ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

A Useful Funding Tool for Less Segregated and Diverse Communities

Oct
26

Communities with a mixed ethnic background and more diversity are likely to come up with new ideas. According to a study by the Yale School of Management, having people in a community with different backgrounds is beneficial for Venture Capital (VC) firms as it leads to economic development and innovation.

In various countries around the globe, communities, universities, and businesses are pursuing diversification. Apart from the immediate benefit of getting fairness, having multiple points of view and diversity of experience is very useful for the overall performance of these sectors.

 

Effect of VC on Integrated Communities

The study also revealed that VC investment is more beneficial for ethnically integrated communities as compared to segregated communities. The effect of VC on the integrated communities was 30 percent higher as compared to segregated ones, especially in terms of creating more wealth, jobs, entrepreneurship opportunities, and facilitating innovative activities. The startup businesses create more value and job opportunities that eventually lead to economic growth.

In a diverse community, you get to interact with people having diverse backgrounds, which leads to getting access to more resources and information as compared to segregated communities. In the past, studies have shown that economic vitality is enhanced as a result of social interaction within a community.

 

Implications of Social Interaction for Venture Capital

The purpose of the study in question was to identify whether a social structure is vital for economic development or not. The VC was the focus of this study, given the fact that it is a useful financial tool for high growth businesses.

It was revealed that such relationships have significant implications when it comes to VC investments. VC investors put their money in new businesses that are in the close vicinity. They tend to rely on professional relationships and friendships for leads and information that cannot be received via cold calls or internet search.

VC investments were compared to aggregate income, employment, new businesses, and a number of patents. It was found that VC performed much better in less segregated and diverse areas, resulting in more patents, more jobs, and created more value.

Social interaction has benefited various communities. One of the many factors that led to high level of innovation in the United States is the increasing number of immigrants that bring diverse culture. When they interact with one another, it creates room for transferring valuable information and ideas, which leads to better economic outcomes. Besides, when people from different ethnic backgrounds live close to one another, it brings about healthy relationships and effective interactions that is favorable for the wider economy.

 

Diversity Leads to Innovative Thinking

Diversity is also very useful to promote innovative thinking that leads to success in the venture capital market. Any sector that does not have diversity or mixed race is very limited in innovative mindset and thought process. This results in similar thinking with not many innovative ideas. In addition to that, there is gender bias in the VC sector that restricts the overall growth prospects. It is a widely known fact that female founders represent the rapidly growing entrepreneurial group in the United States and their firm’s experience growth 1.5 times faster than the average growth rate in the market.

 

Providing Solution to Promote Innovative Decision Making

Despite the lack of diversity, it is quite likely that change is taking place gradually. An increasing number of entrepreneurs with diverse background are entering into the market. They are focused on providing a solution to the problem and make a profit in the process.

It has become really important to promote diversity in the communities and in societies at large so as to promote economic development and prosperity. Not only will it be beneficial for the venture capital industry, but it is also going to help the masses in getting equal opportunities in every sector.

 

The venture capital market has also derived benefits from diverse communities in terms of innovative thinking and plethora of useful information. To continue moving in the right direction, countries around the globe should embrace diversity in order to have successful businesses and create more job opportunities that will eventually bring economic prosperity in the long run.

The Key for Venture Capitalists Better Performance

Jul
20

Venture capital is a booming sector in developed economies. With the increasing trend in venture capital investments, a lot of research work is being carried out for its growth and continuous developments. Recently, a working paper has been posted on the National Bureau of Economic Research by professor Paul Gompers from Harvard University and a Ph.D. student Sophie Wang.

 

Greater Gender Diversity

According to the paper, if a venture capital (VC) firm hires a partner who has daughters, it is more likely to perform better as compared to other VC firms. But it does not mean that a girl totally understands what’s hot in the investment market and what’s not. Gompers and Wang conducted a study of large venture capital companies between a period of 1990 and 2016. They observed that the partners of the firms with higher gender diversity have, on average, more daughters. During the period of their study, it was revealed that VC firms with higher gender diversity have shown better performance as compared to firms with partners that do not have daughters.

The study also revealed that raising daughters decrease the element of biases toward women and it eventually leads to hiring more female staff. Researchers noted that firm partners who had daughters that were above 12 years of age had instilled a culture of higher gender diversity. They said that it goes hand in hand with fathers experiencing a likely gender bias faced by their daughters as they grow up.

 

Having a Daughter – A Step Toward Successful Deals?

72 percent of the venture capital companies do not have any female investors, therefore, the effect of having a daughter should be considered. The study conducted by Gompers and Wang comprised of 998 firms with 1400 investing partners. They employed a mathematical model and concluded that if each partner of VC firms had a daughter instead of a son, the firm would have experienced successful deals with a growth of 31.6 percent on return on capital employed than an average growth of 28.7 percent.

These calculations were based on reasons, such as, generation of better ideas in a diverse working environment or the opening of new avenues to access better deals.

 

The significance of “Having a Daughter” Effect

It is not astonishing, however, that by replacing a female child with a male child, the chances of hiring a female investor increases by 24 percent for VC companies. According to the study, 8 percent recruitments in the past 15 years were female and an increase of 24 percent would only represent a ratio of 10 percent in the VC sector.

The ratio of daughters in the VC sector is not so low. It represents a ratio of about 125 male children for 114 female children. This is consistent with the national demographic figure of 51 percent boys. It indicates that apart from an artificial genetic selection, the argument of daughters having an impact on the VC sector does not seem to be strong.

It has been acknowledged by researchers, because the basis of this view is mainly to eliminate the gender bias and also to emphasize its importance for the prospects of the venture capital market. Those who seek to have gender equality in the VC market can rely on the gradual change that has taken place in the sector over the years.

 

A Move Toward Gender Equality

In 2014, a financial market where venture capitalists operate, women represent 54 percent of the labor force, wherein, 18.3 percent of the women are board of directors and 12.4 percent are executive officers. A managing director and co-founder of the Women’s Venture Capital Fund, Edith Dorsen, is of the opinion that teams with greater gender diversity are more competitive in the market and companies with such teams have higher chances of financial growth. The majority of the people have, so far, not been able to fully understand that it is a real opportunity to earn high profits.

Anu Duggal, a founder of VC fund called F Cubed, started her firm in 2013 and the main purpose behind it was to change the common perception. She is building a network of support that comprises both men and women. This network will be focused on finding the most innovative ideas and entrepreneurs.