The Importance of Diversity in a Startup Ecosystem

Ben Wiener, Managing Partner, Jumpspeed Ventures

Ben Wiener, Managing Partner, Jumpspeed Ventures

A cross the globe, politicians, entrepreneurs and community leaders scratch their heads and wonder “How can we turn our city into the next Silicon Valley?” As startups begin to cluster together we see catchy new nicknames like Silicon Alley (New York City), Silicon Wadi (Israel), Silicon Slopes (Utah), Silicon Prairie (Dallas) and Silicon Forest (Portland). But the question remains: what are the key elements of a successful startup ecosystem, and what can community leaders do to foster the growth of a self-sustaining startup community?

Nicolas Colin of Paris’ The Family has developed a three-part formula for startup ecosystem success. He writes that an entrepreneurial ecosystem must feature technology know-how (typically in the form of universities and/or large tech companies), capital (investment for new startups) and a spirit of rebellion in the city. This last element is the hardest to create “out of thin air” — it can take many years to plant the seeds of what Professor Richard Florida calls the Creative Class, from which sprout the shoots of communal creativity and the resulting “sprit of rebellion.”

These three elements — technology, capital and creativity/ rebellion — are certainly the core foundation essential to an ecosystem’s success, and are hard enough to assemble. But there is an additional element that can catapult the ecosystem to even greater heights and long-term success: Diversity.

While venture capital is a global industry, the most comprehensive data comes from the U.S. market. Even a cursory look at venture capital funding data shows clear biases at play across all startup ecosystems, and the closer one gets to the Mecca of venture capital, Silicon Valley, the worse the bias gets. The majority of venture capital investors are white, male, and well-educated, and the majority of founders receiving funding are white, male and well-educated. In a recent Crunchbase study of venture-backed startups, over 60% of the startups receiving funding of $1m or more were led by a founder from one of only four schools: Harvard, Stanford, MIT and Wharton. For the past few years, only 2-3% of venture-backed startups have been led by a female founder. According to a Carta survey of over 13,000 startups, while 34% of the employees were women, those women held only 20% of the equity; while 7% of the startups’ founding teams were female, those women held only 7% of the equity.

A famous academic problem-solving study showed that teams of diverse strangers solved problems more efficiently than teams of close friends

Such disparities are not only wrong, they are also bad for business. There is a long litany of academic research and empirical evidence showing that diversity leads to better business outcomes. Companies with diverse boards of directors and executive teams perform better. The lead takeaway of a landmark ten-year survey by venture capital fund First Round Capital of their entire portfolio was that startups led by female founders outperformed the broader portfolio. A famous academic problem-solving study showed that teams of diverse strangers solved problems more efficiently than teams of close friends. While venture capital investment tends to be extremely homogenous, every indication points to the opposite path for success. “Old boys’ clubs” may get along well, and enjoy each others’ company, but a non-diverse environment can blind the participants to new ideas, oncoming pitfalls and potential opportunities that a diverse team is more likely to identify and act upon.

Notwithstanding the evidence in favor of diversity, a strong cognitive dissonance pervades the venture capital industry. Most investors would be shocked and offended to be called biased, yet they consistently fall prey to a psychological force called Confirmation Bias, which subconsciously induces them to invest in entrepreneurs that look and sound like them and come from similar backgrounds.

In the Jerusalem startup ecosystem, one of the things we are most proud of is our community’s diversity. While most of the capital in the “Startup Nation” finds its way to the thousands of startups in the Tel Aviv area, Israel’s capital Jerusalem has undergone a startup renaissance in recent years and is host to hundreds of exciting startups. In fact two of Israel’s largest tech exits in history are Jerusalem-based (Mobileye, acquired by Intel for $15.3 billion in 2017, and NDS, acquired by Cisco for almost $5 billion in 2012). According to Startup Genome, a survey of global startup ecosystems found Jerusalem to be one of the top ten most diverse tech ecosystems in the world. At my fund, Jumpspeed Ventures, which invests exclusively in Jerusalem-originated startups, over 50% of our current portfolio, is made up of female-led startups. Our community features startups led by men and women, secular to Ultra-Orthodox, Jew and Arab, immigrant and native-born founders. The crowd at our popular monthly community meetups is as diverse as the shoppers in the local shuk on a Friday morning. This diversity is the secret sauce of our ecosystem that has helped it grow and strengthen, and it’s not only good for our community and society, it’s also good for business.

Community leaders seeking to create the next Silicon Valley should take note of the key elements that are prerequisites for any startup ecosystem. But in order to truly catapult a city towards entrepreneurial success, they must make efforts to promote diversity and inclusion throughout the ecosystem.

Weekly Brief

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