Why investing in diverse start-ups maximises returns

The stereotype of the entrepreneur skews strongly in favour of white, privileged men. Just think of the most famous entrepreneurs in our lifetime: Mark Zuckerberg, Bill Gates, Richard Branson to name a few.

But the tide is changing, as the latest statistics would have it. In 2017, StartupAUS, Australia’s national advocacy group for startups, published some eye-opening figures on 47 of the country’s most successful startups:

●      29.8 years is the average age of startup founders

●      57% of startups were founded by immigrants or children of immigrants

●      15% of startups have at least one female founder

I’m personally encouraged to see more women, young people and inclusive nationalities making their mark as entrepreneurs. It’s something I’ve always valued in my work – in fact Investible’s portfolio of investments is to date over 30% into businesses with a female founder (more than 2 x the norm). The returns, as it happens justify the effort with our three best performing investments Canva (US$1 b), Brandless (US$0.6 b+) and Ipsy (US$0.5 b) having at least one female founder. But we can still do more.

Numbers don’t lie

A 2017 report by global management consulting firm McKinsey & Company analyzed more than 1,000 companies across 12 countries. The result? “Companies with the most ethnically diverse executive teams - not only with respect to absolute representation but also of variety or mix of ethnicities — are 33% more likely to outperform their peers on profitability.”

The stats are similar for gender diversity, and happily Australia leads the way when it comes to women’s share of executive roles (21%). But there’s a long way to go before real equality and inclusivity is reached. Investing in small startups is one way to change this landscape - improving profit margins along the way.

Gap in the market

When only people with a limited viewpoint are allowed to call the shots, it makes sense that the products can become pretty limited, too. But diverse businesses can potentially reach further because they better understand the needs of a wider audience.

I’m reminded of Renae James, the founder of Australian sleepwear and lifestyle brand, Papinelle. She discovered that women’s pyjamas were either too masculine or two feminine, so she created a brand that filled a gap in the market (and made millions along the way).

Happy people, happy business

Nine out of 10 startups will fail. That’s a scary figure when you’re investing. CB Insights analysed 101 Startup Postmortems and identified “No Market Need” as the number one reason for failure (contributing to 42% of startup blowups). It’s essential therefore to have founders who understand the market – and that market is both gender and ethnically diverse.

Investors therefore, more than ever, should seek more diverse businesses to commit capital to.