There is growing awareness about the importance of attracting diverse talent, but still little meaningful action. As investors, it is imperative we look to those with lived experiences, who can provide fresh insight into the challenges of underserved communities and into invaluable opportunities to drive incredible impact.

Last year, a record-setting $329.5 billion was invested in U.S. startups. The unprecedented growth included a flood of funding for Black startups, with such investments quadrupling in just the first half of 2021 alone. But a deeper look reveals this historic increase still accounted for just 1.2% of the investments made during that time. 

Since 2020’s racial justice demonstrations and the pandemic’s disproportionate impact on communities of color, venture capital has made many high-profile commitments to diversity, equity, and inclusion. 

Yet these efforts, on the whole, have been woefully insufficient, with the opportunity gap between white founders and founders from underrepresented backgrounds still more resembling a chasm. In an industry renowned for being results-driven, this stagnancy should give us all pause. 

Perhaps, investors are approaching racial equity from the wrong angle. Investing in diversity is about far more than checking boxes for an equity and inclusion scorecard, meeting arbitrary quotas, or performing some other display of statistical diversity theater.

 In practice, it requires making prudent and informed decisions to support highly-driven and effective founders from diverse backgrounds. And that takes setting a standard for selection that’s proven time and time again to drive incredible returns and impact: lived experience. 

Product-market fit

With VC-backed start-ups remaining overwhelmingly white and male, the majority of entrepreneurs receiving investments are not necessarily the best suited for tackling the challenges of our increasingly diverse and dynamic workforce and economy. But simply investing more often in founders of color is not enough. 

We must go deeper in our search for promising entrepreneurs to more fully account not only for their race, ethnicity, or gender but the experiences they have lived through – and how those experiences are informing their business and its potential outcomes. 

Because of their lived experiences, these entrepreneurs are creating businesses with an immensely strong product-market fit, generating a greater return on investment and, ultimately, driving even more funding toward diverse entrepreneurs. 

Consider the case of Promise, which provides payment processing for utilities and government agencies. 

CEO and founder Phaedra Ellis-Lamkins was inspired to create the platform from her background as a union organizer and anti-poverty advocate in underserved communities throughout the Bay Area. She watched friends being hounded by bounty hunters and bill collectors. They would call her in a panic, worried about loved ones who couldn’t afford to pay bail, and the jail time and lost wages they would face as a result. 

From that immersed vantage point, she recognized the importance of providing people experiencing poverty with a stable and flexible way to pay their bills with dignity. Promise has helped countless clients avoid utility shutoffs, license revocations, and incarceration, recovering millions of dollars for utility companies and government agencies in the process. 

A similar story is behind Mentor Spaces, a virtual mentorship platform for underrepresented students and professionals. 

The platform’s founder Chris Motley grew up on the South Side of Chicago as a child of a single mother. While he has relied on several mentors throughout his life, Chris vividly recalls a Goldman Sachs trader he met only by chance but to profound effect in high school. The relationship informed his selection of a college major and enabled him to grow his network until he ultimately secured a Goldman internship. 

Chris’s intimate understanding of how rare such life-altering mentorship opportunities are for kids in his community led him to create Mentor Space, which has so far facilitated 2,000 conversations between 900 mentors and 6,000 mentees. 

Scalable opportunities 

Finding these kinds of entrepreneurs begins with creating the space for founders to feel comfortable sharing their experiences. People with backgrounds outside the historic tech mainstream have long experienced bias and negative outcomes in traditional VC pattern matching. This means there is great hesitancy when it comes to many entrepreneurs detailing their lived experiences. 

Investors must explicitly and intentionally communicate they value diverse lived experiences. They also have a responsibility to acknowledge that not all venture capitalists hold the same perspective and to recognize the immense risk founders are taking in sharing their stories. After establishing this sense of trust, the investor should work closely with the founder to map their lived experience to venture scale opportunities. 

The impact – for both investors and the communities the startups serve – speaks for itself. The global firm Techstars recently invested in 20 companies with CEOs who are not only from underrepresented communities but who have all lived through the challenges they are solving. 

After just two years, the investments now represent $134 million in market capitalization. As part of Techstars Workforce Development Accelerator, these companies were provided access to mentorship and coaching support. These kinds of resources are critical, helping connect the knowledge that can only be gained through lived experiences with the business skills and expertise necessary for building and growing a company. 

Working to more fully understand and recognize the lived experiences of founders from diverse backgrounds will serve as a powerful competitive advantage.Taylor McLemore is a managing director at Techstars and Angela Jackson is the chief ecosystem and investment officer at Kapor Center Investments.