2020 was a year of promises from several venture capitalists to address diversity at their firms and portfolio companies by making more concerted efforts to support equitable representation across the ecosystem. 

Some firms have created funds or initiatives dedicated to investing in startup founders from underrepresented backgrounds and vowed to hire more people of color and women. Yet, many investors felt they needed outside help to get a real sense of how to improve diversity efforts at their institutions.

"How do you know what is good enough?" said Christine Tsai, CEO and founding partner of 500 Startups. "We need to benchmark not just numbers, but also practices and policies with our peers."

500 Startups is among a cohort of VC firms that have had a third party examine their diversity efforts. Tsai said that this will allow 500 Startups to be more accountable.

The firm received certification through the Diversity VC Standard, a program that was launched in Europe last year by the nonprofit Diversity VC in partnership with startups Diversio and OneTech. Other VC firms in the US that have received certification include Bessemer Venture Partners and Toyota AI Ventures

Last year, 18 firms in Europe including Atomico and Balderton Capital qualified for level one certification in the program. This indicates that a firm has backed up their diversity commitments with specific programs, not only within the workplace but also regarding investment practices and capital allocation.

Toronto-based Diversio, one of the startups behind the initiative, intends to help companies uncover their biases and recommend solutions by using AI to assess firms on several criteria, including employee feedback, public perception in real time and an assessment of internal and external diversity and inclusion policies. 

The results are then benchmarked against peers using a proprietary dataset of more than 21,000 companies globally. The automated benchmarks are a starting point before recommending a customized action plan designed to improve their performance. 

Tsai said the benchmarking process is only as good as the number of firms that participate in the program and emphasized how important it is for other firms to sign up to gather more data. 

The program has helped her team "take a pulse of the organization," introduce training on unconscious bias, ensure they bring in talent from underrepresented communities and more importantly, get guidance on best practices on how to execute these efforts, she said.  

500 Startups announced its 26th seed accelerator program in February last year, with 70% of companies in the batch having one or more founders identify as a racial minority. 

Racial diversity of investment partners at VC firms has not changed much at all between 2018 and 2020, according to the most recent VC Human Capital Survey, a joint study by Deloitte, Venture Forward and the NVCA to assess the state of diversity across the venture industry. For example, just 3% of investment partners at the 378 VC firms surveyed were Black employees, an unchanged figure from 2018.

The study also found that for 41% of the firms surveyed, one of their limited partners requested diversity, equity and inclusion details in the past 12 months, up from 36% in 2018. And that interest is another reason why Diversio was able to grab the attention of several VC firms. 

"One of the biggest drivers of this effort is the fact that big institutional investors and governments are really applying pressure on firms and saying, look, this is a big part of our mandate," said Laura McGee, founder and CEO of Diversio.

McGee said that some VC firms also requested to join the certification program because they wanted to "clean up their own house" before encouraging portfolio companies to do the same. 

"There is no shortage of statements and commitments, but ultimately what is missing is real, meaningful and structural change," she said. "And so we thought that this is exactly the right time to launch a standard and a certification that would demonstrate that venture capital firms are really walking the talk."

Featured image by RLT_Images/Getty Images

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