Diverse teams are often said to perform better, but it can be difficult to determine why that is. This article offers evidence for why diverse teams perform better during or leading up to IPOs, as well as suggestions for how to improve diversity in your company.
Diverse Teams Make More Profitable Decisions
In a Harvard Business Review article titled “The Other Diversity Dividend,” Paul Gompers and Silpa Kovvali discuss their research regarding whether diverse teams actually make better decisions that lead to higher profits. Many organizations are too large to easily see results from a change in diversity, so Gompers studied venture capital (VC) firms, which are usually smaller with a relatively stable set of investment partners. These investment partners choose companies to invest in, then work to guide and groom the companies to deliver a profitable exit (commonly in the form of an IPO or acquisition).
In the Gompers and Kovvali research, the authors discovered that the success rate of IPOs and acquisitions was lower when the investment partners of the VC firms were less diverse. For investments by partners that had graduated from the same university, the success rate of IPOs and acquisitions was 11.5% lower on average than investments by partners from different schools. If the partners had a shared ethnicity, success rates were lower by 26.4% to 32.2%. Additionally, VC firms that “increased their proportion of female partner hires by 10% saw, on average, a 1.5% spike in overall fund returns each year and had 9.7% more profitable exits.” What was most interesting about these discoveries though, was that projects selected by both homogeneous and diverse sets of partners were equally promising at the time the investment was made. The differences in profitability and success were in the way the partners helped guide and lead that company to grow and eventually exit through an IPO or acquisition (Gompers and Kovvali).
Differences in decision quality and performance came later, when the investors helped shape strategy, recruitment, and other efforts critical to a young company’s survival and growth. Thriving in a highly uncertain competitive environment requires creative thinking in those areas, and the diverse collaborators were better equipped to deliver it. (Gompers and Kovvali)
Based on this research, it appears that diverse leadership teams make a substantial difference, especially in the early stages of a company’s life. Any company preparing for an IPO could benefit from increased diversity in the teams that make decisions about strategy, recruiting, or other key areas.
This study is not the only evidence for diversity being key to increased profitability. EY and McKinsey have also performed studies and research that confirmed this finding. EY conducted a global study and found that “a company with a leadership team comprising at least 30% women could add up to 6 percentage points to its net margin” ( EY article). McKinsey also studied over 1,000 companies and found that “those in the top quartile for gender diversity on their executive teams were 21% more likely to have financial returns above their national industry median than those in the bottom quartile; ethnically and culturally diverse management teams performed even better at 33%” (Kelley). Based on this research, any company preparing for an IPO could benefit from improving its diversity, especially in its executive teams. However, actually achieving greater diversity is another matter entirely.
Increasing Diversity Prior to an IPO
As your company nears its IPO date, things will likely become more hectic, and building a diverse team may seem far down on the list of priorities. Thus, it is essential to start early. Before an IPO, companies are usually smaller, and the culture of the organization will be easier to change. Once an organization grows, however, it may become homogeneous and nearly impossible to change. Prioritizing diversity early on sets your company up for a more successful IPO.
There is a huge business case for diversity. You will be making products for people you don’t understand, you don’t interact with. If you don’t have an inclusive, diverse workforce, it makes you myopic. (Renée James, former president of Intel)
Next, it is important to consider where your organization should focus its efforts to increase diversity within the organization. Start with decision making groups. Put qualified women or racial minorities in charge of hiring or make them capable of changing the organization’s future makeup by overseeing a key product. Although some may worry that members of dominant groups may be excluded from hiring if diverse employees are making the decisions, this has been proven false.
But one of us (Gompers) actually found in a recent study that members of traditionally underrepresented groups were more likely than white men to seek out people unlike themselves when forming entrepreneurial teams. That result implies that qualified members of dominant groups aren’t in much danger of being locked out of diverse organizations. (Gompers and Kovvali)
Finally, you can also consider benchmarking against companies that you are striving to emulate. Find out what these companies are already doing and follow their lead. You can also review rules or regulations for organizations you may want to work with in the future. For example, if your organization plans to IPO with Goldman Sachs, you won’t be able to do so without at least one “woman or other person of a diverse background on the company’s board of directors” (Remick).
As your company continues to grow and prepare for its IPO, consider making diversity, equity, and inclusion priorities. Doing so at an early stage could make your organization more profitable in the long run. We hope these suggestions and research are helpful to you as you consider your next move.