The Need and Importance of Diverse Venture Capital Fund Managers
By: Chris D. Redd
Tags: Investing, Venture Capital, Midwest Startups, Diversity In Tech, Fund Managers

You may have become used to being frustrated and disappointed by corporate diversity, like the fact that just 1 percent of Fortune 500 CEOs are black. It is worth noting that these numbers get only slightly less bleak further down the organizational chart. For example, did you know that only about 9 percent of law firm partners belong to ethnic or racial minorities?

What is the reason for this disconnect? Note that the types of institutional and cultural changes that allow companies to recruit and retain a diverse workforce are significant. This is why they do not usually happen overnight. Also, it is worth noting that these changes also require a strong top-to-bottom commitment to considerably changing how firms hire, promote, and train employees.

However, one industry in which diversity figures seem like they are out of the nineteenth century is the US asset management industry. Did you know that asset management firms owned by white men manage a significant 98.7 percent of the $69 trillion in asset that the US asset management industry manages? A 2019 Knight Foundation analysis revealed these numbers for asset management firms, including hedge funds, venture capital funds, mutual funds, and real estate funds.

Importance of Diversity

You should know that there is an increasing body of evidence-based research that outlines how diversity, such as cultural, racial, and gender diversity, can lead to considerably better decision making and improved financial performance in venture capital fund management.

A McKinsey’s Women in the Workplace report took a broad cross-industry view and was conducted over several years. The report covered 600 companies and about 250,000 participants. It indicated that companies or firms in the top quartile for ethnic diversity and racial diversity are about 35 percent more likely to earn returns higher than the industry median.

Did you know that research repeatedly indicates that organizations with diversity in senior leadership considerably outperform their all-white and all-male counterparts? You will be pleased to know that diverse leadership generates stronger innovation, better financial performance, and higher levels of startup success.

A few other McKinsey studies have shown that diverse firms are 21 percent more likely to enjoy above-average profitability. They also have a 27 percent likelihood of outperforming their competitors and peers on longer-term value creation.

Benefits of Hiring Diverse Venture Capital Fund Managers

You should know that the benefits and advantages of diversity show up in the modern investment world in many different ways. For example, in venture capital firms, diverse fund managers can drive differentiated investment behavior. For instance, women may make better investment decisions that will help diversify portfolios and differentiate returns. Did you know that background and experience can also shape decision making and increase diversification?

Diverse venture capital firms can also offer crucial differentiation in deal flow. Also, it is worth noting that where competition for investments is quite fierce, such as in venture capital or private equity, having a diverse team comprising women and minorities can help unearth lucrative but less competitive deals. Also, as a result, multiples might be lower.

And note that as many diverse investment firms are, on average, smaller, they can be nimbler and more flexible. This allows them to react better and more quickly to various market shifts.