Diversity in Startups: Whining, Warring, Winning

Recommended Reading: The Weaponization of Diversity

Almost two years ago I wrote a lengthy personal essay regarding my own story growing up as a low-income child of Mexican immigrants, weaving through the American educational system (UT Austin, Harvard Law), and eventually finding success in startups and venture capital as a managing partner of an elite boutique law firm specialized in that field. In that essay I described the significant cultural divide I observed growing up in the latino community in Houston, between the educational expectations I had at home driven by my elite college educated Mexican mother, and the cultural values of my latino peers; all of whom came from blue collar and laborer backgrounds.

We lived in the same neighborhood and were all lower-income, but our home cultures were starkly different. Many of my latino friends found my study habits extremely peculiar and aberrant from how they felt a latino child “should” grow up. As a result I was often labeled a “coconut” (brown on the outside, ‘white’ on the inside).

In that essay I applied my own childhood observations to research I’ve reviewed regarding the under-representation of certain minorities in various high-performance professions (tech entrepreneurship, elite law, etc.), as well as to my observations as an adult responsible for recruiting lawyers into our firm. My general thesis is that “warmongering” over diversity in these industries has resulted in two very negative dynamics.

First, it leads to the silencing of many people – good, very much not racist, progressive people – who see a clear causal relationship between home culture, including childhood educational values, and under-representation in elite industries dependent on compounding education and training; like tech and law. For fear of being penalized personally and professionally, these people avoid contributing constructively to the discussion, and as a result the general topic of diversity becomes dominated by stale and exhausted narratives suggesting that “racism” and “unconscious bias” are supremely explanatory for disparities. Because these narratives are (flatly) wrong, the results of their non-solutions are disappointing.

Second, aggressive pressure to increase representation in elite industries leads employers, investors, and other decision-makers to make rushed hirings, promotions, and investments in URM (under-represented minority) candidates. Because the market isn’t nearly as irrational, discriminatory, and “racist” as many people make it out to be, a significant portion of those individuals who are elevated by these “affirmative action” initiatives end up very visibly underperforming. That underperformance ends up reinforcing stereotypes (bias) in the minds of observants. In other words, it backfires. Being overly aggressive and simplistic with increasing representation of URMs in highly competitive meritocratic industries, when their under-representation broadly is actually reflective of real performance issues (on average) in the marketplace, ends up harming those same groups in the long-run by strengthening stereotypes that we should instead be strategically and methodically weakening.

The essay is long for a reason. This is an extremely sensitive and nuanced topic, and to give it its due requires time and depth. For that reason, I respectfully ask that anyone bothered or offended by the above paragraphs please actually read the essay, to understand the real point I am making. It is not victim blaming. It is not pretending socioeconomic inequality isn’t a problem. And it most certainly is not pretending that racism and discrimination do not exist at all in our society. Rather, it is an honest attempt to explain why, all else being equal, focusing on racism and “unconscious bias” as the primary reasons why URMs, like American Latinos, are under-represented in elite industries has been incredibly unproductive, even counterproductive, and it will continue as such until we inject some sincerity and reality into the discussion.

The purpose of this post is to be less theoretical and analytical than the original essay, and more practical. How should founders, CEOs, and Boards of Directors in the startup ecosystem respond to concerns about diversity and the under-representation of certain minority groups? How can they empathetically listen to the variety of voices on this topic, while constructively and safely fulfilling their fiduciary duties to maximize the performance and success of their businesses? To cover this topic, I’m going to touch on three categories of approaches advocated by “diversity activists” in elite industries (including tech startups) – whining, warring, and winning – and why it’s in the interest of both key decision-makers and under-represented minority groups to steer discussion and action toward the latter.

Whining

This post assumes the perspective of my original essay; those claiming that “racism” and “bias” are the main drivers of under-representation of URMs (or at least of American Latinos specifically) in elite industries are flatly, demonstrably, wrong. Of course isolated instances of racism and discrimination can be found in a country of 300 million people, just as they can be found all over the world. These isolated cases are unacceptable, illegal, and deserve to be addressed forcefully.

But pointing to a limited number of isolated anecdotes does not in any way demonstrate that the startup ecosystem as a whole is racist. We are talking about an industry full of thousands of individual companies, and hundreds of venture capital funds, all led by highly educated and progressive people from an enormously diverse set of ethnicities and nationalities. These people are not all racists, and they would be punished financially by market competition if they were neglecting high-performing undervalued talent that competitors could then recruit or invest in.

In fact, the startup ecosystem is one of the most diverse (in terms of skin colors, surnames, ethnicities, etc.) industries you will find in America. Its diversity is part of what drew me to that kind of work in the first place. Not only is the industry incredibly diverse, it is so starved of high-performing talent that it has had to bid average salaries far above other industry norms, and aggressively recruit internationally, in order to fulfill demand; stretching even further the credibility of the suggestion that tech companies would, simply out of irrational prejudice, ignore millions of high-performing candidates available for work.

The industry is, however, fiercely, almost olympically, competitive and meritocratic; by necessity. We are talking about very small entities, with very limited budgets running usually at a perpetual operating loss, in hyper-competitive markets often filled by incumbents 100x in size, and funded by high-risk investors with high-stakes expectations of returns from their own LPs. The room for error in this segment of the economy is smaller, and the cost of underperformance is higher, than anywhere else in the market.

Saying that underperformance is the main reason URMs are under-represented in elite industries, like tech startups, is not a slam dunk argument for silencing debate; much like it isn’t in other policy discourse about race and social justice. In other parts of the economy, like universities and government, there are many activists who will argue that even if URMs underperform, organizations are responsible for elevating them anyway. This is, in essence, the argument for “affirmative action.”

The affirmative action debate in the university context gains its legitimacy from the fact that most universities are non-profit entities with missions that can be tied very closely to broader issues of social justice and fairness. Elite universities also in particular have large endowments, and spend at least 4-years with students – a fair amount of time to “catch up” – before those students enter the marketplace. Thus it takes some rhetorical gymnastics for an elite university with an endowment the size of a small country’s GDP to say that it can’t “afford” to accept and train some number of underperformers in order to pursue some higher-level societal goal.

As we move from large elite universities to large for-profit employers, the argument for “affirmative action” begins to reach stronger resistance, but not so much that there isn’t room for reasonable debate. Once a company has reached a market capitalization of, say, $25 billion, with thousands of employees and layers of staff, the idea that it too “can’t afford” to incur some costs to pursue a broader societal concept of “fairness” is far from obvious. This is why various “diversity initiatives” are not uncommon in large companies. You see them in law as well, with “diversity fellowships” in the AmLaw 100.

Gains have been made in improving the representation of URMs in large, for-profit companies, particularly at entry and mid-level positions. But activists are now starting to turn their attention to the C-suite, noticing that far smaller gains have been made there. And this is where the very real challenges and constraints of startups and much larger companies start to look similar, in terms of their legitimate inability to afford substantial underperformance. Underperformance from a CEO or CFO is catastrophic at a Pfizer or an Apple just as it is at a far smaller startup. Your views about social justice and fairness may have some legitimacy and weight in the non-profit university context, and in some market contexts, but that legitimacy ends when it starts threatening entire companies and industries, on whom millions of peoples’ livelihoods, and the economy at large, depend.

What’s a word used to describe situations when someone makes strong complaints for X or Y, often citing “unfairness,” and yet the justified response is that it simply can’t and won’t be done? Whining. I understand some people may object to my use of this term as being overly dismissive and offensive, but I nevertheless think it accurately captures the tone and language often encountered by key decision-makers in the startup ecosystem when “diversity” is used as a reason to question their judgment.

In this context, of high-stakes startups and venture capital, we aren’t talking about the right to any kind of employment, or the right to use a particular essential facility or public resource. We’re not talking about civil or human rights; the contexts in which morality and fairness really should override all other concerns. Far more often, we see someone already earning a relatively comfortable salary in a white collar job using “diversity” as a reason why they should be earning an even higher salary in a more senior position. Or someone already in the top quartile of education and income nevertheless arguing that they should receive millions of dollars in private funding for their business, because they are “diverse.” In other words, here “diversity” looks far less like a legitimate, authentic moral argument for societal fairness, and more like a rhetorical device for self-promotion and advancement.

I’m sorry, but Cesar Chavez fought for oppressed very low-wage farm workers. His spirit should not be invoked while discussing whether or not a software engineer or lawyer deserves a promotion. Speaking as someone who grew up surrounded by true low-wage laborers, let’s not hijack their challenges and the moral force of their causes for high-class soft-handed gains.

My advice to key decision-makers when they encounter this kind of argument is to focus on specifics and context. Is the argument being made that this particular individual has been judged by different performance standards than those applied to other similarly positioned individuals? That is illegal, and should be addressed immediately. But if that isn’t really the argument – and it often isn’t – but rather someone is trying to claim an entitlement to “affirmative action” treatment from a startup, return to the specific context in which it is being raised.

We are not an elite non-profit university with a billion-dollar endowment and years to help someone catch up on performance. We are not a Fortune 500 company with enormous insulation in the market to absorb the costs of helping someone meet performance standards. We’re a startup trying to survive and fulfill our obligations to our employees and investors to build a successful business in a hyper-competitive market. For that reason, we need performance today, and those who can’t perform today are not the responsibility of startups. In this context, expecting a private business to absorb the cost of fixing enormously complex and nuanced social and historical issues is unreasonable and unsustainable.

Many intelligent, thoughtful, progressive people who support upper-income diversity in far more appropriate and sustainable contexts will understandably draw a hard line when asked to risk the survival of their own businesses and careers for such a cause; the equivalent of levying a tax on people who simply do not have the means to pay it. We need to leave space for people agreeing on the goal of greater diversity to still be open and honest about the very real problems with specific tactics for achieving it.

Warring

When mere arguments and complaints about “fairness” have not resulted in the action that diversity activists want to see, the most aggressive have turned to weaponizing and politicizing diversity. In other words, they start using economic punishment as a way to force private market actors to improve their “diversity numbers.”

For very large consumer-focused companies, weaponizing diversity can take the form of public shaming and threats of economic boycotts. Activists may put together statistics about “disproportionate representation” at X or Y company, and fund a PR campaign to make those numbers highly visible. Public backlash then results, with consumers withholding their purchasing dollars, and the company responds by increasing their hiring of the appropriate groups. This is effectively politicizing hiring, by making it no longer simply about the productivity of the individual candidate, but about how that candidate’s characteristics feed into statistics that then impact the public image of the company, which then impacts the purchasing of the company’s products and services, and ultimately benefits the bottom line. It can be highly effective in some mass-market contexts.

In more private areas of the economy, this sort of weaponization can take the form of channeling investment dollars or referrals of work depending on a particular company’s “diversity statistics.” For example, very large Fortune 500 companies who have responded to their own weaponized diversity incentives by upping “diverse” hiring in their ranks, can make sending legal work to X or Y law firm dependent on that firm meeting certain diversity statistics for its own roster of lawyers. Activist limited partners of venture capital funds have started this tactic as well, pressing the venture partners that they fund to improve the “diversity” of their portfolio.

This is where benign pushing for diversity now becomes much more aggressive shoving. Do it, or it will cost you money that we control. Is it effective?

As I mentioned in my original essay, no one engaging in a serious discussion about diversity issues argues that high-performing URMs simply do not exist. That would be racist, but no one is saying that. What they say is that for historical, socioeconomic, and (importantly) cultural reasons high-performing URMs are much harder to come by in the market. What happens when you have a scarce resource for which demand is subsidized with economic incentives? Those who can pay top dollar are able to obtain it, and those who can’t don’t.

Already elite companies, capable of paying the highest amounts of compensation, absorb the more limited number of high-performing URMs; high-performers who wouldn’t have had trouble getting work to begin with. These companies are then able to promote how “diverse” and progressive they are, as if their superior cultures are the reason they are so “inclusive.” Weaker and smaller companies (startups?) can’t afford to bid away those in-demand high-performers from the deep-pocketed elite, and so they end up being less “diverse.” Calling one “inclusive” and the other “racist” completely misses the mark of what is actually happening. It’s about money.

It’s unclear that, even at large companies, using sticks and stones for diversity has moved the needle much on the core issue (the supply of high-performing URMs) other than creating a bidding war for the already-existing high-performers in the market; a war which benefits those able to pay the highest comp packages. There is, however, an emerging strategy that both large companies and startups are increasingly adopting in response to aggressive warring over diversity, and it almost certainly wasn’t intended by activists.

Have you noticed how in recent years the startup and tech ecosystem has dramatically increased its involvement in both Africa and Latin America? There are surely a number of reasons for this, but one big reason is companies realized that international hiring is a highly effective way to disarm some of the strongest rhetoric from diversity activists. If you know there are complex social, historical, cultural, etc. reasons why it is not feasible to dramatically increase your domestic (US-side) URM recruiting and investment without running up against very costly performance issues, but you also know that you really aren’t racist and that skin color and ethnicity are not drivers of your decision-making, there is a growing industry more than happy to help you recruit highly qualified talent directly from Mexico, Chile, Argentina, Nigeria, Kenya, and Ghana, among other countries full of ambitious, driven prospects.

Because American companies can pay so much better than local industry in those countries, they can recruit among the cream from their very large populations. Also, those populations aren’t subject to the historical, cultural, and immigration selection dynamics that are the core backdrop (see my essay) of why American URMs struggle disproportionately with performance in education-driven technical industries. Google and tomorrow’s Googles want diverse high-performing talent, but they are not fools, and will recruit directly in Mexico City or Lagos before diversity warriors force them into hiring US-side underperformers that they can’t even acknowledge as underperformers (and thus in need of extra training or lower-level roles) because someone will accuse them of being racist.

Thus we are seeing tech companies and startups increasing their “diversity” with more international talent. Is this a “win” for diversity? It depends on whom you ask. If the goal was simply to increase the number of latino and black people in tech and startups, then yes it is definitely a win. But if the goal was to increase hiring and investment in American under-represented minorities, then no, much less progress is being made. Such little progress will continue until activists are willing to put down their weapons, and let industry be honest about the real causal relationships behind disparities. Until that happens, no one should blame founders, CEOs, and Boards for taking a logical path, via international hiring, that proves they aren’t racist, while still fulfilling their obligation to recruit high-performing talent that furthers the survival and success of their companies.

International hiring and investment is a very effective near-term tool for improving the diversity of the startup ecosystem, even if it’s not the result that warmongering activists actually wanted to force decision-makers into.

Winning

We are thus faced with the fundamental tension in the diversity debate as applied to startups, and other high-performance, high-stakes industries. Diversity and increasing representation of minorities is a categorically good thing in an abstract sense. You will be hard-pressed to find someone actually say, publicly or privately, that they’d prefer a less diverse startup ecosystem. That would be inane.

But startups operate in the most competitive, high-stakes, low-margin-of-error segment of the modern economy. Arguments and tactics used by diversity activists that have found some success in universities, and even in large companies, face a fundamentally different set of constraints and realities in the startup economy. As I said in my original essay, and I will repeat here, if you want to see more URMs in startups, you need to actually help them win.

Whining and warring will not materially move the needle on diversity in a startup ecosystem that simply cannot safely absorb underperformance in the way that universities and massive companies can. Winning will. Unambiguous, credible, level-playing-field winning. You know who really doesn’t care about representative disparities, and judges a startup’s products and services purely on their objective merits? Their customers. There is no more brutal judge of performance than the open market, and for that reason no one does URMs any favors by acting as if affirmative action special treatment should continue well past the educational system and into the for-profit marketplace. When results, and only results, silence all other factors, help people actually deliver.

The most honest and effective diversity activists in tech and startups do not adopt childish arguments suggesting that hundreds of founders and VCs are “racists.” Nor do they suggest that highly competent and progressive executives are ignoring high-performing talent out of some dramatically oversold idea of “unconscious bias.” Rather, they understand performance gaps are real, and are doing the work of filling those gaps; via additional resources, training, and networks applied to under-represented candidates. This is a perfect corollary to how elite universities who’ve adopted affirmative action policies didn’t do so by simply throwing sub-qualified URM students into their schools and hoping for the best. They thoughtfully implemented extra training and resources to help those students “catch up” to the performance of the rest of their student bodies.

This costs time and money. As I’ve emphasized, elite universities are very large, very rich orgs with plenty of time and money to pursue higher-level societal goals. The vast majority of the players in the startup ecosystem simply do not have the time or resources to play a material role in this process. For completely understandable reasons, they can only afford to recruit and invest in today’s winners, with the ethnic or racial makeup of their teams and portfolios being neither here nor there. That is their mandate. It doesn’t make them racists or jerks. It makes them pragmatic, normal businesspeople with a job to do.

But tomorrow’s winners, including those who are under-represented minorities, are being trained, built, and elevated by honest people who aren’t shying away from uncomfortable realities. They aren’t throwing colleagues and friends under a bus with slanderous labels. They also aren’t pretending that feel-good messaging, “bias workshops,” or public guilting and shaming of decision-makers are the key to success for URMs in a highly competitive market economy. They’re addressing the game actually on the field, and putting in the time and resources to help URMs win it, under the same rules everyone else plays by.

We all want to see a more “diverse” startup ecosystem, in every sense of the word. To get there we need less whining, less warring, and good people willing to put in the work and honesty to ensure there’s far more winning.