Towards Better Representation in Entrepreneurship: Part II
Not all early-stage entrepreneurial journeys are created equal. Here’s why:
March 24, 2023
As we discussed in Part I of the series, the innovation ecosystem does not serve everyone in an equitable fashion. Although we can all agree we want to support awesome companies doing awesome things, inequities permeate throughout entrepreneurship. We do not need to look any further than who is receiving funding (and who is not), who typically appears in founding teams (and who does not) and which areas of entrepreneurship are well-funded (and which are not).
In this follow-on article, we’ll talk about how incubators, accelerators, and venture capital firms make decisions on who gets into their programs and who receives their investments. While some programs and VC firms put a greater or lesser emphasis on the criteria listed below, the core takeaway is that being able to meet certain elements is easier for specific members of the population. In Part I, we pointed out assessment criteria that are used to identify high-potential companies. These criteria included the innovative idea itself, the traction generated (e.g., sales, letters of interest from potential customers, previous venture funding), the market potential and value proposition, founder-market fit (e.g., the alignment between founder experience and the market they aim to disrupt), and qualifications of the founding team. Why is it easier for some aspiring entrepreneurs to achieve these elements than it is for others?
The Innovative Idea
There are many ways to come by inspirations for an innovative idea. Whether it is personal frustration, the experience of a loved one, something you hear about from others, or connecting the dots in a way you haven’t seen before, the next step is always the same: needing to find additional insights to validate the problem and better understand the space to be disrupted. Deeper insights come from the networks of specialists you develop over time (e.g., direct experiences in the industry), the networks you fight to create (e.g., cold emails and LinkedIn messages), and the connections you are born into having. Does not having easy access to a network through family connections, your educational institution, or your own training and work experiences mean you are ill-suited to innovate in that industry? Maybe not. However, not having these advantages from being born into a well-connected or highly educated family from a specific industry, or being able to afford tuition at elite institutions, does mean you need to work harder to develop trusting relationships and unlock the insights you need to be successful.
The Traction
Men tend to benefit more economically and socially than women in stereotypical negotiations (e.g., those that favour win-lose outcomes). The same trend appears to be true for other minority groups. In such stereotypical contexts, women are less likely to interpret terms as negotiable, be uncooperative or speak more than their counterparts during the negotiation and be aggressive in the tone and language they use. At the end of this type of negotiation, women more often feel powerless, have negative sentiment about negotiations, and experience low self-efficacy. In contrast, in cooperative negotiation scenarios (e.g., those that favor win-win outcomes), female-identifying individuals are just as successful in negotiations as their male-identifying counterparts. The trend makes sense due to the economic and social backlash that female-identifying individuals from many cultures face when being assertive and profit-oriented. All this while their male-identifying counterparts are expected to leverage such behaviors to win in similar conversations. This bias leads to inhibitions by those negotiating as well as unconscious biases that lead to less favorable terms being offered by negotiating parties This is true in a range of negotiation scenarios which include salary negotiations, establishing contractual terms in business deals, convincing others to be early adopters of innovative ideas, and much more. As we discussed in Part I, unconscious bias deeply influences power dynamics in society, and negotiations are no different. Network centrality, a term that points to the number of social ties and strength of relationships held by the negotiating party, appears to be a significant influence in negotiation performance. The impact of network centrality implies that entrepreneurial advantage can be gained through belonging or being connected to influential families, attending elite academic institutions, and, by extension, working at prestigious companies.
Market Potential and Value Proposition
Are you trying to address a problem with a large market that is well understood? A smaller market that is well understood? A market with less widespread understanding? Some areas of research are chronically underfunded (e.g., women’s health and mental health) despite massive potential for socioeconomic impact, A lack of research funding impacts the pipeline of technologies available for venture funding by either preventing research-intensive early-stage start-ups from validating nascent technologies (e.g., through establishing signals of success) or lowering the total number of potential ventures emerging from these fields. Certain experts point to a significant lack of understanding in the value propositions and potentials of companies with underrepresented founders. If the challenge includes unconscious bias and a failure to understand value propositions due to over-reliance on pattern-matching (e.g., looking for what looks like what has worked before) but we also know that white men manage 93 per cent of venture capital dollars, where do we begin to improve our communications?
Founder-market fit and team qualifications
Most venture funding goes to founders from Harvard or Stanford. In exchange for a hefty tuition of up to $55K USD per year (‘hefty’ being a relative statement, considering that the average student at these institutions has a family in the 80th income percentile), elite institutions provide access to prestigious networks. It just so happens that these prestigious networks include 40 per cent of venture capitalists that also went to Harvard or Stanford. Now consider that the average business requires $30K USD just to get started. Who has the possibility for such an up-front investment (those from wealthy upbringings?), better access to networks of highly qualified professionals from an elite institution, and an easier time accessing venture capital from investors (who want to work with those they are most like)? The diversity problem in venture capital is suddenly much easier to comprehend. This is not to say that individuals from elite institutions are not incredible entrepreneurs. Rather, it affirms that entrepreneurial success is dependent on a confluence of ability, inspiration, financial (and other) resources, and connections. If the advantages of financial (and other) resources and connections are given to very few, with a strong bias to those who resemble individuals in powerful positions, how many highly valuable ideas and ambitious entrepreneurs are we missing?
We can see that not all entrepreneurial journeys are created equal from the start. Selecting founders on seemingly objective factors without understanding inherent biases in the criteria being used only furthers the privileges that some individuals have, and others don’t. The start-up team review process does not consider the ‘distance travelled’ by entrepreneurs to get to the point of a program application form or an investor pitch. How do we level the playing field for those with the ambition, determination, and drive to create impactful ventures and re-balance entrepreneurial possibilities for all?