July–August 2018
Article
Harvard Business Review

The Other Diversity Dividend

By: Paul Gompers and Silpa Kovvali

Format:Print

Abstract

Researchers have struggled to establish a causal relationship between diversity and financial performance—especially at large companies, where decision rights and incentives can be murky, and the effects of any given choice can be tough to pin down. So the authors chose a “lab rat” with fewer barriers to understanding—the venture capital industry. VC firms are fairly flat: Every investor is a decision maker, and choices have clear business consequences. Using publicly available information, researchers can see how similar or different decision makers are and compare decision quality on the basis of investments’ performance. After examining tens of thousands of VC investments, Gompers has found that diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though associating with similar people can have social benefits for those people, it can lead investors and firms to leave a lot of money on the table. In this article Gompers and Kovvali describe the research and provide recommendations for reaping the business benefits of diversity.