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Illustration by Getty Images.

The Relationship Model Is Killing Venture Capital

By  |  Jan. 31, 2023 9:00 AM PST
Photo: Illustration by Getty Images.

The social and racial homogeneity of the venture capital industry has long been a source of frustration for entrepreneurs and investors alike. In recent years, this frustration has boiled over into a full-fledged movement, with a growing chorus of voices arguing that venture capitalists are destroying value by overlooking founders from swaths of the population including women, people of color and those from other disfavored regional or class backgrounds.

Despite study after study demonstrating that this pattern of bias has led to profoundly negative economic consequences—and that founders and investors who come from outside the VC bubble reliably and substantially outperform insiders—no amount of activism so far has been able to amend VC’s dismal diversity track record. Meanwhile, VC insiders continue to insist incorrectly that the industry, while far from perfect, does a good job of identifying and funding the most deserving founders. The real problem, they say, is a lack of qualified entrepreneurs from underrepresented groups.

The data are clear—diversification efforts have the potential to increase financial returns and diversify entrepreneurship. But how to go about it? Prevailing approaches such as diversity pledges, investor-matching tools, and investor-training programs tend to be overly deferential to incumbent thinking, reflecting the same entrenched biases and assumptions they seek to change. To make meaningful progress, reformers must challenge industry conventions, which means examining the assumptions that govern both VC investing and their own thinking.

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