candidates whether that’s gender or ethnic diversity is incredibly challenging in today's market. Most founders networks and VC networks are not appropriately diverse and don’t reflect the consumer base that most of their customers are serving. Hiring for diversity takes longer. There is a conflict with building your company and you need to hire five engineers, three designers, and two product managers. You have incredible pressure to do that in order to move quickly, yet you also want to hire for a desire for diversity.

The trap that most people fall into is taking on diversity debt and what they don’t recognize is that that debt increases exponentially in comparison to technical debt. When you have a team of four and you add an underrepresented candidate to that group they represent 20% of your culture, 20% of your DNA going forward and will make 20% of your hires most likely having an outsized influence on your group. As you grow as a company, the ability for that first person to feel that they have a place in the company, that they can affect the DNA of the business without taking on tremendous responsibility for any one person to influence that culture and to drive hiring practices…that burden quickly becomes untenable for the vast majority of people and it becomes unlikely that the company will ever achieve diversity between 10 people…and 500 people. I think we see this today at some of the very largest tech companies as they struggle to retain underrepresented candidates and employees. What they are finding is yes they can recruit because the quality is absolutely there and with tremendous effort to expand your network you can find obviously unbelievably talented people that will bring diversity to your employee population. At the same time, retaining them because of the DNA of those businesses, because of the cultures that have been established is a whole other challenge which is exponentially harder than recruiting them in the first place.

The costs of diversity debt compound much greater than taking on technical debt. Your ability to hire an inclusive group of great employees early on will lend to the recruitment of more diverse individuals as you scale to reach new customer bases. The massive venture outcomes of the next decade are likely to be founded by an underrepresented entrepreneur. Diversity is the one startup debt you really can’t pay back.

I highly recommend reading Barnes’ previous articles on the subject. You can listen to the full podcast and more by clicking the link below:

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Harry Alford

Harry Alford

Institutional Sales, Coinbase Cloud