In Brief
The Problem
Researchers have struggled to establish a causal relationship between diversity and financial performance—particularly in large companies, where decision rights and incentives can be murky.
The Research
The authors zeroed in on the venture capital industry, which presents fewer barriers to understanding: Every investor is a decision maker, and choices have clear business consequences. Incentives are aligned and readily discernible.
The Findings
The evidence is clear: Diversity significantly improves VCs’ financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. The authors provide recommendations for reaping its business benefits.
When managers and scholars talk about diversity’s impact on organizations and teams, they’re usually referring to the effects on collective accuracy and objectivity, analytical thinking, and innovativeness. On “harder” measures of financial performance, researchers have struggled to establish a causal relationship with diversity—particularly when studying large companies, where decision rights and incentives can be murky, and the effects of any given choice on, say, profits or market share can be nearly impossible to pin down.