What’s the Problem?
An entrepreneur is a person who takes a problem that is not being addressed at all (or well enough) and runs with it.
To many, entrepreneurship represents the freedom to create new value in the world. While most of the public knows it involves a lot of hard work and – eventually – pitching for money from investors (think Shark Tank or Dragon’s Den), the general perception is that entrepreneurship is for those who are brave enough, persistent enough, smart enough, and – as Michael Seibel from YC Combinator puts it – formidable enough to do the work that needs to get done.
Merit is “the quality of being particularly good or worthy, especially so as to deserve praise or reward”. An organization that claims to be meritocratic offers rewards in the form of bonuses, promotions, or enrichment opportunities to those who deserve them. In the world of entrepreneurship, the rewards are slightly different. They may include the ease of getting paying customers (especially early buyers for solutions that still have unproven value), venture capital from investors (e.g., money in exchange for a chunk of your company), and fairness in any partnership, investor, and contractual relationships (i.e., favourable terms that set the company up for success). An entrepreneurship system that claims to be meritocratic offers these rewards to those who deserve them. In theory, this checks out.
But here’s the real-world problem with merit-based reward systems: they don’t work. At least, not in the way that you think they do.
Human beings are inherently biased. Have you ever had a feeling that someone you just met is credible and trustworthy, someone you would want to work for, or even someone you would want to introduce to influential people in your network? Have you ever experienced the opposite effect – where you had a feeling of “this person is good but…” you did not feel compelled to support them? If yes, you are not alone. The first step towards change is building greater self-awareness around these subconscious biases to manage them when they inevitably happen.
Conscious biases are the ones you are aware of – the ones you can do something about. Unconscious biases are the ones you are not aware of – they are the ones that are harder to manage because you don’t realize you have them. Here’s the kicker: we all have a significant amount of both. These biases influence how we think, feel, and act. Since bias is influenced by our personal experiences and backgrounds, as well as cultural contexts and societal stereotypes, it is deeply engrained in the ways we view the world around us. Unconscious bias is often influenced by our observations of power structures: who makes decisions and who doesn’t, who receives respect and who doesn’t, who gets to say things without backing up their claims and who doesn’t… the list goes on. We are unconsciously driven to reinforce what we have already seen and reject what is inconsistent with our world view. When we reject based on unconscious bias, we often do so in irrational ways by using phrases like ‘they aren’t a good fit’ or ‘I have a gut instinct’ to explain our approaches. Individuals who do not fit our expected stereotypes (e.g., to call it out explicitly: CEOs and CTOs who identify as women, non-binary or belonging to racialized communities) are often subjected to a higher burden of proof – or pressure to demonstrate credibility – over those who fit into our existing narrative of what entrepreneurs look like. This pseudo-rationalization and masking of prejudice is exactly what makes unconscious bias so challenging to dismantle.
Emilio J. Castilla from the Massachusetts Institute of Technology calls the interplay between merit-based systems and bias ‘the paradox of meritocracy’. Through research, his team demonstrated that merit-based processes tend to increase biases rather than reduce them. The less accountability and transparency in any decision-making process, even one that claims to be meritocratic, the more prone it is to unconscious bias. Systemic bias, another important term, is conscious and unconscious bias at scale. This is the type of bias that is so deeply entrenched in our policies, processes, behaviors, practices, and expectations that it has become institutionalized. And since it is institutionalized, it can seem normal to those who experience it every single day.
One way to establish the presence of systemic bias in entrepreneurship is to compare entrepreneurial outcomes in a specific group (e.g., racialized, LGBTQ2S+, women-identifying) to the total number of individuals of that group within the general population – and then compare how different groups perform on that outcome. For simplicity, we begin this conversation by focusing on where money is being invested. In a population where 51 per cent of individuals identify as women, we could reasonably assume that 51 per cent of investor dollars are given to companies that are fully or partially founded by those who identify as women. This makes sense because women can be just as brave, persistent, smart, and formidable as their male-identifying counterparts. Right? Well, it should be. However, gender parity in how money is invested simply hasn’t happened for women. Not even close. And the lack of parity, let alone representation, is only worse when we look at what happens for individuals who identify as racialized, LGBTQ2S+, women, and non-binary.
Below are a few alarming stats to illustrate the problem:
- All-female founding teams received a record 3.4 per cent of all U.S. Venture Capital (VC) money in 2019. This fell to 2.4 per cent in 2020 and 2021. During the same time period, teams with both female- and male-identifying founders received 11.6, 10.8, and 10.3 per cent of all U.S. VC money while all-male founding teams received 85.0, 87.0, and 87.0 per cent of all U.S. VC money. In 2020, the average size of a VC deal for an all-female founding team was $6.8 million. For an all-male founding team, it was $18.7 million. This disparity continues even though start-ups founded and co-founded by women generate an average of 78 cents in revenue for each dollar of funding received compared to 31 cents in revenue for each dollar of funding received by all-male founding teams. Remember that female-identifying individuals are not a minority: they represent 50.5 per cent of the U.S. population.
- Approximately 77 per cent of all companies that receive VC money have at least one white co-founder. Over 70 per cent of all companies that receive VC money have at least one white male-identifying co-founder that went to Harvard or Stanford University.
- Less than 1 per cent of all VC money went to LGBTQ entrepreneurs between 2010 and 2019. This is further challenged by the fact that at least 75 per cent of entrepreneurs who identify as LGBTQ will intentionally not reveal their sexual or gender identities to investors due to fears around the negative consequences of such transparency. Individuals identifying as LGBTQ represent 5.6 per cent of the U.S. population.
- Less than 1 per cent of all U.S. VC money went to Black and African founders between 2015 and 2019. Individuals identifying as Black and African represent 12.4 per cent of the U.S. population.
- Less than 2 per cent of all U.S. VC money went to Latinx founders between 2017 and 2021. Individuals identifying as Latinx represent 19 per cent of the U.S. population.
- Only 0.2 per cent of all Canadian capital is accessed by First Nations and Inuit founder owned businesses. Individuals identifying as Indigenous represent 5.0 per cent of the Canadian population.
NB: The absence of detailed statistics on specific groups may indicate an absence of studies done to understand how money invested impacts that population. We are always looking for more resources – if you know of additional sources for this type of information, let us know.
Based on the statistics above, the short-sighted conclusion might be that men (especially white men) are better at entrepreneurship. The stark reality is that this is how systemic bias works and shapes the world around us. A deeper analysis with explicit consideration of how bias works is required to ask the real questions we (still) need to consider in 2023:
- Why do challenges with representation of racialized, LGBTQ2S+, women, and non-binary identities continue to exist in VC-backed start-ups and entrepreneurship?
- If we are aware of these issues, why are our commitments to “make change happen” in the entrepreneurship community not yielding the results we need to achieve fair representation across all identities?
- What are the relevant metrics that will enable us to be transparent and accountable for how we are addressing representation challenges in VC-backed start-ups and entrepreneurship moving forward?
- How might we stop perpetuating a lack of representation in entrepreneurship and start creating effective, appropriate, and inclusive selection processes and programs?
- What are the best practices for how to move the needle on representation in entrepreneurship and how do we share these best practices across the entrepreneurship community moving forward?
Decision-making: Who gets access to Incubators, Accelerators, and Venture Capital
Incubators, accelerators, and venture capital firms make funding decisions based on the idea itself, the traction (e.g., sales, letters of interest from potential customers, previous funding), size of the market, and a few other factors including – drum roll – the line items on a founder’s resume and other indicators of founder ‘potential’. Selecting founders on factors that might bias us towards privileged upbringings (e.g., accolades, academic pedigree, freedom to work on ventures without financial worries), nebulous characterizations of entrepreneurial ‘fit’ or compatibility, and previous start-up experience (e.g., which may signal an absence of systemic barriers to overcome for that individual) can miss the point. Special consideration of the ‘distance travelled’ and context of entrepreneurial experience matters. How do we build this into our recruitment and selection processes?
Types of Problems Tackled in Entrepreneurship
The entrepreneurship system caters to businesses that are viewed as venture-backable (typically this means a scalable business that is targeting a market opportunity of at least one billion dollars). As it turns out, women- and racialized individuals start 40 per cent of businesses in the U.S. – but they are not always VC-backable start-up opportunities. How does the entrepreneurship system ensure that all types of businesses are supported, not just those that are VC-backable? And are there ways in which VC interests can span a wider range of new high-impact (but smaller market) business opportunities?
Behaviours Encouraged (or Discouraged) Based on Identity
This article started off by claiming that entrepreneurship is for those who are brave enough, persistent enough, smart enough, and formidable enough. Beyond the fact that all these characteristics exhibit themselves in a variety of ways, many of them are also actively discouraged in specific groups through societal norms and expectations. Research reveals that entrepreneurs receive different questions based on identity rather than the content of materials presented and this leads to very different investment outcomes. While due diligence is a necessary part of the decision-making process in VC investments, why is it that start-ups founded and co-founded by women generate an average of 78 cents in revenue for each dollar of funding received compared to 31 cents in revenue for each dollar of funding received by all-male founding teams? What will it take to view entrepreneurs beyond stereotypes, remove implicit bias, and stop unfairly subjecting underrepresented groups to higher burdens of proof when much worse outcomes are tolerated for (already very well-represented) teams of white male-identifying founders?
All things considered, where do we fit in?
Those who make up the entrepreneurship system – incubators and accelerators, business support services, investor groups, and others – can make change happen. But why do we, as members of the system, struggle to achieve fair representation across all identities? Using words already familiar to organizations that make up the entrepreneurship system: it comes down to a lack of product-market fit; organizational leadership that does not have the lived or learned experience needed to support this range of identities; systemic barriers beyond our control; and the arrogance (yes, arrogance) to assume we already know what is needed and moving forward to create mechanisms to “make change happen” without doing the much-needed “customer discovery.”
A lack of representation in entrepreneurship programs means we need new types of programs, decision-makers that are representative of the communities we want to reach, approaches that re-build trust in communities that have been systematically underserved through our current offerings, and a stark shift in what is meant by “start-up culture.”
The ways we make merit-based decisions that reward entrepreneurial talent need to be checked: if someone is brave enough, persistent enough, smart enough, and formidable enough to do the work that needs to get done, they should be rewarded regardless of identity.
And what if someone does not seem to have these characteristics? Maybe check for unconscious biases, understand the context of achievements, and focus on objective measures of merit before making that claim.
The distance individuals travel in life and the barriers they face in expressing their entrepreneurial identity is not easy to understand if you lack that life experience. By saying we want to support entrepreneurs, it is our collective professional responsibility to understand the people we intend to serve. Learning to check our unconscious biases and becoming transparent in our decision-making processes will go a long way towards being accountable to our communities. If we don’t create an equitable playing field in entrepreneurship, who will?