Editor’s note: Veteran entrepreneur and investor Donald Thompson is a regular contributor to WRAL TechWire. His columns appear on Wednesdays.

RESEARCH TRIANGLE PARK – What do you think of when you picture a venture capitalist? Probably, you imagine a wealthy white man: someone who has lived a life of affluence and privilege. You might be thinking, stereotypically, of someone interested in sailing, fine art, the developing world and emerging technologies. You probably don’t picture people who are beginning to lean in on diversity, equity, and inclusion (DEI), but they are. And why? Because they know that DEI creates better returns.

Venture capitalists (VCs) provide risk capital for high-growth businesses that often do not have access to traditional sources of financing. Their job is to place bets on companies and ideas that have the potential to disrupt industries and change the world. DEI is one of these ideas that can transform the way organizations do business. So, while the rest of us are debating whether diversity training is good or not good, the investment community is investigating it. They know there’s something important happening, and they don’t want to be left behind, so they’re learning as much as they can to make data-based decisions about whether DEI is a worthwhile investment.  

This month, my team is releasing our new industry briefing, Transforming Venture Capital and Private Equity Through Diversity, Equity, and Inclusion, and I couldn’t be more excited to share it with you. In building this paper, we interviewed key executives in the venture capital, private equity and start-up communities to gather their perspectives on the current state of DEI in the investment space. What we learned feels encouraging.

Where we are now

You know I am a well-trained optimist, but any conversation about the hopeful future of venture capital and private equity has to start by acknowledging the poor state of diversity in firms right now. Numbers reflecting venture capital and founder diversity beyond racial and gender parameters are hard to find, but still, it’s disheartening to see just how little money went to Black and Latinx founders in 2020. In short, CNBC says just 2.6%. PR Newswire echoes that data, reporting that only 40 Black founders raised venture capital in the fourth quarter of 2020. 

The statistics are similar for women founders. Funding for women-led startups has always been a struggle, but it absolutely plummeted during the pandemic. As Crunchbase explains it “not only did total funding to female-led startups fall this year, but the proportion of dollars to female-only founders also declined, to 2.3 percent, compared to 2.8 percent in 2019.” Of those 40 Black founders mentioned above, only 6 were women.

Historically, culturally diverse and women entrepreneurs face an unlevel playing field and a hefty dose of bias in gaining investment from venture capital or private equity firms — a problem that seems to start long before they ever get to seek funding. In a Pitchbook article, Allison Baum, a partner at SemperVirens, summed it up beautifully. “Dollars are being disproportionately allocated to experienced founders,” she said, “and this disadvantages minorities and women who do not have the same pre-existing reputation and network.” Huge gaps in community wealth, plus limited opportunities for networking and limited exposure to major capital create a whirlpool of disadvantage for underrepresented founders.

Nevertheless, I see things changing. The VC and PE experts I’m talking to are interested in learning more about DEI. They’re saying, “tell me again how this DEI stuff makes me money?” Because people in the money game know they have to be flexible, and they have to be competitive thinkers if they want to bet accurately on what’s coming next. Great investors have to be open to change. 

Where we are headed

There’s a certain type of investment leader that focuses on ESG (environmental, social and governance) funding. Often, that’s called sustainable investing. If the phrase is new to you, it’s an umbrella term for investments that seek a triple bottom line impact: positive returns and long-term good for people, planet, and profit.

It wouldn’t be surprising to find an emphasis on DEI within sustainable investment communities, but research shows a growing interest across the VC field. That’s likely because, as Fortune points out, “a more equitable society naturally means a better flow of capital, and more opportunity means greater innovation.” Investors are driven not just by moral and social imperatives, but also by building financially successful enterprises, and the evidence connecting DEI with increased revenue grows stronger every year. 

I am inspired by the growing number of VC firms for underrepresented founders, like Salesforce’s Ventures Impact Fund, Brown Venture Group, Morgan Stanley’s Multicultural Innovation Lab, and Rethink Impact. In our conversations with startup leaders, it’s obvious how big and how positive a difference the venture capital and private equity communities can make by investing in diversity, equity, and inclusion.

Our white paper is designed to help VC, PE, and startup leaders build a business case for investing in DEI, consider different strategies for achieving that goal, and accelerate their journey so that wealth and opportunity can be shared more broadly. Once you read it, I’d love to hear what you think, and if you have a personal story as a startup or as an investor, I hope you’ll consider sharing it with me, here or on LinkedIn

About the Author 

Donald Thompson is a serial entrepreneur, angel investor, author, podcaster, public speaker and mentor for Google’s Entrepreneurs Exchange. He is also currently CEO for Walk West, an award winning digital marketing agency, and co-founder/CEO of The Diversity Movement, a technology-enabled diversity, equity and inclusion training firm. Their new industry briefing digs deep into this topic: Transforming Venture Capital and Private Equity Through Diversity, Equity, and Inclusion. To learn more, visit donaldthompson.com.