As we unveil this year's Disruptor 50 list amid nationwide protests and calls to end racial inequality and senseless violence against Black people, the list has a glaring absence. There are no Black CEOs.
While we give weight to the diversity of a company's management, board and employee base, as one of the quantitative metrics used to calculate the list (more on that here and below), the lack of Black CEOs on this year's list is another reflection of the massive inequity in American business. It speaks to the fact that Silicon Valley's vast networks of capital exist in a community that traditionally has excluded Black entrepreneurs. This has sidelined many of them from the financing that has delivered generations of tech-driven start-ups (most of them with white male CEOs) to the public markets and generated billions of dollars in wealth.
A starting point for understanding the lack of Black representation among founders of the biggest, fastest-growing venture-backed companies — for which the Disruptor 50 list is a proxy — is understanding the lack of diversity in the institutions that write those venture capital checks. More than 80% of VC firms don't have a single Black investor, and the numbers show they are overlooking companies with Black founders.
Just 1% of venture-funded start-up founders are Black, according to BLCK VC, an organization to connect and advance Black venture capital investors. And Black women represent 0.2% of venture-backed founders. PitchBook reports that 9,300 U.S.-based start-ups raised money last year. And yet there are just 209 companies on this Black Founder List of U.S.-based VC-backed Black founders of for-profit start-ups compiled by POCIT (People of Color in Technology).
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The companies on the list are mostly at the early stages of their development — over 60% of those companies are at the Series A stage, according to Crunchbase. That means they're relatively young, compared to the later-stage companies on the Disruptor 50 list, which places a heavy weight on size and growth rate.
Just 10 of those 209 Black Founder List companies nominated themselves for this year's Disruptor 50 list, among more than 1,300 nominees.
Those statistics mean there aren't many Black-led companies that have drawn the funding to reach unicorn status, or a valuation of $1 billion or more. This year the majority, 36 companies of the Disruptor 50, are unicorns, as the list aims to identify the largest, fastest-growing private companies. At the moment, there's only one company on CB Insights' Unicorn List with a Black CEO: Compass, whose founder and CEO Robert Reffkin spoke recently on CNBC about racial inequality.
The lack of diversity in the leadership of start-ups echoes the lack of diversity at the world's largest public companies. There are only four Black CEOs on the Fortune 500 list.
Why are there not more Black founders and executives at start-ups? A study by Kauffman Fellows and MaC Venture Capital called "Deconstructing the Pipeline Myth and the Case for More Diverse Fund Managers" finds that the source of the diversity gap is not solely an educational pipeline problem, as there has been a sharp increase in the number of Latinx and Black students earning post-secondary degrees. From 1980 to 2016, the share of master's degrees awarded to Black students grew from 6% to 14%, and those to Latinx students rose from 2% to 10%.
Black and diverse founders represent a huge, untapped, economic opportunity for investors, because they, on average, deliver higher returns. Diverse founding teams — defined as a group with at least one founder with a non-white perceived ethnicity — have earned a 3.26x median realized multiple on IPOs and acquisitions, 30% more than the 2.5x realized multiple for all-white start-up founding teams, according to the Kauffman Fellows study. It also finds diverse executive teams have an even greater advantage: yielding a 3.3x return, 65% higher than the 2x return for white executive teams.
These findings are echoed in a 2018 Boston Consulting Group study: "How Diverse Leadership Teams Boost Innovation." Companies with above-average diversity scores report 45% average revenue from innovation, compared to 26% for companies with below-average diversity scores.
There are clear financial arguments for investing in Black-led companies, so why are investors missing out on this opportunity? The Kauffman study finds it comes back to the bias — intentional or unconscious — of the small, largely homogeneous community of venture capital investors writing checks. A key factor that could build diversity among successful CEOs: having more diverse investors, particularly at those crucial early stages, to identify and support promising entrepreneurs at the seed and A-round and beyond.
We've seen some recent announcements about new funds focused on diverse founders, such as SoftBank's $100 million minority-focused fund, and Andreessen Horowitz' Talent x Opportunity fund. But to achieve meaningful long-term change in Silicon Valley and among the most valuable start-ups, it is key that all funds understand the financial opportunity in investing in diversity.
All of this brings us back to the lack of Black CEOs on the CNBC Disruptor List this year and an explanation of how we compile it. We have a 55-person advisory board, comprised of academics in the fields of innovation and entrepreneurship at institutions around the world. They've helped us put together an algorithm that weighs 17 different quantitative criteria based on data that companies give us and data drawn from outside sources. The calculation is 75% quantitative: sales and user growth, as well as the scalability of a company, are among the most important of these metrics. The diversity of a company's executive team, board and employee base ranks as a more important factor than a company's funding or valuation. The remaining 25% of a score is qualitative — determined by a committee of more than 50 CNBC reporters, editors and staff. The qualitative assessment takes into account how much the company has innovated in the past year, the uniqueness of each company's business model and, in this year's case, how well it has adapted to Covid-19 and the resulting economic downturn.
While this year's list has no companies with Black CEOs, it is diverse in many other ways. The list is the most geographically diverse in the Disruptor 50's eight-year history, a reflection of the fact that the venture capital community has increasingly looked outside the bubble of Silicon Valley for investment opportunities. This Disruptor 50 list features unicorn start-ups from Philadelphia, Pittsburgh, Atlanta, Denver and Columbus, Ohio. While 7% of the Fortune 500 have a female CEO, 12% of the CNBC Disruptor 50 are led by women. (Both those percentages speak to persistent gender inequity.) The list also features CEOs and founders who are Latinx, Indian, Asian and Middle Eastern, among other backgrounds. Many of the CEOs are immigrants to this country.
And many of this year's Disruptor 50 have diverse workforces. Twelve companies, nine of which are based in the U.S., told us that more than half of their employees are non-White. (Fifteen companies didn't answer that question.)
Tech-driven disruption and innovation can come from anywhere and anyone. We want to include a diverse list of companies and founders that fully represent the diversity of our nation. We believe that we can play a role in driving toward that representation by highlighting the inequality that exists now and how it doesn't make sense — from a financial perspective — to miss out on the economic value diversity brings.
We'll be working harder to tell those stories, and on our other list of start-ups to watch, the Upstart 100, which is released every fall. That list recognizes earlier-stage start-ups, which have raised no more than $50 million in capital. Much more progress across the diversity spectrum can be found there. In coordination with our Disruptors and Upstarts initiatives, we'll be highlighting individuals — founders, innovators and investors — who are making their marks on the business world and driving it toward a more diverse and inclusive future.