The ability to raise capital is pivotal for technology and innovation startups aiming for fast growth and large scale. We seek to help clarify the relationship between startup founding team ethnic diversity and total investment capital raised by that team. Despite the rise of bootstrapping, startups need investment capital to succeed. We studied more than 1,000 startup teams that participated in a Startup Accelerator (Techstars). We looked at the diversity of the founding teams and analyzed how much investment capital they raised compared to startups whose founder teams lacked diversity.
The Startups We Studied
We studied more than 1,000 startup teams that participated in a Startup Accelerator (Techstars) over a ten year period across 20+ Techstars locations around the world. Techstars is considered among the top accelerators in the world and its programming invests capital, mentorship network resources and time into cohorts of 10 startups semi-annually. Each cohort ends with a Demo Day where the startups pitch for follow-on funding. Because at the start of the program, each startup is given the same resources at the same valuation, we are able to compare ‘apples to apples’. We controlled for location, time and industry factors. We chose to study the amount of capital raised by startups because it is an observable measure (i.e., recorded in Crunchbase) and is often based on perceived expectations about the startup’s future potential valuation.
Diversity Matters!
Startup teams with ethnic diversity may create the possibility of accessing different sources of information, and developing alternative interpretations of the same information. Diverse founder mind frames can increase innovation and problem-solving capacity by mixing individuals with different mental models. We find a robust positive linear relationship between startup team ethnic diversity and total funding raised. Our results are robust to the addition of control variables including those for other types of diversity, including functional diversity, geographic diversity, and gender diversity.
For our work, a startup team is considered to be more ethnically diverse if individuals are equally distributed over all the different ethnic categories (i.e. groups with common ancestry, culture, and or/language). For years, research has been inconclusive about the impact of founder team diversity on startup success. Prior research suggests that unlike functional diversity, findings are inconclusive about the influence of ethnic diversity on founding team performance outcomes. The positive effects of diversity which might lead to better fundraising include: access to more varied networks, experiences, and mental models which leads to faster problem solving, higher agility in the market, and there are indications that startups with founders of varying ethnicities use different entry, internationalization, and innovation strategies. The often mentioned negative effects of diversity in prior research including the potential for more internal conflict amongst founders and higher resolution costs, seem less impactful on fundraising at this stage of new venture creation.
Founders Should Choose Diverse Cofounders
This result is important to both founders starting a new venture and to those investors who support such new venture creation (e.g. Angels, VCs, etc.). Founders considering a new venture, should pay particular attention to the selection of co founders. Entrepreneurs should not shy away from forming diverse teams but instead, should view members of different ethnicities as potentially fruitful for raising capital. Founders should look to increase diversity not just functional, but ethnic as well, avoiding the tendency to work with others like oneself. Early stage investors likewise should look to optimize ethnic diversity as they seed new ventures, since these companies have greater access to future investment capital based on our findings.
Readers can find the original study “Startup Team Ethnic Diversity and Investment Capital Raised” published in the Journal of Business Venturing Insights.
Authors Bio
Dr. Sean Wise is an Assistant Professor at the Ted Rogers School of Management at Ryerson University. He is an expert on startups & venture capital. He uses this expertise in his various roles as: university professor, bestselling author, international business speaker, and partner at Ryerson Futures, a seed stage venture capital fund.
Dr. Sepideh Yeganegi is an Assistant Professor in Policy, Lazaridis School at Wilfrid Laurier University. She researchers barriers and enablers affecting entrepreneurs, especially employee entrepreneurs that chose spinout ventures with the potential to compete with their parent firms.
Dr. Andre Laplume is an Associate Professor at the Ted Rogers School of Management. He studies phenomena at the intersection of strategic management and entrepreneurship, including interactions between startups and incumbencies.
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