What is causing the diversity problem, how we can fix it and how you can help.
Help Us Fix It
Startups are hard. Your gender, ethnicity, age and socio-economic status should not make them harder. Unfortunately, VCs suffer from a lack of diversity in both their teams:
Source: The Other Diversity Dividend, Harvard Business School
...and portfolios:
Source: Table Stakes (#Angels and Carta)
Not only is this unjust, it is a missed opportunity:
Source: Deconstructing the Pipeline Myth, Kauffman Fellows and MaC Venture Capital
So far, efforts to increase diversity in VC have been mostly targeted at the micro level:
…but, as welcome as these initiatives are, they don't go far enough. The diversity problem in venture capital is systemic, pervasive and must be fixed at the macro level.
To find an industry-wide solution, we must first answer one simple question: why don't VCs invest in diverse teams?
Based on extensive research, interviews and Sunlight's Investor and Founder survey data, we have determined there to be three root causes of inequality in the venture capital industry:
Let's look at each of these in turn and conclude with Sunlight's solution:
NFX
Medieval is right. To illustrate NFX's point, let's start at the very beginning of the fundraising journey...
For most founders raising venture capital for the first time, their journey begins with a Google search. This might lead to a few helpful blog posts, the odd VC website or the limited data and cold design of Crunchbase's free tier, but no killer repository.
Let's assume they get lucky and find a list of investors who are currently deploying capital in their sector and location… now the fun begins. Spreadsheet at the ready, the founder visits each individual website, navigates the labyrinthine user interface and finally lands on the team page. No emails, aaahhhh!!!!
To highlight the scale of this problem, let's look at Y Combinator. On average, startups backed by YC need 30 meetings to get to one term sheet. And they're the lucky ones, investors come to them. The average startup will need to target 100s of VCs to even get close to 30 meetings.
That's a lot of time spent searching for VCs, hunting down contact details and writing personalised emails. Time better spent running their company.
And to be clear, VCs don't have it much easier. For funds without proprietary deal flow, they need to be super creative. Especially in today's remote-first world.
With all this inefficiency in the fundraising process, it's easy to see how diversity can take a back seat. It's hard to make diversity a priority when startups and VCs can't even find each other.
One thing is clear: the asset class that loves disrupting inefficient industries is in desperate need of disruption itself.
Sunlight's Solution: A two-sided fundraising network for the VC-Startup ecosystem.
At its core, Sunlight is a searchable database of actively-managed venture capital firm and startup profiles. Each profile contains all the necessary information for a visiting founder or investor to be able to assess fit and decide whether or not to initiate contact.
Consistent, data-heavy startup profiles will remove the need for email pitches and endless back-and-forth, enabling VCs to more efficiently manage deal flow.
A central repository of VC firms, with advanced search to filter by investment criteria, will significantly reduce spray-and-pray pitching and level the playing field for less-connected founders.
Every fundraising journey begins with discovery. Sunlight makes raising venture capital for startups, and researching startups for investors, faster and easier than ever before.
Freada Kapor Klein, Kapor Capital
Let's pick up the fundraising journey where we left off. After countless hours of research, the founder now has a target list of VCs and is ready to start pitching.
Reviewing their spreadsheet, the founder notices a recurring theme: the preferred method of contact for the overwhelming majority of VCs is a warm introduction from their network.
This poses a new problem for the founder, an industry outsider. But, like all good founders, they hustle away and start reaching out to portfolio companies (the irony of cold-emailing founders to avoid cold-emailing VCs is not lost on them).
After countless more hours spent searching for contact details, the outreach begins. Most emails are ignored (founders are busy!), but a few offer to help. We're finally in business.
Unfortunately, the founder didn't generate enough warm-intro interest to get close to the 30 meetings target, so it's time to finally unleash the cold emails. After diligently researching each VC, they carefully craft personalised pitches and hit send.
The founder is now days, if not weeks, into a fundraising journey that could have been done in mere minutes and, so far, has nothing to show for all of their effort.
Sadly, this is all too common. And not only is it a colossal waste of time at a critical juncture in a company's lifecycle, but it hurts diverse founders the most.
This policy of favouring warm introductions disproportionately affects startups founded by underrepresented minorities (URMs) due to the lack of diversity in venture capital investment teams and portfolio companies.
Closed networks are antiquated, repressive and, based on overwhelming evidence, an inferior investment strategy.
Sunlight's Solution: Every venture capital firm and startup must accept, and respond to, cold introductions.
On Sunlight, there are no gatekeepers and no barriers to entry for less-connected teams. As long as there is an investment criteria match, any startup can contact any VC (and vice versa).
Advanced deal flow management software — in combination with detailed startup profiles — will enable VCs to accept more pitches, review them efficiently and provide timely responses. All without opening Gmail.
By embracing cold introductions, Sunlight will create a level playing field for all startups, venture capital firms, founders and investors.
Paul Graham
Paul isn't alone. We are all guilty of unconscious bias. There are 100s of studies confirming the presence of homophily related to gender, ethnicity, education, age, social status and more.
This doesn't bode well for our founder, who (spoiler alert) is a black woman.
Picking up our fundraising journey from before, with the exciting news that she was able to get a handful of meetings with investors, the immediate concern is: will homophily ruin her chance of success? Will her startup die because of a lack of diversity in venture capital investment teams?
This is a very real concern for a lot of founders. Unless diversity is prioritised at the earliest stage of fund formation, the results can be catastrophic.
Unchecked, investors will be drawn towards founders with similar backgrounds to themselves and towards startups that are solving problems that may reflect their own, but not society as a whole.
These teams may then go on to successfully exit and join the ranks of future VCs and angels, further compounding the problem. Inequality is a vicious cycle…
…and it's also bad for business. The lack of diversity in investment teams leads to groupthink and increased focus on a handful of “hot deals”, driving up valuations and lowering returns for the venture capital asset class as a whole.
Furthermore, with venture capital firms' survival inextricably linked to power law dynamics, lack of diversity in investment teams could prove fatal. It is a VC's duty to find outliers, making diversity a critical component of any investment strategy.
Sunlight's Solution: All VC firms and startups will be required to publicly disclose diversity data on a semi-annual basis and sign Sunlight's Diversity and Inclusion Pledge.
Sadly, there is no quick fix to the diversity problem in venture capital. The good news, however, is that there is a collective desire from both startups and VCs to create a more egalitarian and diverse ecosystem.
Sunlight will embrace this collective desire for progress by asking startups and VCs to make a bold gesture: to lead by example and publicly disclose diversity data on an ongoing basis, so that they can hold themselves accountable over time and help build a better, more equal future.
Sunlight will use transparency and data to usher in a new era of diversity, equity and inclusion for the VC-Startup ecosystem.
At its core, Sunlight is a searchable database of venture capital firm and startup profiles. Once you've created your company's profile, you're ready to start pitching. But be warned, to join Sunlight you must follow a few simple diversity-based Rules and, of course, do the DIP.
Create your profile: Showcase your company for VCs: profiles are designed to include everything an investor would want to know about your company, with advanced privacy settings allowing you to hide sensitive information and grant individual access to VCs on request.
Find investors: Search for investors based on their investment criteria, team diversity and more, read verified reviews from named (not anonymous) founders and manage your fundraise with custom software designed specifically for the VC fundraising process.
Connect: Introduce yourself to VCs with one-click, no need for long emails and endless back-and-forth to provide more info. Everything they want to know is on your profile, so you can get back to what's important... building your startup!
Learn More
Create your profile: Showcase your mission, team and portfolio for startups. Sunlight's VC profiles will help you reach a global audience of actively fundraising founders and measure the effectiveness of inclusivity initiatives with your custom diversity data dashboard.
Research startups: Whether you're assessing inbound pitches or searching for startups that match your investment criteria, Sunlight startup profiles contain everything you need to know to be able to assess fit and decide whether or not to initiate contact.
Supercharge dealflow: Combining detailed startup profiles with advanced dealflow management software enables you to accept more pitches, review them efficiently and provide timely responses. All without opening Gmail.
Learn More
We can only fix the diversity problem in VC if we do it together, and we need your help. Please show your support by joining our waitlist, following us on Twitter, filling out our Investor and Founder surveys, and spreading the word. And please feel free to email us with any suggestions, feedback or just to say hi. We would love to hear from you!
