How can leaders create diverse and equitable ventures?

Investigating asset funneling and early leadership decisions in start-ups.

Women and racial minority men are drastically underrepresented as leaders in finance and technology (Catalyst 2018; Graf, Fry, and Funk 2018). A key to explaining these trends lies in who has access to capital to become entrepreneurs and investors within these fields. Venture capital and technology startup firms feature striking disparities in who gets leadership opportunities and investor capital. Women hold only 12 percent of the check-writing seats in the venture capital industry (All Raise and PitchBook 2019). It comes as no surprise then that of the total capital invested in U.S. venture-backed startups, companies founded solely by women garnered only 2.2 percent, compared to 85 percent for firms founded by all men and only 13 percent for gender-diverse founder teams (Clark 2018). The disparities according to race are also stark (Scott et al. 2018). This lack of access to capital prevents women and minority men from becoming leaders in technology and venture funding, limiting the potential for startup firms to create diverse workforces both in their nascent stages and as they grow.

The topic of diversity in the workplace has received considerable scholarly attention (Correll 2017; Kalev, Dobbin, and Kelly 2006; Nishii 2013; Williams, Kilanski, and Muller 2014). Yet, few studies have considered how the early management and funding decisions made by leaders at technology startup and venture capital firms impact the firm’s ability to establish a diverse and equitable workforce over time. Drawing on in-depth interviews and field observation of the venture capital and technology startup industries, I will examine why few women and minority men gain access to capital and leadership positions in startups, as well as in the firms that invest in them. I investigate how the social disparities in these industries shape the moral values of tech entrepreneurs and venture capital investors with respect to issues of inequality and diversity. To date, I have conducted 20 in-depth interviews with founders, employees, and investors.

The tech startup and venture capital industries are important cases to study because the decisions they make in the foundational days of a company’s existence, and the moral values guiding these decisions, shape whether these workplaces can create a more level playing field that allows diverse talent to innovate and thrive. I focus on the startup phase because early personnel decisions impact the future demographics of the workforce. Overall, research suggests that smaller, startup organizations can be more empowering for underrepresented workers (Mickey 2019; Smith-Doerr 2004), which implies that promoting a diverse group of employees at the early stage will pay off later on. Thus, the startup phase is a key moment for understanding why an entrepreneur’s values, beliefs, and motivations lead them to create diverse and equitable workplaces—or why not.

In this study, I have two primary goals. First, I seek to identify how the assets in these highly lucrative industries become funneled into the hands of a select group that is disproportionately white and male, with attention to who makes the investments at venture capital firms and who sources the investors at startups. Second, I aim to investigate how the early leadership decisions made by startup founders and venture capital investors, and the social context shaping these actions, may impact the company’s ability to establish a diverse and equitable firm over time.

 

Contributions to the Literature

I make two primary contributions to the existing research on diversity in the workplace. First, the research to-date on workplace inequality tends to focus on large, bureaucratic firms (Correll 2017; Roth 2006; Williams, Muller, and Kilanski 2012; Wingfield 2019) or on applying quantitative methodologies to trends in entrepreneurship (Thébaud 2015; Yang and Aldrich 2014). I use qualitative methodologies to shift the focus to the social processes and dominant beliefs in technology startup and venture capital organizations. This shift affords a deeper understanding of the moral values of entrepreneurs and investors, and the impacts of these values on how organizations grow. Focusing on companies in their early-stages and on the financial investors who support a company’s growth will help to identify what actions and mindsets leaders can take to build more diverse companies from the onset, which can increase the chances that these companies will continue to support diversity when they grow to scale later on. I focus on early interventions to prevent the common dilemma startup founders face during the rapid growth of scaling up—how to diversify after the initial hires have been made and the leadership team is in place while a company faces rapid growth and change. Previous research suggests that the startup phase is crucial in setting the stage for diversity later on (Mickey 2019; Ridgeway 2011; Smith-Doerr 2004).

Second, this research helps to shift the scholarly focus from the business case for diversity (Gompers and Kovvali 2018; Lorenzo and Reeves 2018; Phillips 2014) to the moral imperative. That is, the leadership’s ethical obligations to their employees and communities to create a work environment in which everyone feels included and is able to excel. Of course, the business case remains important, as more diverse leadership teams do outperform their peers (Abouzahr et al. 2018; Hunt, Layton, and Prince 2016; Lorenzo et al. 2019). Yet, more research is needed to understand how the social organization and context of these industries impacts entrepreneurs’ and investors’ moral intelligence—the capacity to align moral principles to goals and actions (Lennick and Kiel 2016)—as it pertains to diversity and equity. By applying a sociological lens, I build on the existing research on this topic by examining the social contexts in which the moral values and intelligence of entrepreneurs and investors are formed. This research will shed light on how leaders can develop their emotional and moral intelligence to create a diverse, equitable, and innovative firm from the onset.

 

Methodology

This project uses qualitative research methodologies to examine 1) how the social organization of these interconnected industries predominantly channels investment capital into the hands of mostly white men, 2) how these contexts characterized by homophily—the tendency to surround oneself with like-minded people—shapes the ideological frames and morals of founders and investors, and 3) how these belief systems impact key early decisions that influence diversity. Data collection will include in-depth interviews and participant observation at industry events, which will provide information on how entrepreneurs fund their ventures, how venture capitalists make investment decisions, how social networks and organizatios transmit the industries’ dominant cultural values and beliefs, and how these frameworks inform leaders’ decisions in startup firms.

(1) Semi-structured in-depth interviews. I will interview 50 professionals at technology startups and an additional 50 professionals at venture capital firms with the goal of obtaining a sample with gender and racial diversity. In-depth interviews expose how individual experiences, perceptions, beliefs, and moral values shape decision-making (Weiss 1994). The interview questions cover participants’ professional trajectories, investment philosophies, entrepreneurial endeavors, firm practices, and cultural beliefs about what drives success in their field. The goal is to uncover the broader interpretive frameworks used by venture capital and technology startup workers that organize underlying beliefs about diversity and inequality and better understand the contexts shaping how these frames become formed and cultivated within these industries.

To date, I have conducted 20 interviews. I recruited the participants through online forums, professional associations, and network referrals. I will continue recruiting interviewees through mailing lists, events, and LinkedIn forums of professional associations in the two industries. I will also use snowball sampling; that is, referrals from prior participants, which helps to reach hard-to-access populations, such as underrepresented groups (Wingfield and Chavez 2020), who may not respond to other recruiting strategies (Lofland et al. 2005). By recruiting through a variety of channels, my goal is to create a sample that is more diverse than the actual industry population to maximize variation, which establishes representativeness in ethnographic research (Burawoy 1998). Interviews are audio-recorded, last approximately one hour, and take place at a location selected by the participant (e.g., coffee shops, homes, or workplaces).

(2) Participant observation. Participant observation will enable me to enter the social world of venture capital and technology startup workers and understand its informal norms and practices.  Observations will allow for a deeper understanding of the social environment in which cultural meanings about inequality and diversity are formed. I will attend industry social gatherings such as conferences, seminars, and networking events hosted by professional associations. An in-depth understanding of the industry’s social context will also help to contextualize the data from interviews, and to recruit potential participants. Observations will be conducted in the San Francisco Bay Area, since the Silicon Valley has the highest concentration of venture capitalists and technology startup founders in the country.

 

Timeframe and Publications

From January through June of 2020, I will collect the remaining in-depth interviews and conduct field observations in the San Francisco Bay Area. Then, from July until September, I will transcribe, code, and analyze the data to prepare for presentations and ultimately for publication. This timeframe will allow me to present the preliminary findings at the Consortium for Research on Emotional Intelligence in the Fall of 2020. I will spend the remainder of the year, October through December, preparing an article manuscript on this research and submit it for publication by the end of the year. I anticipate publishing several articles on this research and presenting the findings at the Academy of Management’s and American Sociological Society’s annual meetings in 2021. My target journals for publishing the findings are Administrative Science Quarterly, Organization Science, American Sociological Review, and Socio-Economic Review. I also plan to eventually write a book manuscript on this research with the goal of disseminating the findings to a broad audience. To date, I have published a book with Oxford University Press and have another forthcoming book on how social disparities impact hedge fund investments that will be released by the University of California Press in late 2020. I selected these presses because both are read by broader audiences, and I anticipate working with one of these presses again on this current research project to ensure that the findings can inform and change practices in these industries.

 

Preliminary Findings, Hypotheses, and Conclusions

My preliminary findings have led me to several hypotheses. First, the social organization of the venture capital and technology startup industries appears to create obstacles to empowering all workers. The venture capital industry is organized around funding opportunities driven by networks. This creates barriers to entry for those outside the dominant group, especially women and minority men. Those lacking elite credentials, such as an Ivy League degree, also struggle to gain access. The most lucrative resources and opportunities arise through the dominate networks that tend to favor white men, although there are efforts to change this from groups like the Kapor Center and All Raise. These dynamics restrict access to capital and how capital is distributed to startups. The investor networks not only shape who is funded. They also influence the networks among startups and who gets to become leaders within those firms.

In addition, at startup and venture firms, founders express a value to create more empowering and inclusive workplaces. Founders strive to create flatter firms to allow for open communication and transparency, because they believe these practices will empower workers and promote meritocracy. In theory, this could create a more diverse and equal workplace. To do this, many founders remove formal job titles, ranking systems, performance evaluations, and compensation packages. By eschewing formalized processes, founders strive to create an environment where workers can pursue their own interests, manage their own careers, and negotiate for opportunities and rewards. The founders and workers alike tend to believe that this is more meritocratic and empowering for workers.

The founders have good intentions. Yet, the absence of formalized procedures allows room for discretionary power, procedural ambiguity, and informal networks. These are all conditions that amplify bias in workplaces (Correll 2017) and exacerbate tendencies towards homophily (Kollock 1994). In the absence of structure, management practices are often more idiosyncratic and uneven, which tends to provide less support for underrepresented groups of workers (Williams et al. 2012). These management practices arise, in part, because many of the founders and investors have technical experience yet lack management skills. Thus, they have not developed the emotional and moral intelligence to cultivate organizational practices that reflect their values for an empowering and equal workplace.

In this study, I will continue to test these preliminary hypotheses. My goal is to reach the following empirical and practical conclusions. First, I will identify the workplace beliefs and processes that lead to fewer women and minority men becoming leaders, entrepreneurs, and check-writers. Second, I will show what is at stake when leadership practices—even those intending to support and empower workers—do not put the leader’s moral values into practice. Finally, I will present solutions for how to change management practices in these startup and investment firms to better align their moral values with practices that can create more diverse, equitable, and innovative workforces.

 

REFERENCES

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