Issues around social justice and racial equity had already been an acute focus of public attention before the summer of 2020, when the murder of George Floyd and its aftermath gripped the United States and helped bring the issues to a boil.
The heat has been on high ever since, and CFOs of pre-IPO companies seeking venture funding should take note. Venture capital investors, generally quite attuned to public sentiment, are watching and increasingly reacting.
New research shows VC firms are ever-more conscious of the benefits to be gained from diversity, equity, and inclusion (DEI) efforts — for both themselves and their portfolio companies.
In a newly released survey of 315 U.S.-based VC firms representing almost $600 billion in assets under management, conducted in 2022, 38% of participants said they had requested DEI details from their portfolio companies. That was exactly double the rate found in a similar, 2018 survey.
Such information broadly consists of employee breakdowns by gender, race, and ethnicity, for different types or categories of positions. VC firms may also ask what portfolio companies are doing to influence DEI, such as establishing goals for the effort, a staff position responsible for it, and programs for staff.
VC firms’ efforts to monitor and influence DEI within their portfolios derive in part from growing interest in the topic from asset-heavy limited partners, such as pensions and endowments, that invest in VC funds.
“We will likely see this continuing to grow, with more VC firms asking for this information,” says Heather Gates, leader of Deloitte & Touche’s audit and insurance private company practice, as well as the firm’s emerging growth company practice. “It’s going all through the capital chain, from the limited partners to the VC firms to the portfolio companies.”
For pre-IPO finance chiefs, attending to DEI is about attracting investment, but not only that. It’s also about attempting to unearth business opportunities by fueling innovative ideas and expanding the company’s external network.
For companies that buy into the appeal of such benefits, according to Gates, it’s important that the CFO brings a measure of what she calls ‘intentionality’ to incorporating DEI into corporate culture. That’s particularly so where human capital management reports to the CFO. “There needs to be an alignment of thinking around DEI,” she says.
VC firms, for their part, are ever more aware of DEI’s potential business impact. “There can be missed opportunities or blind spots if investments are going through people with the same backgrounds or who look the same,” says Mayam Haque, executive director of Venture Forward. “Investors may not be aware of these opportunities, given [fairly] closed networks and how network-driven investment decisions can be.”
The survey found that almost half (44%) of the participating VC firms had a diversity strategy, up from 15% in 2016. And 60% of the firms said they have either a staff person or a team responsible for DEI, compared with just 34% five years ago.
The survey has been conducted biennially since 2016 by the National Venture Capital Association; Venture Forward, a 501(c)(3) organization focused on DEI that supports the NVCA; and Deloitte & Touche.
