Diversity in Startups: The Impact of Diversity in the Founding Team on the Success and Failure of Venture-Capital-Backed Companies

Abstract

Venture capital has become a dominant form of financing of European companies and thus presents a catalysator for innovation and economic growth: some of Europe’s most valuable companies, such as Auto1, Klarna or Spotify, are venture-capital-backed. However, also many failed ventures are. In fact, most venture capital investments do not achieve a positive return on investment. This suggests that the decision-making process in venture capital firms is far from trivial. Especially in the early stages of a venture, data that could potentially increase the confidence in the decision-making is scarce. Consequently, investment decisions are often ill-informed and based on gut feelings. One data point, however, is present at all times: the founding team. Researchers and practitioners agree that the composition of the founding team is a valuable predictor for future success. Problematically, relevant research that is directly linked to the success and failure of venture-capital-backed companies and not to the performance of teams in general is scarce. Acknowledging this gap, in this thesis, we construct a new dataset that comprises 495 founders in 178 companies, both successful and failed. For each company, we calculate team diversity indices and subsequently compare successful and failed teams in this regard. Two statistical models confirm that increased age diversity has a positive impact on the success of a venture-capital-backed company, whereas increased gender diversity has a negative impact. Further, we found that other related variables, such as functional diversity and education diversity, do not influence success or failure. These insights show further that one, diversity is a highly complex concept that is neither good nor bad across all factors and two, diversity measures that researchers found to be influential on team performance in general do not apply in the context of venture-capital-backed companies.