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Don’t let your startup get caught up in “diversity debt”

You may have heard of “engineering debt”. Coders and web developers use the term to describe what happens when you take shortcuts to meet a deadline — skipping lines of code and skirting best practices in the interest of getting the job done. The end result may work, but it’s slower and glitchier than it needs to be — you’ll pay the price for cutting corners.

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Is your hiring team diverse? What about your Board? VIRAL framework is a way to assess—and address—diversity

Manu Smadja, co-founder of edtech and financial inclusion startup MPOWER Financing, has another term he’s fond of: diversity debt. It’s what happens when a startup leader fails to invest in diversity and inclusion from the very beginning.

“If you need to hire people quickly and don’t take diversity and inclusion into account, maybe you’ll meet your deadline, but you’ll pay the price eventually. You’ll become too homogeneous. You’re less resilient to a crisis. You’re more subject to groupthink. That can also lead to a toxic environment.”

And like any debt, the problem only compounds.

“Cutting corners will come back to bite you. When you fall into debt, the interest rate keeps growing, and at some point your culture is potentially endangered. Put plainly, few women want to join a company that has an existing team of 15 bros.”

Diversity and inclusion as a strategic advantage

Diversity and inclusion have inherent value from a human perspective — in a diverse and globalized world, you’re missing out if you are not hearing from multiple perspectives. For MPOWER, diversity and inclusion is a strategic advantage.

MPOWER Financing’s co-founders, Manu Smadja (left) and Mike Davis (right)

The DC-based startup, which is in Village Capital’s portfolio, provides loans to high-potential international college students who don’t have access to traditional financing sources such as federal loans. Smadja and Davis both come from families of immigrants — Manu’s family is originally from France, and Mike from Iran. From the very beginning, their goal was to help students coming to the U.S. from all four corners of the world, so they knew they would need a diverse team. Today they help students from 180 countries, and recently passed the $400M mark in application volume on their platform.

“For us, diversity and inclusion was just a good business decision — we’re a financial inclusion company, so it makes sense to be inclusive in the way we recruit as well. But diverse perspectives are useful in any field — a diverse workplace can expand your user base, improve your product, make you more resilient to shocks (by avoiding blind spots), reduce your costs (by tapping undervalued top talent).”

When it came to growing their team, Manu and Mike made sure to check their blind spots. This meant hiring international and DACA students who’d experienced firsthand the financial challenge that MPOWER is solving for its customers. In addition, these hires could speak Spanish, Portuguese, Hindi, Mandarin, and other languages close to MPOWER’s customer base. Today, MPOWER’s team represents 14 nationalities and even more languages, and 43% of its team are women.

“Cutting corners will come back to bite you. When you fall into debt, the interest rate keeps growing, and at some point your culture is potentially endangered. Put plainly, few women want to join a company that has an existing team of 15 bros.”

Building a diverse and an inclusive company requires intentionality. The MPOWER founders knew that the easy path, especially at the beginning of a startup, is to look around your own circles — to hire friends or friends of friends. While that has advantages, like a shared language, it can also come at the expense of building a diverse and inclusive workforce.

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“Your commitment to diversity as a CEO needs to start at the beginning, from your very first hire. This is also when it’s hardest, because diverse and inclusive hiring rarely happens organically,” Smadja said. “It’s intuitive to first look within your inner circles. Your friends will gravitate to you especially if they’re looking for a job, and given your existing relationship with them and your need to hire fast, it’ll be tempting to do so.”

“To be fair,” he added, “Hiring from your inner circle certainly has advantages like an existing, trusting relationship and possible shared values, but that’s when you start incurring your first debt. It’s definitely possible to hire someone aligned with your company’s vision and values outside of your inner circle, you just need to be intentional about it and it requires more work.”

The MPOWER team recruits from places online like idealist.org and angel.co as well as at events such as the Women in Technology Career Fair. “We tried to cast a wider net, and to not be too narrow-minded.”

An investor’s perspective

With less than 30 Latinas in the US venture capital field, inclusion is personal to Marcia Chong, an investment analyst at Village Capital and a Latinx.

Marcia Chong, Investment Analyst at Village Capital

Marcia is part of a team charged with ensuring that diversity and inclusion are considered within Village Capital’s diligence process when picking entrepreneurs to invite to their programs.

“At Village Capital, we’re always trying to find the next great idea,” she says. “We also believe that a lot of high potential entrepreneurs are in investor blind spots — because of their social and professional networks, where they’re from, or their race and/or gender being different from most investors. Village Capital views diversity and inclusion as key to updating the way we back new ideas and in bringing more people and places into conversations and investment decisions.”

Marcia says that “diversity and inclusion cannot solely be defined or categorized by investors, it must include the voice of entrepreneurs themselves.” When we find entrepreneurs with great ideas, we ask, “How do the entrepreneurs define diversity within their team and organization? Are the founders most likely going to face investor blind spots and challenges in raising capital due to investors’ disconnect with their race, gender, and/or the geography of where the venture is located? What type of support is the entrepreneur looking for?”

We also place a lot of strategic value on finding entrepreneurs with diversity and inclusion embedded as part of a venture’s team, problem and vision, and value proposition. We ask “does the founder seek to solve a big problem in society? Has the founder or anyone else in the team experienced the problem themselves? Has the team spent significant time with its customer? Does the team’s diversity reflect its customer base? Does the team understand its customer base better than the competition?”

Diversity and inclusion require constant self-improvement

Smadja stressed that this getting past diversity debt is a continuous process.

“You may have achieved perfect gender parity for your sales team, but is that true at the senior levels of the company, like the C-Level and the board? Our biases are constantly at play in key hiring and evaluation decisions we make; building a diverse workplace involves a continuous fight against our own internal biases.”

“Diverse and inclusive hiring rarely happens organically.”

Diversity and inclusion also go beyond your core team — to your investors, board members and business partners. This goes back to building a diverse and inclusive set of experiences and skills — thoughts that allow you to avoid blind spots, build a new group of customers — by design, more profound dialogue, less groupthink.

“It’s hard to have one [diverse part of your startup] but not the rest. If your board is not very diverse, if your executive team is not very diverse, if your partners are not very diverse; how are you going to have a diverse rest of the company and how can you say that you are diverse and inclusive?”

Ways for entrepreneurs and investors to push against “diversity debt”

  • A lot of investors and startup CEOs have been intentional about diversity and inclusion from the beginning. Don’t wait until it’s too late. The Kapor Center for Social Impact has some great advice for investors who want to take diversity seriously, and there are lots of resources about how entrepreneurs can minimize unconscious bias in hiring — for example, steer away from qualitative questions, and use somewhat more objective cases instead.
  • We encourage investors to be intentional about diversity and inclusion within their investment decisions that link diversity and inclusion to an organization’s business strategy. We also encourage investors to use a data-driven approach to choosing entrepreneurs, as we’ve started to do with our STAR (Startup Team Aptitude and Readiness) Survey.
  • We encourage both investors and entrepreneurs to think through how diversity and inclusion can be embedded in the language used to communicate with one another. VIRAL, or the Venture Investment-Readiness and Awareness Levels Pathway, is a good framework for entrepreneurs to articulate how ready they are for investment and for investors to communicate the point at which they want to invest. Read more about VIRAL here.

Ebony is the Director of US Ventures at Village Capital. She oversees Village Capital’s work in finding and supporting US start-ups in the five sectors that receive investment from Vilcap Investments. In her previous role at the firm, she managed the Education: US 2016 venture development program. She graduated with her MBA from the University of Michigan’s Ross School of Business in 2015, focusing on strategy and entrepreneurship. While at Ross, she traveled to Tanzania, where she developed and taught a business curriculum for agriculture technology entrepreneurs as an Enterprise Consultant for Land O’Lakes. Additionally, she was Education Circle Director for the Social Venture Fund. Prior to Ross, Ebony worked at New Urban Learning, a charter education management company focused on preparing Detroit students to successfully graduate from four-year colleges and universities. Before her work in education, she lived in the Bay Area, where she was an Account Strategist for Online Sales at Google. Ebony holds a B.B.A in Finance from Howard University.