Diversity and inclusion rank low on local startups’ list of priorities

The existence of diverse teams and founders is one of the areas investors will investigate when deciding which startup to fund. While topics like diversity and inclusion are becoming mainstream inside the boards of large firms, in the case of startups this kind of discussion is still in its early stages, but with a good potential to grow in the coming years.

By Ovidiu Posirca

Companies that focus on treating workers well and creating a diverse and inclusive environment for everyone may perform better financially and earn the trust of consumers and investors, according to studies carried out by organisations such as Bank of America/Merrill Lynch and the Peterson Institute for International Economics.

FEW WOMEN IN INNOVATIVE STARTUPS

Research has found that companies ranking in the top quartile in terms of diversity on their executive teams were consistently more likely to financially outperform their peers.

“Although most of the domestic funds are co-financed via the European Investment Fund, a champion of diversity and inclusion among European institutions, we have no clear evidence that local funds might have specific benchmarks for backing diverse startups in Romania. We do expect both the public and private sectors in Europe to follow venture firms – such as SoftBank, Andreessen Horowitz, and many others – which have set up growth funds dedicated to backing diverse startup founders,” Marius Nicolae, head of technology in strategy and transactions at professional firm EY Romania, tells BR.

Meanwhile, the European Union recently launched a new funding scheme supporting deep-tech startups led by women.

EU data shows that around 5 percent of venture capital goes to mixed teams, while only 2 percent goes to all-female teams across European startups. Furthermore, only 15 percent of innovative startups are founded or co-founded by women, and just 6 percent have all-women founding teams.

However, diversity covers a wide array of factors, ranging from age to nationality, sexual orientation, ethnicity, and socioeconomic backgrounds. Dan Mihaescu, founding partner of GapMinder VC, says that the gender diversity situation in Romania is actually one of the best in Europe. This can be seen in the top and middle management of large companies and multinationals as well as in small and medium enterprises.

“In terms of startups, we often encounter teams that include a good level of gender diversity among the co-founders. In GapMinder’s portfolio, 20 percent of all investments (both Seed/Series A and Pre-Seed) have such diversity at the level of managing founders or co-founders, and the figure in the Seed/Series A portfolio is around 30 percent,” Mihaescu tells BR.

In the European tech sector, 91 percent of total capital investment went to all-men founding teams in 2020, according to data from dealroom.co. Despite the discouraging statistics, female founders are starting to raise more money for their startups, especially in the early stages.

In 2020, startups with women founders closed the largest number of funding deals in the

USD 10-50 million bracket, according to dealroom.co data. However, women-only teams did not close any funding deals over USD 50 million.

Pam Kostka, chief executive of nonprofit All Raise, suggested that focusing on earlystage funding rounds can help build a pipeline of future female-founded unicorns.

“Entrenched behaviours like risk aversion and pattern recognition,” as well as “investors going back to repeat entrepreneurs… inherently excludes women and people of colour, who have traditionally not had the same opportunities to found and scale companies,” Kostka was quoted as saying by the Wall Street Journal.

FEW WOMEN WITH LEADERSHIP ROLES IN INVESTMENT FUNDS

women hold senior investment roles. Also, in VC funds based in Central and Eastern Europe (CEE), 85 percent of team members are male.

“They invest in companies with all-male founders, who received 94 percent of all the capital invested, with no significant change over the last 5 years. All-women teams also raise less capital but are much more effective. They outperform male-founded companies by 96 percent when looking at the revenue to funding ratio. In women, there is more of the four-leaf clover than the mythical creature,” said Małgorzata Walczak, investment director at PFR Ventures, in the Funding in the CEE region report.

The report further points out that just 3 percent of CEE funds have all-women general partners, while 90 percent of fund capital is raised by funds with only male general partners. Emília Mamajová, founding partner at Espira Investments, says that there are over 150 funds investing in gender diverse companies, mostly focusing on the VC stage. However, only 15 funds are based in Europe. “Central Europe is the least developed region – so due to a lack of dedicated investors there is a significant untapped market opportunity,” said Mamajová, according to the report.

The current picture points to a small amount of funding activity going to womenled startups in the wider CEE region. But the improving figures for early-stage deals can represent a starting point for new companies that have diversity embedded into their founding spirit.

Analysing startups’ diversity initiatives is also a market that is in the early development stages. For instance, nonprofit Diversity VC is among the first organisations evaluating workplaces, investment strategies, and capital allocation. The market for diversity certifications is growing as VC funds want to join this process before asking the companies in which they invest to do the same.