Harvard research shows diverse teams perform better, so we talked to VCs and founders about the best ways to break out of your social bubble
Diversity has long been treated as a second-order consideration in business, but numerous studies show that teams with a mix of ethnicities and genders perform better than more homogenous teams. It's time for business leaders to reexamine how they network, otherwise they'll miss out on financial performance, not to mention the inherent benefits of diverse ideas and an inclusive culture. "Warm introductions," a staple of the business world, can lead to a homogenous network, so taking cold calls can be one quick way to widen your scope. On the other hand, fostering ecosystems to elevate underrepresented networks is an important investment. Visit Business Insider's homepage for more stories.
Diverse businesses are better businesses, so say numerous academic studies that examined how a mix of ethnicities and genders in an organization made a marked improvement in financial performance. In one study, published in 2018 in the Harvard Business Review, researchers used the venture-capital industry as a stand-in model for businesses in general and found there was a financial-performance "penalty" for homogeneous teams. "Partners who came from the same school achieved an 11.5 percent lower success rate for acquisitions and IPOs; those who were ethnically homogenous saw a success rate 26 to 32 percent lower," study authors Paul Gompers and Silpa Kovvali wrote. An analysis from the National Bureau of Economic Research published last year in the journal Econometrica looked at US Census data and showed that industries with higher barriers to diversity kept talent from entering the field, leading to lower aggregate performance. The problem boils down to how business leaders go about growing and tapping their social networks, which tend to be extremely homogeneous. The HBR paper said nearly half of all venture capitalists went to either Harvard, Stanford, or Wharton. One cure, according to venture capitalist Del Johnson, is to "ban warm introductions" of the sort recommended by many business leaders, which he described as "a legacy practice that requires the nonnetworked, including founders and other investors, to find someone the VC knows and trusts, and convince that third-party to refer you to the VC before the VC will respond." Johnson said taking cold calls was the only way investors and entrepreneurs could break out of their respective bubbles and reach a more diverse set of talent. Another approach comes from Keenan Beasley, an investor and founder of Venture Noire, a support network for Black startups that hopes to help underrepresented founders widen their professional networks. Beasley, who draws on his experience in corporate America and as a West Point alumnus, says Venture Noire helps foster relationships with the companies, people, and capital that are instrumental to startup success. "It's really about creating this ecosystem to make things more familiar and lower the perceived risk," he told Business Insider. Su Sanni, the CEO of a mobility startup called Dollaride, told Business Insider about the measures he's been required to take as a Black founder to get the same engagement from investors and business partners as his white peers. "It makes fundraising for me a little bit more challenging, and I have to be more strategic about who I go after," he said. "I've had to become really emotionally intelligent about this and aware of where the gaps are, and how I can hack the system in order to get an investor who doesn't really know me to trust what I'm saying, and to take the steps further to evaluate us." That's extra work that Beasley said founders like Sanni could — and should — be putting into building their businesses. "You want your leadership focused on growing the business, not focused on raising capital needed to survive," he said.SEE ALSO: A white mob burned down Tulsa's booming 'Black Wall Street' 99 years ago. Meet the young entrepreneurs rebuilding it despite coronavirus — and Trump's impending visit. Join the conversation about this story » NOW WATCH: Pathologists debunk 13 coronavirus myths
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Investors and founders reveal how to know if venture capital is the best way to fund your startup, and what paths to take if it clearly isn't
Summary List Placement Successful entrepreneurship is about knowing the best way to fund your business. Raising...Summary List Placement Successful entrepreneurship is about knowing the best way to fund your business. Raising venture capital isn't always the answer. Venture capitalists say the most important factor to consider is market size: How big could your company get? Ultimately, venture capitalists want a big return on their initial investment. Click here for more BI Prime stories. If you're thinking about raising venture money for your startup, you should start by asking yourself one question: Is this business appropriate for a venture capitalist's investment? Too many founders answer "yes" (if they bother questioning the wisdom of raising venture capital at all). It's part of how high-profile companies like Amazon and Google achieved success, the thinking goes, so it must be advisable for every startup. And yet, in blindly pursuing venture capital, these entrepreneurs are setting themselves up for a series of rejections (or a difficult partnership with an investor down the road). That's because venture capitalists look first and foremost at a company's potential market size. If yours isn't large enough, they won't want to work with you. The economics have to make sense for a VC to invest in your company David Rose, who runs Gust, a digital platform for early-stage entrepreneurs and investors, previously told Business Insider that a venture capitalist's decision comes down to numbers. If, say, you're bringing in a maximum of $1 million a year in revenue, "it may be a great, wonderful, much-needed business," Rose said. "You may be doing the world a favor, or you may enjoy it and support your family. You may be able to make a fortune yourself and take vacations." But, Rose emphasized, the economics of a business that brings in $1 million a year in revenue "are just such that there is no way that you can get an investment from me at any reasonable number for that to make economic sense." Rose's approach to investing is hardly unique: Investors expect outsize returns on their money. Sometimes it's even a large multiple of what they put in. If your startup is generating revenue in the low millions, or if the likely exit price is in the low millions, a venture capitalist has minimal incentive to support you. That's especially true because venture capitalists are well aware that most of the companies they back will fail. In fact, they generally make money only from the sliver of portfolio companies that are wildly successful. Market size is the most important factor in a VC's decision to invest Take it from Scott Kupor, a managing partner at Andreessen Horowitz, the venture-capital turned financial-services firm that invested in Facebook, Airbnb, and Lyft. Kupor previously told Business Insider, "For a venture capitalist who knows that they're going to be wrong a lot of the time, they have to figure out what's the likelihood this company could be in that upper-right tail of returns," the small number of companies with the highest return on investment. Kupor went on: "When we're doing an early-stage investment, what we're trying to imagine is the 'what-if' question. 'What if this company worked? What could it look like? How big could it be? How much revenue could it generate? Ultimately, what could the equity value be?'" Then Kupor considers, based on what he knows about the company, "What do I think the likelihood is of that happening?" Read more: Founders and investors reveal the ultimate guide to scaling a startup — and common pitfalls to avoid For entrepreneurs, that translates to one all-important consideration. In his 2019 book, "Secrets of Sand Hill Road," Kupor said anyone raising venture capital should be able to convince themselves and their potential investors that their business is able to bring in several hundreds of millions of dollars a year in revenue over the next seven to 10 years. That means you could reasonably take your company public at a market capitalization of several billions of dollars, Kupor wrote. Which, in turn, means "the returns to the VC on this investment should be meaningful enough to move the needle on the fund's overall economics." A business doesn't have to be a 'unicorn' to be successful Venture capitalists typically invest in companies they believe can be grown aggressively. That may not align with your financial plans or ideology, especially since such bargains frequently give investors a degree of power over the companies they invest in. Samara CEO Salima Visram previously told Business Insider that she decided her sustainable fashion brand, which makes small batches of clothing and accessories out of environmentally friendly materials like apples, would clash with the expansionist goals of venture capital and be better off bootstrapped. She was prompted by several friends in the startup world who told her horror stories about how they lost control of their companies after investment deals. Read more: How a founder bootstrapped her fashion startup to a profitable $2 million in revenue with bags made of apples and no investors "A lot of it is growth-at-all-costs," Visram said. "For us, we want to be conscious." Visram's smaller brand may not have the vast resources of a venture-backed early-stage startup, but keeping costs down has made Samara profitable "since day one," Visram said. To reiterate what Rose said, if you aren't positioned to become the next Google or Facebook, that doesn't necessarily mean you're not building a successful business. It means your company may be a "lifestyle startup," which doesn't require venture capital and probably won't ever be a "unicorn" worth $1 billion. Read more: The founder of a billion-dollar startup says you need to nail 'message-market fit' if you want to raise millions from investors In the book, Kupor mentions smaller venture capital funds and debt financing from banks as two paths to raising capital without traditional venture-capital money. (You can also bootstrap your business, using personal funds and money from friends and family.) Perhaps the most important takeaway here is to clarify your personal definition of success. You don't have to build a unicorn to get there. Angela Lee, the founder of the venture-capital firm 37Angels and a professor of professional practice at Columbia Business School, previously told Business Insider that a lifestyle startup could easily bring in $10 million a year. And, Lee said, "since when did making $10 million a year become a failure?"SEE ALSO: How to know it's the right time to launch your business, according to a former Amazon VP who just raised $4 million for her skin tone-matching beauty startup SEE ALSO: How a 32-year-old first-time founder raised a $3 million seed round by asking investors about their sex lives Join the conversation about this story » NOW WATCH: Here's what it's like to travel during the coronavirus outbreak
Startup founders are quietly suffering with increased mental health issues since the startup of the pandemic and fear being stigmatized
Startup founders are already under immense pressure to succeed in an industry where many fail, and...Startup founders are already under immense pressure to succeed in an industry where many fail, and fear they won't be able to attract investors and talent if their personal struggles are revealed, some told Business Insider. But they aren't alone. A new survey of nearly 600 startup founders found that over three-quarters — 78% — say their mental health has been suffering during the pandemic. Two-thirds reported feelings of loneliness, while 60% percent said they had been overworking, and 38 percent said they had been drinking and using substances. "It should be no surprise that the mental health part of the crisis is real, and accelerating," venture capitalist Brad Feld told us. Visit Business Insider's homepage for more stories. In 2017, while running his startup Fresco News, John Meyer lost his father to suicide. Naturally, he was grief stricken. But as a 20-something, first-time CEO, he didn't let it show. "Startup founders worry about if they share, let's say, something vulnerable about a big family issue they're going through that's creating a lot of anxiety and stress that they'll be looked at differently," Meyer, who is now running his second startup, Homebound, told Business Insider. Anything that smacks of a mental wellness issue is "extremely stigmatized in the industry," he said. He found a path to healing almost by accident, while sharing what he was going through over a dinner with other startup founders. "Once I did it, everyone around the table started doing it," Meyer said. "I ended up realizing that most startup founders, at least these days, are going through very significant life issues outside of their company. But they can't really work through it because they can't find the time to go to therapy. They don't have normal friends who are not in business or startups to talk to about those kinds of things." As COVID-19 roils the U.S., the public's mental health has become more perilous. A CDC survey published August 14 found 11% of respondents had struggled with suicidal thoughts in the past month. Startup founders in particular, who already live in a high-stress world, have experienced a mental downward spiral, according to a new survey from consulting firm The Kung Group. The survey of 584 founders, running startups ranging from pre-seed to Series D stages, found a spike in negative emotions and unhealthy behaviors since the onset of the U.S. outbreak. Specifically, 66% reported feelings of loneliness; 60% said they had been overworking; and 38% said they had been drinking and using substances. Overall, 78% said their mental wellbeing had suffered during the pandemic. "Humans are simply not built to be isolated in their homes for months at a time," said venture capitalist and TechStars cofounder Brad Feld, who has publicly discussed his own bouts with depression and anxiety. "Founders, who are already under immense pressure from many directions, now have to contend with that dynamic for themselves, in an extremely uncertain business environment, connected only by video conferencing and email to their teams, investors, and customers, with no relief from the endless intensity of creating and leading a business," Feld said. Startup employees outside the C-suite struggle with their mental health as well. Yet Kung Group founder Jocelyn Kung said founders face a unique pressure to show no weakness. She worries that their unchecked stress could bleed into their decision-making and affect the entire company. "There's almost this unsaid expectation that the leader needs to be strong," Kung told Business Insider. "The leader needs to have strong shoulders to hold up the organization." The unhealthy 'cult of the startup' There's some evidence that entrepreneurs are more inclined to struggle with their mental health than the average person to begin with. A 2015 study from the University of San Francisco found almost half the entrepreneurs participating were dealing with mental health conditions like depression, ADHD, bipolarity, and substance use. The precarious task of building a successful startup lends itself to unhealthy behaviors like overworking and too little socialization. Karan Singh, founder of mental health app Ginger, said he realized during his early days as an entrepreneur that there was "a cult of the startup" among founders that valued an extreme work ethic above all else. "The startup defined you," Singh told Business Insider. "It was your epithet. It was how you introduced yourself. It was how you described who you were." These days CEOs are also struggling with feelings of loss of control as COVID-19 locked them in their homes and scuttled their business plans. That's difficult for the personality types of founders, who already have what Singh calls "almost irrational belief" that they can succeed in a field where most fail. Dueling with that self-assuredness is a tendency for CEOs to compare themselves to others. Singh gets together for a group discussion once a month with other CEOs to talk through whatever they're facing. "Inevitably, in almost every single session, there is some description of imposter syndrome," Singh said. "A feeling of like 'I shouldn't be here. I don't have the skills and capabilities. The gravity of the situation is so great that I might not make it.' I think that's a pretty consistent feeling for most founders." 'Extremely stigmatized' Finding the right people to talk to is a key part of managing such feelings, according to Kung, Singh, and Meyer. But being open with their issues can be difficult for founders who have practical concerns about attracting talent and capital. Meyer said being open about what he went through after his father's death led to extra scrutiny from some investors. "Occasionally I would run into an investor who would do a second check and say, 'Are you sure you're able to keep the ship going with all of this?'" Meyer said. "'Should we look at bringing in an interim CEO for a while?' And this is something that I've heard from other startup founders as well." Meyer thinks too many venture capitalists talk about the importance of mental health but too quickly default to the idea of bringing in a replacement CEO. "There's very rarely any sense of encouragement from a venture capitalist to simply encourage a startup founder to, you know, pair up with a therapist instead," Meyer said. But Feld sees that slowly starting to change. "It should be no surprise that the mental health part of the crisis is real, and accelerating," he said about the pandemic. "Fortunately, the stigma associated with mental health, especially among founders, is lessening. It's still very real, but more are talking about it." This is helped by the tech industry and VCs like himself addressing it in the way they know best, with new apps and startups. "There are many more coaching options like Reboot to help founders, CEOs, and leaders through this. There are companies, like Meru Health (which we recently funded) that are working to rapidly make mental health services more broadly accessible and affordable," he said. Ultimately, being open and vulnerable about his own struggles is how Meyer found his way through the dark time after his father died. "Opening up to these folks over dinner was probably one of the most key or primary ways that I worked through healing this crazy experience of losing my father to suicide while running a company," Meyer said. Since then Meyer has started hosting what he calls "founder vulnerability dinners" where entrepreneurs can open up about their personal struggles. Meyer said the waitlist for these events can stretch into the hundreds. "If you are dealing with something that you feel might be challenging, I think it is also very therapeutic, to just talk about it," Singh said, "to talk openly about what you're going through, and to be to be open about that with your colleagues, to be open about that with your friends, with your partner." Are you a tech worker with a story to tell about mental health? Got tips about startups or venture capital? Email Max Jungreis at firstname.lastname@example.org, DM him on Twitter @MaxJungreis, or contact him on encrypted messaging app Signal at (907) 947-0299.SEE ALSO: 25-year-old Luminar CEO just sold the self-driving-car startup he founded in high school in a $3.4 billion deal Join the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship
Black Lives Matter protests inspired a wave of investor support for Black-owned businesses. These 3 Black founders in Europe tell us what must happen next.
After the death of George Floyd, Black Lives Matter protests drew attention to racial inequality around...After the death of George Floyd, Black Lives Matter protests drew attention to racial inequality around the world. Venture capitalists, who spend just 1% of their money on Black-owned businesses, have upped their support for Black entrepreneurs through new initiatives. Some members of the public have rushed to help Black-owned businesses, too. Three Black founders in Europe told Business Insider discuss what needs to happen for this support to last. They warn that without structural change, Black entrepreneurs will remain underfunded and left out. Visit Business Insider's homepage for more stories In 2018, Ghanaian-German entrepreneur Nana Addison was pitching a beauty service booking app called Styleindi, aimed at an ethnically diverse customer base. Potential investors shied away because there was no data to back up her business case: Germany does not collect stats on its citizens' ethnicities. So she created CURL CON, a Black hair, beauty, and lifestyle fair, and made 30,000 euros ($35,600) on a 300 euro ($356) budget from thousands of customers, who came from across Europe. She showed there was a market for products aimed at a diverse audience — and those same investors that said Styleindi was "too niche" soon came knocking. Styleindi was officially born. Addison is frustrated by the extra hoops she had to jump through, saying her story "could be inspiring" but is "actually really sad." "I have to do all of that just to fund my tech business, when there are billions being invested in other similar tech businesses," she says. Just 1% of venture capital funding goes to startups led by Black founders, according to Crunchbase. Immediately after the Black Lives Matter (BLM) protests in June, following the killing of George Floyd in Minneapolis, venture capital firms rushed to help: SoftBank, for example, invested $100 million in startup founders of colour via its Opportunity Fund. Some members of the public also upped their support for Black-owned businesses. Black founders have welcomed this, but some fear the focus will dwindle, leaving them back where they were before BLM grabbed headlines — underfunded and left out. The surge in interest benefited Benedicta Banga, who in 2019 launched UK-based shopping app Blaqbase, which showcases products from black-owned businesses. It was designed to highlight "the great things Black women were doing." She says sign-ups soared around the protests. "White women with quite big audiences started sharing us … That was unexpected and it was quite welcome to see that people outside of the community were supportive," she says. "I like that there's more people trying to create distribution platforms for the Black-owned brands, which is a good thing for the brands because that allows them to scale." More... 12 online directories all entrepreneurs who care about diversity should be checking daily to connect with Black vendors, business partners, and contractors Demi Ariyo founded UK-based Lendoe, a lender that helps Black and ethnic minority early-stage entrepreneurs, in 2018. Data from lender ThinCats suggests half of small businesses are rejected when they seek finance for the first time — and Ariyo says black founders face extra barriers. Black and ethnic minority entrepreneurs are "too scared to approach the banks … their companies need finance, but because they feel they are going to be discriminated against or turned down, they don't attempt it," he says. He launched Lendoe in 2017 as a side project, providing loans of between £1,000 ($1,310) and £2,000 ($2,620). At the end of 2019, when Ariyo began working full-time on the firm, he found raising the necessary money challenging. "If we approach a bank to raise capital, we go with a portfolio of these businesses that are Black-owned and there is already a problem of big banks not investing in these owners," he says. The fact many of Lendoe's clients are cash-centric businesses like barbers or nail salons, with no or little online presence, made the banks apprehensive. Lendoe's commitment to support what it calls "underestimated founders" also made it difficult to recruit talented staff, who could earn more elsewhere, Ariyo says. But "since the BLM campaign broke out, that's changed significantly," he says. "We've built a steering committee that consists of at least 100 years of funding experience from private equity to investment banking and hedge funds. And that's people from the Black community who now want to give back." While the increased interest isn't solely due to the BLM protests, the movement has "highlighted the need for us to come together," he adds. Addison says BLM has helped highlight the lack of investment opportunities for Black people. "I feel like now there has been a microphone added. My voice is amplified," she says. She wants to see more research from investors on the route Black people take into entrepreneurship. "Many of us don't start in tech but in the consumer, entertainment or PR sector, because historically these have been the only access points," she says. "I want investors to educate themselves on which spaces Black founders exist in and invest there as well as to making other spaces, such as tech, more accessible to Black talent." Banga, from Blaqbase, argues that PR and marketing teams also need to be more proactive in contacting Black female influencers — who have previously reported feeling excluded — and smaller, Black-owned brands to address the inequalities in business. New Initiatives by Google and others, launched in the wake of the BLM protests, are geared towards making it easier for people to support Black-owned businesses, but they will not remove structural barriers for founders unless they are "measurable, tangible and sustained," Addison says. She is still undecided on whether what has happened over the last few months will "create real sustainable change." "So many VC and Angel firms are doing 'lunch hours' where Black founders can get mentorship and advice and while it can be useful, it is time to add some euros to their advice. "They need to put their money where their mouth is ... What I really want is the resources to scale, because I already know what I'm doing. I learned it by myself. Now, I want to see some checks."SEE ALSO: How to go beyond buying and truly support Black-owned businesses, according to 4 Black entrepreneurs Join the conversation about this story » NOW WATCH: Inside London during COVID-19 lockdown