Insights from Top Venture Capital Investments

What lessons can be gleaned from examining the most successful 40 venture capital investments ever made? A prominent observation is a tendency to invest primarily in male founders, with a preference for those of white or Asian descent.

A review of CB Insights’ compilation of the “40 of the Best VC Bets of all Time” revealed that all 92 founders of the 40 featured companies were men.

Founder Demographics

• Among the 43 founders based in the U.S., 35 identified as white American. Four were white immigrants or first-generation individuals originating from France, Ukraine, Russia, and Iran. An additional four were first-generation immigrants from India.
• All 19 founders based in Western Europe and Israel were white.
• The 30 founders based in Asia were all natives of the countries where their businesses were established: 23 from China, three from Japan, two from Korea, and two from India.

It is important to acknowledge that this dataset is not exhaustive. Numerous examples exist of founders from underrepresented groups who have achieved substantial returns. For instance, Tope Awotona of Calendly is Nigerian American, Isaac Saldana of Sendgrid is Latinx, and Whitney Wolfe Herd of Bumble is among the youngest women to lead a company public.

Despite these examples, the pattern within the dataset is noteworthy. Why, then, is there a preference for investing in individuals who are not white or Asian men?

The Business Case for Diversity

The commonly cited rationale is that diversity yields positive results. Research conducted by BCG, Harvard Business Review, First Round Capital, the Kauffman Foundation, and Illuminate Ventures demonstrates that investors in diverse teams achieve superior returns:

• Paul Graham, co-founder of Y Combinator (2015) stated: “A common suspicion exists that venture capital firms exhibit bias against female founders. This could be readily identified by comparing the performance of portfolio companies with and without female founders. A study published, potentially unintentionally, by one VC firm revealed such a bias. First Round Capital discovered that startups with female founders outperformed those without by 63%.”

• A 2020 report by the Kauffman Fellows indicated: “Founding teams with diverse representation generate higher median realized multiples (RMs) on Acquisitions and IPOs. Diverse Founding Teams returned 3.3x, while White Founding Teams returned 2.5x. Similar results were observed when examining the perceived ethnicity of the executive team, with Diverse Executive Teams returning 3.3x compared to 2.0x for White Executive Teams.”
• BCG (June 2018) found: “Startups founded and co-founded by women demonstrated better performance over time, generating 10% more cumulative revenue over a five-year period—$730,000 versus $662,000.”
• BCG (January 2018) reported: “Companies with above-average diversity on their management teams also reported innovation revenue that was 19 percentage points higher than companies with below-average leadership diversity—45% of total revenue compared to 26%.”
• The Peterson Institute for International Economics (2016) concluded: “A consistent correlation exists between women in C-suite positions and firm profitability. A firm with 30% female leadership could anticipate a more than 1 percentage point increase in net margin compared to a similar firm without female leaders. Considering a typical profitable firm’s net profit margin of 6.4%, this represents a 15% boost to profitability.”

How can these seemingly contradictory datasets be reconciled? While research consistently demonstrates the benefits of diverse teams, companies, and founders, the most significant VC successes appear to stem from white or Asian men.

First Round did not incorporate their investment in Uber into their analysis due to its outlier status. However, one could argue that traditional VC investing inherently focuses on identifying outliers.

• Seth Levine, analyzing data from Correlation Ventures (21,000 financings from 2004-2013), noted that “a substantial 65% of financings fail to return even the initial capital. Furthermore, only 4% generate a return of 10x or more, and only 10% achieve a return of 5x or more.” Levine’s model suggests that a $100 million fund with 20 investments would yield approximately $100 million in proceeds from 0.8 financings exceeding a 5x return. Missing a key outlier could jeopardize the fund’s overall returns.
• Benedict Evans observes that successful investors aren’t necessarily better at avoiding failures. “For funds with an overall return of 3x-5x, the return of deals exceeding 10x was 26.7x. For funds exceeding 5x, it was 64.3x. Top VC funds don’t just have more successes and larger wins—they have significantly larger wins.”

The reliance on an outlier model in VC investing often leads to, on average, suboptimal returns and increased risk. A 20-year analysis of 100 venture funds by the Kauffman Foundation revealed that “only 20 funds generated returns exceeding public market equivalents by more than 3% annually,” while 62 “failed to surpass returns available from public markets after fees and carry were paid.”

The outlier model also tends to favor homogeneous teams. The highly uniform profiles of the most successful wealth creators likely reflect their willingness to take substantial financial, reputational, and career risks. Those with greater privilege are often better positioned to absorb such risks, as they are less concerned with basic needs like food, shelter, and healthcare. According to the Kauffman Foundation, a study of 549 successful entrepreneurs in high-growth industries found that “over 90% came from middle-class or upper-lower-class backgrounds and were well-educated: 95.1% held bachelor’s degrees, and 47% possessed advanced degrees.” However, examining the next tier of VC success—companies that don’t reach the Top 40 but rank within the Top 500—reveals greater diversity.

In VC, opportunities for 100x returns are rare, occurring only once every few years. Basing a fund’s strategy on such opportunities relies heavily on luck. A more prudent approach involves pursuing numerous 3x-20x return opportunities.

We prioritize investments based on statistical probabilities, not chance. That’s why Versatile VC offers companies an “alternative VC” model, utilizing a non-traditional term sheet designed to align investor and founder incentives. We also actively seek to invest in diverse teams. Given the choice between a fund with one 100x investment and a fund with two 10x investments, we would choose the latter. The former suggests a near miss on a crucial investment, indicating a potential weakness in our investment strategy.

“While the pursuit of exceptional ‘home run’ investments is appealing, most investors aim to build reliable portfolios based on data,” Shelly Porges, co-founder and managing partner of Beyond the Billion, observed. “This isn’t about aiming for the spectacular but leveraging experience to consistently achieve singles and doubles.”

Finally, the data discussed reflects companies that typically required a decade to develop. As cultural norms evolve, we anticipate that the 2030 list of top wealth creators will include a more diverse range of individuals. In 2018, 15 unicorns were founded with at least one woman founder; in 2019, 21 startups founded or co-founded by a woman achieved unicorn status. This shift is driven by:

• “All else being equal, a larger pool of female-founded companies to select from for VC investing should increase the odds of a higher number of female-founded VC home runs,” said Michael Chow, research director for the National Venture Capital Association and Venture Forward. According to PitchBook, investments in women-led companies grew approximately 54% from 2015 to 2019, from 459 to 709. In the first three quarters of 2020, there were 468 fundings of women-led companies, surpassing the total annual fundings of 2015, 2016, and nearly 2017.
• “Millennials value a diverse workforce,” Chow added, citing Gallup and Deloitte Millennial surveys. “In the competition for talent, diverse founders may have an advantage in attracting the best and brightest, and talent is essential for growth.”
• The increasing popularity of alternative VC models, which are particularly attractive to women and underrepresented founders. Currently, 32 U.S. firms have launched inaugural Revenue-Based Finance funds. Clearbanc highlights its data-driven approach to identifying high-growth funding opportunities, removing bias from decision-making. They funded eight times more female founders than traditional VCs and invested in 43 U.S. states in 2019.
• More VCs are proactively marketing to underrepresented founders. “Implicit biases are pervasive and require a proactive, intentional approach to shift the current funding status quo,” said Gesche Haas, Founder of Dreamers & Doers. Holly Jacobus, an investment partner at Joyance Partners and Social Starts, noted that “we’re proud to feature approximately 30% female founders in core roles in our portfolio—well above the industry average—without specific targeting. However, further progress is needed. We heavily rely on our software and CEOs to identify the best technology and teams in the most promising segments, and we continuously improve our process with systems that eliminate bias from deal flow and due diligence.”

We extend our gratitude to Janet Bannister, managing partner at Real Ventures, and Erika Cramer, co-managing member at How Women Invest, for their insightful comments. David Teten is a former Advisor to Real Ventures.