As the venture-capital industry continues to pursue diversity and inclusion initiatives, a new study from Stanford University highlights the uphill battle many black-led firms still face.
The study, out Monday, found that professional investors rated venture-investing teams led by white men more favorably than firms led by black professionals, with all other credentials remaining the same.
“Asset allocators manage a lot of money,” the Stanford psychology professor and study author Jennifer Eberhardt told Business Insider. “Only 1.3% of assets are actually managed by women and people of color, so you have this hugely powerful industry that’s virtually all white and male, and we were interested in why that was.”
For the study, Eberhardt partnered with Illumen Capital, a venture-capital firm based in Oakland, California, that hopes to reduce implicit bias in investing.
The study asked 180 asset allocators, otherwise known as limited partners or professional investors, to evaluate four different venture-capital firms for potential investment. The firms were broken out into white-led and black-led categories, then were either designated as high-performing or low-performing.
Potential investors were asked to rate the firm’s overall performance, investment skills, competency, social fit, and their expectations of how much the fund could raise. They were also asked how likely they were to take a meeting with the team and begin the investment process — all based on a one-page summary of the firm’s credentials and performance.
“We found that there was evidence for racial bias when you look at the teams that were most qualified,” Eberhardt said. “Even though people were looking at the same teams, black teams were perceived much more negatively, all other things held identical. It showed us that this is not just a pipeline problem because these highly qualified black-led teams suffer. And in fact, the more qualified the black-led teams were, the more bias they faced.”
The opposite was true for weaker teams, the study found, with more professional investors favoring the black-led teams. But they were still hesitant to invest.
“It helped to put into context my daily experience,” Illumen Capital founder and managing partner Daryn Dodson told Business Insider. “The fact that people would reduce the set of possible investments at the top to most competitive firms was a pretty striking finding in that people seemed to have an inability to see value when race is present in the decision making process.”
The study was initiated to confirm the existence of racial bias in venture investing, Eberhardt said, so it didn’t look at the potential reasons behind the professional investors’ decisions to back white-led teams over black-led teams. But the study’s findings push back on the widely held belief that the industry is subject to a so-called pipeline problem, which ascribes the underrepresentation of minorities in the tech-investing industry to a lack of candidates with the requisite qualifications.
“I think investors need to become aware that this exists, and we have empirical evidence now that this exists,” Dodson said. “This is just the first step. We are identifying and clearly stating that this is just not a pipeline problem. If you only try to solve the pipeline problem, that isn’t going to be enough. It’s a condition we cannot solve.”
Eberhardt is eager to expand on the study’s findings to see whether racial bias is present across different fundraising stages for firms, or if the presence of diversity training has any influence on professional investors’ decisions.
“I didn’t really even know that much about the world of investing before Daryn contacted me,” Eberhardt said. “Most people don’t really know how investment markets work, and it was all blind to me until I got involved in this, and it’s been a real eye-opener.”