DIVERSE & INCLUSIVE FUTURE

Diversity and inclusion have received their fair share of attention in the ecosystem over the past few years, and for good reason. Last year, our joint research piece with Atomico, State of European Tech, showed that 78% of founders and 84% of VCs agree that “the focus on creating a more diverse and inclusive European tech ecosystem is important”.

At the same time, founders and employees of European tech startups took a pretty grim view of the current state of things. Only 17% of women and 29% of men thought that the “ecosystem provides equal opportunity for people of all demographics, backgrounds, and experiences”. Across genders, 34% of those who lived comfortably prior to founding their company agreed, contrasted with 19% of those who started from a lower socioeconomic footing.

These sentiments are not just conjecture; all-male teams received 92% of the continent’s total venture funding in 2019, with regressive development over the past five years. Shockingly, all-female teams raised just three of the 745 reported rounds of over $10M in Europe in 2019. This is not reflective of the wider founder pool. 21% of founders that responded to the State of European Tech survey in 2019 self-identified as women.

The homogeneity of the European ecosystem is evident along a plethora of other axes as well.

According to the 2019 State of European Tech survey, more than 7 in 8 people working for European startups self-identify as Caucasian or White.

Out of founder respondents to the same survey, 82% had received a university degree, and just 8% had never enrolled at university. This is not representative of the European population. According to Eurostat, the share of the EU-28 population aged 25–54 that has attained a tertiary degree or higher is 35%.

Within the founding teams that feature a university graduate, the demographic is further skewed towards select fields of study. 93% of these teams include a founder who received a technical or business degree, whereas only 36% feature a founder who studied some other major. According to Eurostat, this compares to just 43% of European tertiary education graduates in 2017 that were from technical, business or legal programs.

In other words, while most of us are on the same page about the need for increased diversity, European founders still represent a very specific subset of the continent’s population, and opportunities are unequal within that subset.

“There is a massive lack of diversity, particularly in founding teams, in terms of educational background, gender and age.”

–Operator

At the same time, Western and Northern Europe face a persistent talent problem, as indicated by the high percentage of Slush startups listing talent among their biggest challenges.

This gap won’t be filled just by increasing the cross-border mobility of skilled people. European startups urgently need more talent in absolute terms. For that, we need an inclusive ecosystem, which embodies ideals that attract an increasing number of different kinds of people.

Notably, many of our interviewees alluded to the fact that the discussion around diversity tends to one-dimensionally focus on gender.

“Diversity is defined as something like 16 factors, but when talking about it, we tend to use origin, race or sex as proxies, because they’re easier to grasp.”

–Investor

This derives, at least in part, from the fact that gender is the most researched axis of diversity, and that data remains insufficient on most others. We set out on writing this whitepaper in order to provide some nuance and granularity around the topic, but for these very reasons, fell short of our targets. Much of the text will revolve around gender and, due to limitations in our methodology, we’re forced to discuss it mostly in binary terms.

However, we want to do better. To that end, we are launching a survey together with Inklusiiv on diversity and inclusion in European tech. Look out for that in the upcoming weeks.

Diverse teams perform better. When asked about that statement, almost 90% of respondents to the State of European Tech survey in 2018 agreed. In fact, the question received the highest level of unanimity in that year’s survey. This is backed up by quantitative evidence from BCG and MassChallenge, who found that companies with a woman on the founding team delivered twice as much revenue per dollar invested than those run solely by men.

“I don’t think anyone in this world should have doubts about the benefits of gender, racial and religious diversity. I believe it makes any company better in terms of efficiency, operations, and ultimately, in terms of revenue.”

–Operator

The same seems to be true for startups that come to Slush. In our 2019 cohort, startups of comparable age whose application was submitted by a woman (usually one of the founders) had received less funding on average, but done more with the money, generating more revenue per euro of funding and per employee.

“If the whole employee base is too homogeneous, it will drive the company in a certain direction and some viewpoints will go underexplored.”

– Founder

However, just as importantly, a lack of diversity limits the problem set that the ecosystem solves for. Founders address problems that concern them directly, and talent gravitates towards companies whose products excite them.

An indicative example of this phenomenon is medicine, which, as The Guardian pointed out, has a long history of discriminating against female health. On ResearchGate, a research database, there are five times as many papers about erectile dysfunction—a condition affecting 19% of men—than on premenstrual syndrome, which affects 90% of women.

”Entrepreneurs don’t see problems that don’t concern them directly. For example, there is very little work around the problems of elderly people.”

– Founder 

Interestingly, in our 2019 cohort, while gender diversity was poor across the board, startups whose application was submitted by a woman were far more likely to work in verticals such as social entrepreneurship, biotech, education, health and foodtech.

When homogeneous teams do solve problems for all of humanity, they risk creating products that only work for some, or are outright discriminatory. For example, Deloitte points out that the automotive industry remains very male-dominated to date. As TechCrunch writes, it’s difficult not to imagine a causality between that and the fact that, for long, crash test dummies were modeled after the average male height, weight and stature.

The risk of creating biased solutions increases further in an age where startups are selling to a global market from the get go. Data on our 2019 cohort shows the stunning extent to which this is the case. 34% of European startups were targeting a market outside of the continent already in their founding year. For four-year-old startups, that percentage jumped to 57%. Having a diverse set of perspectives is of particular importance when creating products for a nuanced pool of customers.

“If you’re doing a global platform, it can’t be run by Californian hoodiemen. You have to have a global team that understands all cultures and worldwide nuances.”

–Investor

The 2020s present a huge opportunity for young ventures to tap into underexplored verticals and customer segments. Previous patterns of success will break down, and investors will have to look beyond current, saturated spaces for asymmetric success.

By the end of the 2020s, people won’t only consider diversity the right thing to do, but the only way to be successful.

“Stereotypical white-male, 25, Oxbridge type founding teams produce very few massive successes, so clearly diversity is of functional value. You see a very limited problem set if you’re fresh out of Oxbridge.”

–Founder

When examining actions that can be taken to increase diversity, it’s worth noting that systemic challenges arise before talent enters the workforce.

Microsoft surveyed 11,500 young women across 12 European countries, finding that girls aged 11–12 are just as interested in STEM (science, technology, engineering and mathematics) as boys, but that interest drops significantly once they turn 15–16. At that age, just 5% of girls report that they expect to have a career in computing or engineering, compared to 18% of boys, according to the OECD. This is not driven by performance—in the PISA assessment, which is taken at that age, girls and boys perform comparably in natural sciences.

The results of this are evident in higher education. In the OECD countries, fewer than 1 in 3 engineering graduates are women. In computer science, the number is even lower, below 1 in 5.

However, the startup ecosystem’s diversity metrics are grim even compared to those of surrounding society. At Slush 2019, less than 20% of all C-level startup attendees were female, with even lower numbers in technical positions.

What’s more, lacking diversity is not a one-way street. Microsoft found that the declining interest of young women is driven by their awareness that women aren’t treated equally in the STEM workplace. In a separate study, Microsoft noted that the number of girls interested in STEM almost doubles when they have a role model to look up to.

It is imperative for startups to provide those role models. Our analysis shows that just 7 of the 166 founders of European tech unicorns conceived since 2008 are women; a deplorable figure in an ecosystem whose narratives of success often fail to accommodate for anyone but the people at the top. What’s more, even when women are part of founding teams, they are less likely than men to serve as CEO, as evidenced by data on founders at Slush 2019.

“There is a massive lack of role models, which means that young women just don’t consider founding a company an option.”

–Founder

The likelihood to found a company is also skewed towards select academic institutions. 13% of European pre-seed companies have a founder that studied at one of just 15 universities*; a striking number considering that the EU estimates there to be 4000 higher education establishments on the continent.

Since admission to some of these institutions is notoriously distorted, the ecosystem inherits a homogeneous founder pool. For example, as the Guardian writes, privately educated children make up just 7% of the student body in the UK, yet win over 30% of the undergraduate places at Oxford and Cambridge.

However, once again, instead of flattening out those differences as ventures mature, the ecosystem heightens existing inequalities. Beyond Series B, 30% of companies have a top 15 university alumna on their founding team.

“How are you going to get these kids from council estates to raise seed funding? I just can’t see it happening any time soon. There’s this huge gulf between where those people are and where we in the ecosystem are.”

–Founder

On a similar note, it’s extremely hard to be innovative if you have to worry about livelihood.

The Quarterly Journal of Economics analyzed 1.2 million inventors in the US. They found that children from families in the highest income percentile are 10 times more likely to hold a patent than those from low or middle-income families, and that the gap persists among people with similar results in early childhood math tests. That study also pointed to the importance of role models, finding that those exposed to innovation as children were more likely to become inventors themselves.

“To address diversity, we need to start earlier, already in education. By the time that people would be ready to join a company like ours, it’s often too late.”

–Founder

Over here in Europe, out of founder respondents to the State of European Tech survey in 2019, 80% were financially well off immediately prior to founding their company. This compares to 39% of the EU-28 population, according to Eurostat. Furthermore, the share of founders who had raised external capital was higher among those that started out with better socioeconomic standing.

Entrepreneurship, and startups in particular, are often considered vehicles of social mobility. Unless our societies provide better support networks for risk-taking regardless of background, much of that opportunity is lost.

“In Scandinavia, you don’t end up in debt after graduation. That’s a huge advantage. People have enough energy to make the world a better place. My friends in the United States and Korea have to solve the world’s problems, plus they have to pay back a loan.”

–Founder

Clearly then, part of the ecosystem’s lack of diversity stems from elsewhere in society. While participating in the discussion, startups need to stop doing worse than the world around them, and instead start to provide the role models that young people look to them for.

In 2012, Ellen Pao, then a partner at the venture capital firm Kleiner Perkins (KPCB), filed a sexual discrimination lawsuit against her employer, as recounted by Wired. Five months later, she was fired from the firm. The case became highly public after Pao rejected several multi-million dollar out-of-court settlement offers and the case proceeded to trial, unlike many of its kind. Ultimately, the jury ruled in favor of KPCB on all four accounts.

However, the movement that Pao had started did not end there. In what has been titled ‘the Pao effect’, a number of women have since filed claims of discriminatory practices against today’s tech giants, as depicted in Fortune. Many more have spoken up.

In 2017, Susan Fowler, a former Uber engineer, accused the ride-hailing company of fostering a culture of pervasive sexism and harassment. Fowler’s blog post set in motion a remarkable series of events, as detailed by Vox. Eventually, the company’s illustrious founder-CEO Travis Kalanick was forced to resign.

“Do you feel that you have been personally affected by discrimination?”
“Oh yeah. I have so many stories. How much time do you have?”

– Founder

Importantly, harassment cases are only the most extreme manifestations of a much more pervasive culture, in which noninclusive practices are celebrated and discriminatory ones condoned.

Even Travis Kalanick didn’t intentionally set up his company to tolerate harassment. However, he did encode the behavioral models that led to it in the company’s DNA. Uber’s original, now infamous list of 14 corporate values included attributes such as always be hustlin’, toe-stepping and superpumped. When replacing these with a revised set of eight cultural norms, the company’s new CEO Dara Khosrowshahi wrote: “‘toe-stepping’ was meant to encourage employees to share their ideas regardless of their seniority […] but too often it was used as an excuse for being an asshole.”

As a result of this failure to make people from all walks of life feel welcome and safe, tech companies are losing out. In a 2014 study, the Centre for Talent Innovation found that female employees in the US leave tech at a 45% higher rate than men.

“I’ve seen a lot of startups that ended up creating quite a toxic culture. They hired a lot of the wrong people, or had the wrong type of management in place.” 

– Founder

While international headlines have been dominated by the struggle with inclusion happening across the pond, there is no cause for complacency in Europe.

Only 38% of women and 51% of men responding to the State of European Tech survey in 2018 considered the European tech industry to be inclusive. Against such a bleak backdrop, it shouldn’t be surprising that 49% of female founder respondents to the 2019 survey, and 40% of all founders that belong to a minority ethnic group, reported having experienced discrimination while working in the industry in the past 12 months.

The survey also revealed that discrimination in European tech takes many forms. This underlines how a conversation focused solely on gender fails to account for many of the negative experiences that plague the ecosystem.

What’s more, the industry’s aggregate figures fail to capture the experiences of underrepresented groups. Non-white founders face a distinct set of obstacles, where ethnicity, rather than gender, is the most common type of discrimination encountered.

As a result of all this, too many people that don’t fit tech’s narrow norm still feel like their identity or background is a barrier to success in the European ecosystem.

It’s also important not to discuss people’s backgrounds as if they were mutually exclusive. Human heterogeneity is intersectional; a lot of people represent more than one underrepresented group. Data on selected intersectional demographics from State of European Tech 2019 shows that in those cases, barriers compound.

Unfortunately, only those who are on the receiving end of discriminatory practices seem to be interested in learning about the topic. Out of people submitting startup applications to Slush 2019, women were far more likely to list program topics revolving around diversity, culture and teams as being of interest.

This is distressing, because without training, people are notoriously bad at noticing their own biases. In an experiment from 2005, Yale University researchers asked undergraduate students to evaluate hypothetical job applicants for the role of police chief. They found that the students who constructed the most pro-male criteria also showed the highest level of conviction in the objectivity of their hiring decision.

Over the course of the next decade, each of us will have to work hard to do better. Instead of bolstering existing power structures, startups should lead the way in building workplaces that are welcoming and safe for all kinds of people.

“Culturally, diversity in all its forms is the biggest problem in the ecosystem. The right culture from the start makes achieving diversity quite easy.”

– Founder

Venture capitalists are a notoriously homogeneous bunch. As data from funds at Slush last year shows, gender diversity is lacking across the board, and gets worse with seniority.

VCs exist to unlock the potential in unproven young ventures. There are very few alternative types of capital that are willing to incur the risk involved in this. Thus, VCs have huge power to select which ideas get tested out in the market. If a homogeneous bunch of investors, susceptible to only funding solutions that they feel excited about, calls the shots, that set of ideas will remain limited.

“VCs shouldn’t think that they know all patterns of success. If you look for things that look like what you’re used to seeing in the past, you’re going to miss out on a lot of other opportunities. A lot of people risk losing out on great deals because they’re not even looking.”

– Investor

Our data suggests that this isn’t just conjecture. Funds focusing on industries inherently connected to the issues of a diverse group of people are more diverse themselves. More than a quarter of the investors attending Slush 2019 from funds focusing on health, biotech, fintech, medtech and cleantech were women, compared to less than a seventh from ones focused on gaming.

VCs exist to unlock the potential in unproven young ventures. There are very few alternative types of capital that are willing to incur the risk involved in this. Thus, VCs have huge power to select which ideas get tested out in the market. If a homogeneous bunch of investors, susceptible to only funding solutions that they feel excited about, calls the shots, that set of ideas will remain limited.

“VCs shouldn’t think that they know all patterns of success. If you look for things that look like what you’re used to seeing in the past, you’re going to miss out on a lot of other opportunities. A lot of people risk losing out on great deals because they’re not even looking.”

– Investor

Our data suggests that this isn’t just conjecture. Funds focusing on industries inherently connected to the issues of a diverse group of people are more diverse themselves. More than a quarter of the investors attending Slush 2019 from funds focusing on health, biotech, fintech, medtech and cleantech were women, compared to less than a seventh from ones focused on gaming.

“VCs need to transform. There are patterns that have been in place for too long. In most cases, funds are still run by white males. This means that the observation of new opportunities just isn’t there.”

– Operator

However, VCs are also making discriminatory calls independently of vertical. In 15 out of the 20 most common industries at Slush 2019, the startups whose application was submitted by a man had accrued more funding than those where the applicant was female.

A look at European rounds going to founders from the continent’s top 15 universities reveals some further skewed preferences. Firstly, the share of companies funded is systematically higher amongst the alumni of those schools, and the relative discrepancy increases by stage. Secondly, across the stages, founders from top schools are being written bigger checks than their peers.

As a result of this, founders from just 15 universities have raised 41% of Europe’s total venture funding in 2019 and 2020 to date.

“People like to invest in what they know. If you went to Stanford, and the VC who is thinking about investing in you went to Stanford, you’re a safer bet, even if someone in a village in Africa would have a better idea.”

– Founder

Previous research offers some clues as to how investor biases manifest themselves in everyday interactions. Kanze et al. analyzed interactions between 140 venture capitalists and 189 startups at TechCrunch Disrupt. They found that 67% of the questions posed to male entrepreneurs were promotion-oriented, while 66% of those posed to female entrepreneurs were prevention-oriented.

Similarly, a group of Swedish researchers analyzed local VCs reviewing investment proposals and found that the investors talked much more positively about similar characteristics in male founders than in women. This converted to the female founders receiving over 50% less of the funding they asked for, displaying how any preconceived notion of success will dictate what that success ends up looking like.

“I think that the second we get GPs that are women, or more specifically not just white, high-educated, guys, from a rather privileged background, it’s (diversity in tech) going to be changing quickly because we all view the world differently.”

– Investor

Our data suggests that such tendencies are much less prevalent among female investors. Out of the funds that brought at least one female investor to Slush 2019, 24.9% reported a commitment to addressing gender inequality through their investments, compared to 12.7% of those who didn’t.

“The only way to solve the women founder problem is to have more female VCs, which I think is happening, but it’s a slow change.”

– Founder

Similarly, female investors at Slush 2019 were 30% more likely to meet a female founder than their male counterparts.

What’s more, the effects of a narrow scope aren’t limited to funding decisions. Sahil Raina found that startup success post-investment can be dependent on the presence of female investors. In the cohort he studied, when the lead VC of a funding round had no female GPs (General Partners), female-led startups were up to 70% less likely to successfully exit. When a lead female VC was present, that gap disappeared.

Clearly then, the startup ecosystem can only ever be as diverse as those who fund it. Thus, going into the 2020s, VCs will have to rapidly start looking like surrounding society. After all, that’s who’s buying products from the ventures that they are betting their success on.

“I don’t think there is anything fundamentally wrong with the VC model per se, but there is a real diversity issue, if you look at what kind of companies get funded and the kind of founders.”

– Founder

COVID-19 might well revolutionize the way we work. As a result of the pandemic, most of us have had to learn to work remotely. Our COVID-19 Startup Survey, distributed during the latter half of April, showed that 97% of startups that were working from a common office to start with had switched over to remote work due to the pandemic.

Distributed teams could play a part in addressing diversity. For one, once a person’s home address isn’t bound by where their office is, employees have the flexibility to live in more affordable areas, closer to their parents, or a particular school for their kids. As data from State of European Tech shows, exploding rent prices in European hubs are quickly making urban living a luxury reserved for the few.

As of now, data from Slush 2019 shows that European startups are still heavily skewed towards big cities. 55% of young companies are headquartered in a capital city.

“Startups that start to take advantage of remote work—that can access the talent pool outside of small countries, like in the Nordics for example—they’re going to see so much success. Being able to source that kind of talent, you’re going to get people who want to work at the company because of love for the product, not coincidence.”

– Investor

Interestingly, while startups headquartered outside of capital cities are struggling more with fundraising, customer acquisition and finding partners than their counterparts, they seem to have an easier time attracting talent. This could be an early indication that talent is turning away from big hubs.

However, the biggest opportunities that distributed teams pose are international. In the past few years, we’ve seen an emergence of companies working remotely from the get go, employing people from across borders and timezones. This is a revolutionary shift in the way companies are built, allowing people from all over the world to collaborate and build truly global startups. Europe even got its first remote unicorn in 2018; GitLab, as told by TechCrunch.

“Our team is distributed because we are solving something very hard. There are few people in the world who know how to do this, and there is no chance that you’d find them in one place in the world.”

– Operator

In part, this shift is driven by employee preferences. People actually value working from home, or at least the option to do so, and may be more efficient when they do. A 2017 Stanford study found that, on average, workers were willing to give up 8% of wages for the option to work from home. According to a Harvard Business Review working paper, productivity actually rose 4.4% when patent examiners in the US worked from home.

However, data from our COVID-19 Startup Survey suggests that the equation is a little more complex when entire teams are forced to switch to remote, suddenly and involuntarily. During the latter half of April, more startups had seen their team’s well-being and productivity drop from switching to remote work. Perhaps this style of working is only suited for some employees, or there is a period of friction before practices catch up with the new reality and benefits materialize.