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Validating Diverse Startups and Financial Outperformance

Kauffman Fellows releases the first definitive study on diverse startup teams and financial outperformance

Last week, the Kauffman Fellows, a nonprofit organization I’m a part of as a Kauffman Fellow (president of Class 23), released the first rigorous, definitive study on the clear financial outperformance of diverse startup teams looking across 20,000 startups since 2000. 

Key takeaways–

1)    There is no pipeline problem for startups led by LatinX, Black or Female founders. They are a significant number of founders, even though many studies also reveal typical VCs do not have that perception. They are wrong.

2)    Diverse startups have 30% better financial outperformance

3)    Diverse startup teams have trouble with access to capital, but once they get a seed investor, they raise MORE capital and have BETTER financial outcomes.

The study says,

“Our data shows that diverse founding teams who reach an exit by an acquisition or IPO return 30% more capital to their investors.” 

For us, that’s the bottom line. And it’s an extremely resonant one.

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Across Valor’s portfolio, 70% is led by underrepresented founders, making Valor one of the most inclusive investors in venture capital. 

Our numbers are in line with the study’s conclusions as well. While it’s too early to harvest our portfolio, last year across the entire portfolio we saw an average of 31% revenue growth.

I’m proud Valor was formed in 2015 with inclusion at its core. When we started investing Fund 1 in 2016, our  thesis was  informed by some of the best drivers of returns—hypergrowth software, unique geography, a compelling stage (seed equity), and a commitment to sourcing startups inclusively.

Contrary to common wisdom in VC, which prioritizes in-network connections, since our beginnings, we’ve pioneered benchmarking dealflow across race and gender in addition to traditional metrics like stage, product-market fit, churn dynamics, and other common variables for VCs. We use scalable funnels to attract founders outside of our networks, including creating our own events like Startup Runway, our own networks like the Signature Family Office and Foundation series or our Innovation Council, and digital marketing, including our Atlanta Startup Podcast and this blog. We believe great founders are often outsiders, and their outsider’s eyes see valuable insights. 

In Fund 1, we invested in over a dozen strong companies that are on the forefronts of their industries, like Funding U, SmartCommerce, MapMyCustomers, and Drum. Three years later, taking learns from Fund 1, we launched Fund 2 —  an even more refined distillation of that original thesis, focusing on seed-stage Southeast startups driving financial outperformance. Since we launched late last year, we’ve made investments in three stellar startups–Capway, Physician360 and LeaseQuery.

Financial outperformance and financial inclusion

Our diligence process has a “green thread” of inclusion running through-out. We’ve been called out in prestigious publications from Forbes to our local Atlanta Business Chronicle for catalyzing inclusion. While there are many studies by the World Bank, Morgan Stanely, JP Morgan, and Credit Suisse on how diverse investing teams like ours outperform financially and how diverse boards like the ones Valor structures outperform financially, some thoughtful investors we’ve met on this journey pointed that there was no study that could demonstrate that investing in startups led by diverse teams had outcomes on par with “traditional” (that means white male-led) startups.

It was true. Before last week and a bold new study from Kauffman, we had nothing but our team’s practical experience across hundreds of technology companies to go by at a startup level. Plus, of course, extrapolations from studies of management teams and boards that demonstrate the financial outperformance associated with multiple perspectives in business.

As-lived experience in our partnership is “inductive” –it does not live up to deductive academic rigor. Many founders reading this post can relate to me that pioneers work ahead of common understanding. It’s a part of that inherent “outside of your comfort zone” approach it takes to start anything great.  But it sure is nice to have belief points evolve into proof points, right? And that takes time.

The Valor Inclusion Premium and how we support financial outperformance

Inclusion is a risk factor controllable by investors. It’s one we own as a core value and core differentiator for Valor.  The region around us, the Southeast, has the greatest density of diverse founders regionally in the U.S. Plus it boasts the largest population of any region, with 38% of the U.S. population according to the U.S. census. Plus, it’s the fastest-growing U.S. region.

Our Inclusion Premium philosophy for financial outperformance is:

Inclusion is a financial performance risk factor. Diverse management teams and boards are associated in numerous studies with 15-35% financial outperformance. Since inclusion is controllable and influenceable by investors, it is a critical fiduciary responsibility for private equity and venture capital fund managers. Valor processes accelerate and support inclusion at sourcing, at time of investment, and through investment management and disposition. Seed stage is the most dynamic and influential time to implement best practices around inclusion. This is where Valor invests.

My personal thanks and hats off to Collin West, Nihar Neekalanti, and Jeff Harbach at the Kauffman Fellows for their bold and definitive contribution to the understanding of financial outperformance in startups. The Kauffman credo across the network of 600+ venture capitalists across the globe is, “We Believe that the True Value of Capital Is to Fuel the World’s Most Ambitious Endeavors.” You can’t do that if you leave 40%+ of the United States off the map of innovation.

Valor hosts events for the inclusive innovation ecosystem where we discuss these trends and how they impact financial outperformance, whether you are building a start-up or investing your wealth. I hope you’ll join us on this rewarding path. The future is better together, and this study has a lot to say about how much better. See you there. 

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