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Is There A Way For Investors To Actually Eliminate Bias?

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Nov. 3 2021, Published 4:25 a.m. ET

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The last year brought plenty of public promises from VCs to create more equal opportunities for diverse founders, and we’ve seen some positive changes since then. Notably, funding to Black entrepreneurs in the U.S. quadrupled, and at the midway point in the year had already surpassed the total amount invested in Black founders in both 2019 and 2020.At the surface level, this can look like a big improvement – and in many ways, it is. But we’re still far from where we should be in terms of commitments, and many underrepresented founders that I’ve spoken to report that they are being offered valuations at a fraction of what their white male counterparts are getting.

In order for the VC industry to continue to make progress, it’s essential that investors evaluate bias within, particularly in the way they’re evaluating startups. While it may not be intentional, certain frameworks and methodologies that may be ingrained in the way a firm has operated for years, have a disproportionately negative impact on underestimated leaders, like BIPOC and female founders.

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The first place to check bias is the scorecard

A formal scorecard can help investors assess risks and the upside potential of promising startup companies.While the scorecard should, of course, be reflective of each firm’s specific investment goals, being data-driven in the approach can also help weed out bias. And when focusing on early-stage entrepreneurs, it’s even more important.

At Beta Boom, investing in overlooked founders has been our bread and butter since the inception of our pre-seed firm in 2017. Eighty percent of our current portfolio is made up of female and BIPOC founders, and all of our investments support startups that serve the New Majority.

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In our experience, we’ve seen three major scorecard factors become detrimental to equality gains.

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  • Emphasis on pedigree: Most investors are placing significantly more weight in characteristics that focus on pedigree versus grit, traction or execution. Attending an elite academic institution or having previous work experience at a top tech company should not equate to increased points. Recent data has found that only about ⅓ of billion-dollar startup founders attended top-10 universities or worked at tier 1 companies like Google or McKinsey, so it’s time that we stop letting these metrics sway the scorecard.
  • Referral points: If a candidate comes from a referral (a direct introduction from someone within your network) it’s worth taking a look internally at the makeup of lead sources. For example, are your leads coming from university alumni networks, other investors, or colleagues from top companies you held previous positions with? Removing the referral component from the scorecard will help to eliminate bias and level out the playing field.
  • Geographic analysis: Sure, founders from Silicon Valley, New York City, and other major cities may have impressive connections that grant them certain privileges, but that shouldn’t take away from someone else’s capabilities if they come from a smaller city or even a rural town. There are many examples of billion-dollar startups being built in places as varied as Salt Lake City and Atlanta. Taking location out of the equation should be non-negotiable.
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We actually detract points when some of the factors above are present. We call this the “bias adjustment.”

While the venture capital industry is moving in the right direction by investing more dollars in diverse founders, evaluating bias from within is a necessary next step to a more equitable future. The scorecard plays a unique role in illuminating bias, and it’s time to adjust accordingly to move the needle forward to give founders the fair evaluation they deserve.

For those committed to building a truly diverse entrepreneurial ecosystem, I challenge you to keep the funding coming, but to also take the road less traveled by putting in the work to question and rebuild the system itself that has upheld these biased principles. With a new foundation, we can begin to see long-term change.

This article was written by Kate Prumal and Originally Appeared on Women 2.0

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