This is Kristen O'Brien, Managing Editor at NFX, and this is the founder list. Audible versions of essays from technology's most important leaders selected by the founder community. Frameworks for using diversity to win. As the CEO and co founder of incredible health, Iman Abazette shares her actionable framework for diverse hiring in the tech industry.
Her research has shown that building an inclusive, diverse, and high functioning team is a long term commitment that results in a stronger overall performance, read by NFX. If you ask any VC, or executive the attributes they look for in great founders, the phrase data driven will be one of the first things that you hear. As a CEO, we also expect our executives and team members to make data informed decisions when possible. One of the superpowers of Silicon Valley is its per chance for data.
It is one of the strongest prerequisites for action here. And although I've experienced firsthand some investors and operators in the tech industry who want a more diverse workforce because it's the right thing to do, What we really should be saying is it's the data driven thing to do because the data is crystal clear. Diversity leads to stronger performance.
I learned these diversity concepts before founding incredible health and applied them while building products that make incredible health not only the place where nurses find James, but also where they advance their careers. It is also one of our secrets to successfully hiring excellent tech talent for our team from other top companies. As a tech community to really change the extremely slow diversity trajectory we're currently on, we need to first understand what the data is telling us.
And then we need the frameworks to take action. This essay aims to provide both operators and investors with both. Let's start with the data. McKinsey reports detail that companies in the top quartile for gender diversity on exclusive teams were 21% more likely to outperform on profitability. Companies in the top quartile for ethnic and cultural diversity on executive teams were 33% more likely to have industry leading profitability. There's also a huge penalty for opting out of diversity.
Companies in the bottom quartile for both gender and ethnic cultural diversity were 29% less likely to achieve above average profitability. Harvard Business Review highlights that diverse teams make decisions 2 times faster with half the number of meetings primarily because they are percent better results because they focus more on facts. This study by Kaufman Fellows dismantles the pipeline excuse.
While diverse stem graduate numbers continue to rise, that's not translating to more employment in tech. In addition, Using crunch based data, the report describes white founding teams and white executive teams raising venture capital more often. However, when diverse founding teams do successfully raise, they tend to raise 60% more than white founding James. Particularly in late stage rounds. Diverse founding teams have higher returns when cash is returned to investors.
Historically, diverse founding teams earned a 3.26 times median realized multiples on IPOSs and acquisitions. Compared to a 2.50 times realized multiple for white founding teams, a 30% increase. Ethically diverse startup founding teams provide higher returns to investors. There's countless more academic papers and research on this topic The items above are just a small sample. How do diverse teams deliver better results?
Higher revenue, higher profitability, and higher return shareholders, short answer, better, and faster problem solving. Individuals with different backgrounds and experiences see the same problem in different ways and come up with different solutions, cognitive diversity. That increases the odds that one of those solutions will be a hit.
In a fast changing environment like the technology industry, with high stakes and intense competition to innovate, responsiveness that diverse teams enable ensures company is better positioned to adapt. Enriching your team with individuals of different genders, James, ages, and more is key to boosting your company's intellectual potential and likelihood of achieving your mission.
Biases can be kept in check because there's a higher chance of questioning assumptions that hinder innovation and growth. I experienced this firsthand in product development and marketing at incredible health. Our team is highly diverse in age, gender, race, political views, and experience. Consider that we built our product for US based nurses, 20% of which identify as minorities. Nurses in turn care for the diverse patient population.
Therefore, we built our 1st of its kind continuing education or CE product into incredible health's app. Where nurses across the country can complete fully accredited online CE courses for free to maintain their license. Our team knew we'd have to provide a wide range of courses. It wasn't enough to only provide general courses like heart failure, for example.
But also led us to include courses for specific populations, like nurse's role in the opioid epidemic, caring for HIV James and delivering lgbtq culturally competent care. At this point in the history of technology, we're smartphone penetration in the US and other countries is over 80% and businesses are adopting technology more rapidly than ever before. Nearly every team is building and marketing technology products for a highly diverse population.
It's a competitive advantage to have a diverse team that reflects your user base. They can recognize user problems and needs earlier and avoid blind spots. For example, they can address the trust and safety of specific user cohorts that feel unfairly targeted or use more culturally sensitive marketing language that is suitable for a wider range of communities.
They can more easily empathize with a diverse user base and question assumptions more thoroughly as we build and grow the next generation of products from social networks to business workflow software. Ask yourself this memorable question the NFX partners explained to their portfolio on why diverse teams have stronger performance. Imagine you need to lecture on a topic to a group you don't know. In which scenario would you prepare more and deliver a better lecture?
When you know the group is of all the same opinion as you and will gladly accept your view, or when you know when they have different opinions. In a company, it's exactly the same. More diverse teams lead to more thinking. More preparation and more points of view, which creates far better companies. Most importantly, 2020 has accelerated and made it crystal clear that customers expect Morgan. And this is now table stakes.
There is 0 tolerance for culturally insensitive Juneteenth app filters housing marketplaces that discriminate community networks that enable racism or unfettered violent rhetoric aimed at specific groups. Your customers, especially those under age forty, expect more, and are saying it with their dollars. In a recent diluent survey of Gen Z and millennial respondents, Both groups reported that they won't hesitate to penalize companies who stated and practice values that conflict with their own.
Another competitive advantage of diverse teams winning the war for talent and avoiding diversity debt. Investors ask me how we've hired a team at incredible health of engineers and sales reps with strong track records of accomplishment and 10 plus years of experience each. They also ask how we managed to successfully poach talent from Facebook and other top tech companies even before our series a. Your company's success is driven by the speed and quality of your Flint.
And the competition for tech talent in the bay area and in the US in general is intense. Our huge mission, the founders' network, Rapid growth, top tier clients, and top tier investors certainly helped attract top executives and team members. However, when beating competing job offers and attracting a wider range of applicants, the makeup of our diverse team has been a critical competitive advantage.
It's easy to poach from Facebook when they like much of the tech industry consistently have terrible diversity metrics year over year. It's easy to beat the competing offer from another top startup because their team is homogeneous where ours is diverse. The team they meet through our interview process signals and definitively proves that everyone is welcome at incredible health. The data on the preference of talent under age forty is clear too.
The same Delaware survey referenced above found that the majority of millennials give a great deal or fair amount of importance to gender and ethnicity diversity when considering what companies to work for. James that are slow to diversify, accumulate diversity debt, a concept similar to technical debt by choosing the quick and easy approach of building a homogeneous team at first, it is increasingly more difficult to fix later because most talent prefers not to join homogeneous teams.
So if you're a team leader, how do you hire and retain a diverse team? I'm a big fan of frameworks that can be implemented fast. In order to make rapid progress to building a heterogeneous team. Building an inclusive, diverse, and high functioning team is a long term commitment. But here is a 4 part framework to get started. Part 1, make diversity and inclusion and objective and goal. Startups are chaos, particularly those that are rapidly growing.
It's the CEO and leadership team's responsibility to drive focus and a key tactic to do so is through a narrow set of OKRs or goals. For example, an objective is build a team that reflects our customer base. If it's not an OKR, then it's not a priority. By including diversity as an objective, that drives accountability and focus, and it encourages teams to come up with the creative solutions and resources to achieve the goal.
This objective can also be a part of the performance evaluation of hiring managers. For early stage CEOs, you are the chief of police officer. And the buck stops with you. Part 2, diversify your HR and recruiting team ASAP. It dramatically helps to ensure those that are doing the hiring, whether it's the founders in the early days, the hiring managers, and eventually the HR and recruiting teams are diverse. They have access to more diverse network.
They have the knowledge of different sources of talent and can have more nuanced perspectives when evaluating talent. For example, they're connected to black software engineers with computer science degrees from Georgia Tech. Have access to black engineer meetups and communities in the Bay Area or have an established track record of hiring diverse talent.
However, even if the makeup of your HR team is not diverse, then at a minimum, grill them on their diverse network and diverse sourcing during the interview process. This team controls who gets through the front door and carefully designs the interview process to reduce bias and increase hiring on merit. So don't underestimate their critical role in hiring a diverse team.
Even beyond hiring, a diverse HR team can be more empathetic or understanding of diverse employee issues that arise even after team members are hired. Part 3, start hiring for diversity as early as possible and avoid diversity debt. Diversity debt, like technical debt, occurs when you build a homogeneous team first because that's easier and faster. And then it becomes increasingly more challenging to diversify later.
Studies show that diverse candidates and talent of all backgrounds who are gen z and millennials are less likely to join or consider your company because the existing team is homogeneous. Therefore, the best time to build a diverse team is from the very beginning. Because it becomes increasingly more challenging as you grow.
As described earlier, it is a competitive advantage to have a diverse team, especially a diverse executive team because it begets a consistently heterogeneous team and wider applicant pool for the rest of your company's history. So start as soon as possible. Part 4. Make sure your entire team believes they belong. Creating a work environment where diverse teams can thrive is critical to attracting and retaining a diverse workforce.
For example, construct and run meetings in a way where everyone is heard. Pete clear agendas, circulate written documentation and ideas beforehand. Reward individuals obligation to dissent so teams arrive at the best ideas for customers and company goals instead of the best ideas for egos in seniority. Generous family leave for parents with newborns, legal support for immigrant work visas, and flexible work schedules enable a wider range of team members to excel at work too.
Some of these policies and norms are not financially feasible when it's just 2 or 3 founders working away in an apartment in the early days. However, once there's revenue or funding, these norms should be re examined, implemented, or modified to enable a diverse team to succeed. The elephant in the room, fundraising, and diversity. At this point in history, the abysmal statistics for funding women and people of color are well known.
For example, less than 1% of venture capital goes to black founders Pete the ample evidence that diverse teams drive business results. So if you are an investor or an operator of any background navigating the structural bias in the technology industry, How do you think about the topic and make a positive impact to reduce bias? I'm not a professional investor. I've only done a few angel investments personally and as a Sequoia out.
However, I've raised over 17,000,000 in capital from the top tier investors in Silicon Valley for incredible health. Across our seed and series a rounds in the last couple years. So I'll offer some nuanced perspectives. If you are a female or POC founder, Then start with my detailed guide for how founders can successfully raise from top tier investors. The one additional tip I would add for any founder in these specific cohorts is psychological.
You know the statistics show structural bias exists. Take a moment to acknowledge it. Accept it, and then rapidly move on because dwelling on it will only cost you time and energy that's already in short supply. Assertiveness, confidence, and ambition are critical to a successful fundraising process. Your counterparts and competition in other cohorts are not wasting single ounce of mind share on bias. And neither should you.
Also, your target investor list should have clear criteria to help you succeed in the long term. One additional criterion can be focusing on investors that have already funded diverse James, highlighted in NFX's signal product. For the tech investing communities at large, it's helpful to highlight some specific examples of investors who have made rapid progress in diversity as evidenced by the companies in their portfolios and their track records of returns.
Seeing real world examples and KPIs is a key way I've understood what possible and what the bar is as an operator. So a similar technique can be used to see what's possible in investing in diverse teams. Please note this is a non exhaustive list and stems from my experience getting to know these investors. Some of whom are incredible health Morgan investors I got to know well while building our company. Jeff Jordan andresen Horowitz, Let's start with the Titan of the Venture Capital Industry.
Since taking OpenTable public as CEO, Jeff is frequently on Forbes Midas Flint. And has driven massive returns for a 16 Z. Jeff is a board member at acolyte Airbnb Incredible Beller, Instacart, lime, look out, offer up, Pinterest, and wonder school. Notably, he led a 1 6 Z's investments in our company, incredible health. Wonder School, Chris Bennett, and Cadry, Ryan Williams, all of which have black CEOs and has historically invested in Black founders LGBTQ, women, and more.
Jeff met me through NFX in 2017 and led our series a in 2019. I asked him recently, what's his secret to investing without bias? And what enables him to successfully do it, whereas his industry peers lagged behind? His answer, when I'm making a new investment, I'm looking for the elusive founder or product fit. The idea that this founder is the only one on earth that can solve this specific problem. Problems are as diverse as Pete.
So it would be a pretty limited viewpoint to think that only one type of person are back ground can solve all the world's problems. I have learned that I never know anything about a person until I spend enough time to really know them. Once I invest the time, skin color, preference, and all the rest become invisible. In investing, I think this is my key competitive advantage. True knowledge of people.
I'm also looking for entrepreneurs who can overcome obstacles to will their idea into existence. Many diverse founders have already, at least partially, proven their ability to do so by getting all the way into the VC pitch room. Bill Beller, Benchmark. Bill is another Titan veteran of venture capital, consistently on the Forbes Midas Flint, and drives huge returns for his LPs.
Zillow, Uber, Stitch Fix, Next Door, Marco Polo, Insta Work, and Good Eggs are some of his companies he's led investments in. Notably, stitch fix, Katrina Lake, next door, Sarah Fryer, Solve, Heather Fernandez, Marco Polo, Blata Boartnik, and company in stealth. Meredith Harris have female CEOs. I asked Bill how he's been able to invest female or a diverse set of founders where his industry peers have lagged behind.
His answer, while I am thrilled to have the opportunity to work with such diverse set of founders and CEOs. I didn't arrive at this outcome as a result of a direct objective. So in retrospect, I would suggest that absence of bias is likely key. Gender and race are not part of how I evaluate founders or companies. So I end up with diversity in my portfolio. James Currier, NFX.
James has built 4 companies, had multiple exits, and he's one of Silicon Valley's leading experts in growth, network effects, and marketplaces. NFX also has a diverse portfolio that includes incredible Beller. The role of a seed investor like James in breaking the bias that pervades this industry cannot be underestimated. The NFX partners were our earliest investors.
James mentored and coached me in skills like fundraising and network effects, and most importantly shared his extensive network of trust that he built over 20 years. His role in my professional development was critical to our success to Pete.
Experience seed investors and former CEOs like the NFX partners who take the time to mentor and teach diverse founders are crucial not only to impart knowledge and skills, but also because they are important and trusted feeders to larger funds in the venture ecosystem. James's take on investing in diverse founders. First, I have a clear focus and checklist for what I look for in founders that can be found all across demographics and are important in early stage entrepreneurs.
They include things like character, speed, thinking, and data driven way, and having something to prove. 2nd, I acknowledge that I do have biases So I've built counter biases in favor of diverse founders into my thinking, our processes, and our software. For example, If it's a black founder, that triggers our counter bias methodology to make sure that we haven't missed something. My partners and everyone at NSX participates in this way of thinking. Jesley, Sequoia Capital.
Jesley has been partnered at Sequoia for the last 3 years. And has been a tech operator for over a decade. She's also backed female founders at Sequoia, such as Catherine rider at Maven and Morgan Yayawi at Moss. Just found me through female founder office hours Morgan by a nonprofit she co founded. All rise. All rise has a huge mission. What many miss is that it has done wonders for diversifying the deal flow of the investors involved and Beller them find phenomenal companies.
Just a secret to consistently investing in female or diverse founders is that she was a female founder herself, an experienced investor bias firsthand. She built a startup targeted at women, fashion app, Polyvore, pitched to many rooms of all male VCs and had to resort to theatres to convince people that women's fashion was a worthy category. That gave her a positive bias for underdogs and fighters. In her own words, Startups are an irrational endeavor because the odds are so against you.
The kind of person who keeps fighting Pete the system being somewhat rigged is exactly who I want to back. James Joaquin, obvious ventures. James has been a CEO and founder of 7 companies helping lead them to IPO zoom or successful acquisitions by Apple, Kodak, and AOL. As a cofounder of Obvious, He invested in Miyoco's creamery, Miyoco Shinner, and Beyond Pete, one of the most successful IPOs in 2019. James met me through NSX in 2017 and led incredible health's seed round and joined our board.
His team has explicitly called out their continued desire to hire diverse investors and fund diverse founders. World Positive Leading Companies are diverse companies. James pioneered the world positive term sheet and required we sent him our mission and values before wiring our seed capital. I asked, what's his secret to investing in diverse founders? His response, investing without bias is a human impossibility. Since we all carry unconscious biases around with us.
So that's even more reason to build a methodology to counter it. First, remember the data. Diverse teams deliver better business outcomes. 2nd, celebrate the founder's distance traveled. A founder who has faced more adversity in life is better prepared to tackle challenges of a startup versus a founder of privilege. 3rd, founder market fits matters. Have they worn the shoes of their customers? Leadership teams should match the diverse setup of consumers they serve.
Charles Hudson, precursor Ventures. Charles is one of the OG diverse investors, investing in diverse founders long before it was acquired. His portfolio closely resembles the ratio of diversity in the US population. His notable early stage companies with female or diverse founders include Phoenix, Ritchie Serna, Garrett Fertility, Tammy Sun, Noyo, Shannon Morgan, Runa, Courtney McCulgan, Buzzi, Zubin Pete, squad, Issa Watson, and incredible health, Iman Abazid.
The fact that my investing team is black and we have an established track record of founding female, black, white, and or Latino's founders attracts even more diverse founders to us every week. How do you make rapid diversity progress when investing? If you're an investor reading about the investors above, And you have a largely homogeneous portfolio or struggling with low returns, what are you waiting for?
If you have a couple wins under your belt and are looking for the next set, What are you waiting for? The prominent examples above show the mindset and execution to fund diverse founders is not only doable, but it's part of the data driven approach to higher returns. Here's a 3 part framework to put the data into action. Part 1. Make diversity a priority, an OKR, and measure it. The next 20 years in tech are unlikely to look like the last 20 years.
Your returns depend on finding diverse founders, founders with highly unique perspectives and insights. In the same way you rapidly ramp your understanding and network in cryptocurrencies, fintech, SAS, and other hot opportunity areas. You can rapidly ramp on diversity too. For example, track and modify the diversity of the founders in your deal flow, your team, and your referral resources to result in a growing number of female black or Latino CEOs in your portfolio.
Part 2, Build a bigger tent to fix your sourcing and help your CEOs. One tactic that every investor cited above has is an expansive national network that is diverse specifically scouts and refers, executives, and subject matter Pete. A huge tent. This help CEOs in their portfolio hire diverse team members, but also heavily expands and diversifies their deal flow.
For example, I met Mike Smith, president and COO of Stitch Fix through Jeff Jordan, and Mike sequentially referred excellent talent to me. Expand your network. So at a minimum, you're connected to the major hubs and connectors who already have an established network of diverse founders. BLC KBC is one place to start. Another is investors that have already founded diverse James, highlighted in NFX signal product.
From 2020 onwards, you're expected to support your portfolio companies with diversity. So it's best to rapidly make progress inside your VC firm too. Hiring diverse investors is a key shortcut to building a bigger tent too. Part 3, remove or counter the bias in your diligence process. I've gone through the full diligence process of the best of the best series a funds in Silicon Valley. It felt unbiased, highly process oriented, and rigorous.
It included evaluating our vision, market, product, team, founder Morgan fit, speaking to customers, business metrics, backdoor references, and more. Keuristics like 2 white guys from Sanford are sloppy and haphazard. And have the potential to continue hindering future returns if companies are evaluated in this unsystematic way. We are coming to terms with what we have or have not done right in tech in relation to diversity. Regardless of how we all got here, Today is our new starting line.
We all want to win. Data is one way Silicon Valley has won this far. And it's the only way we can keep winning. The data is clear. Diverse teams win. Let's lead into this future with data and make diversity more than just a statement reproclaim. Let's make it an action we take.
For more audio essays from the people who've built companies like Instacart, Facebook, Trello, HubSpot, and Dropbox, visit the founder list at nfx.com, or subscribe to the nfx podcast at podcast.nfx.com, or wherever you get your podcasts.