Signatory type: Investment manager
HQ country: US
The Westly Group is a venture capital firm that invests in companies focused on the digitisation and sustainability of energy, mobility, buildings, industrial technology, and cybersecurity. We primarily invest in Series A and B rounds and were founded in 2007.
Why are we acting on diversity, equity and inclusion?
In 2020, we launched an ESG strategy aiming to tackle social and governance shortcomings in the venture capital and early-stage start-up ecosystem. We created and implemented various diversity initiatives across our deal sourcing, due diligence, portfolio management and internal hiring processes to embed a strong culture and governance within the Westly Group.
The lack of diversity in venture capital is shocking: only 11% of the senior investment teams at venture capital firms are women, and 22% are minorities, according to the National Venture Capital Association.
This inequity can also be seen in the dollars raised by start-ups. In 2021, women founders secured only 2% of venture capital funding in the US, according to PitchBook.
This is not only bad for underrepresented groups, but also bad for business, because research indicates that:
- diverse investment teams can produce better returns[1];
- diverse companies outperform non-diverse companies[2];
- diverse teams help startups reach the customers of today and the future [3];
- modern consumers support diverse, socially aware companies[4].
As a venture capital firm, we are often providing start-ups with their first access to institutional funding and as such, we believe our diversity initiatives can have a significant impact on them.
How we incorporate DEI
- Track for gender in our deal flow: Annually, we evaluate 2,500 companies for investment. In 2021 we began tracking the gender of founders and CEOs at every stage of our diligence process (outlined below) as we recognised a significant gender gap at the final stage.
Figure 1: Investment due diligence stages:
1. Sourcing & Screening: Initial screening call with the start-up and one Westly Group investment committee (IC) member
2. Initial Diligence: Second call with start-up and two to three Westly Group IC members
3. Strategic Diligence: Third call with start-up and entire IC team to dive into the company’s financials, technology IP, competition, and team
4. Deep Diligence: Full IC team conducts customer reference calls and evaluates exit opportunity
5. Term Sheet: IC votes to offer an investment to the company
Tracking helped us understand where the biggest gender gaps were and made us realise we did not have enough female co-founders/CEOs entering our pipeline – in 2020 only 8% of the deals entering our first stage of diligence had a woman co-founder or CEO. We set a goal to have at least 15% of women co-founders/CEOs entering our pipeline by the end of 2021 and exceeded this, with 19% of the deals in our initial stage having a female co-founder/CEO. We achieved this by forming relationships with accelerators and venture firms that are focused on supporting and funding women founders.
- Include a DEI clause in our term sheets: To set the expectation that our new portfolio companies should prioritise diversity early in their lifecycles, we created a diversity and equity term sheet clause (see Figure 2) to highlight the importance of advancing equity efforts in C-level roles and at the board level.
Figure 2: DEI term sheet clause
The Lead Investor is committed to diversity, equity, and inclusion and recognizes the opportunity to drive influence as an investor to advance equity efforts in leadership and boards of directors. The Lead Investor requires that the Company implement recruitment processes that outreach to underrepresented groups and hiring processes that consider at least a certain number of candidates from underrepresented groups, including, but not limited to, people who identify as Women, Black, LatinX, and LGBTQ+. Additionally, the Company will prioritize equal opportunity in the search process and selection for any additional positions as officers or on the Board.
- Commit to equal employment opportunities for all new hires: Diversity at the portfolio company level is only one part of the equation and it is imperative that we ensure candidates from all gender and ethnic groups are given equal opportunity in our organisational search and selection process. We have committed to tracking gender and ethnicity of all applicants for every open position at the Westly Group and comparing the gender and ethnicity metrics against local population demographics for similar roles in adjacent industries. In cases where there is a discrepancy between the industry standard and our applicant pipeline for underrepresented groups, we work with a recruiter to specifically source strong candidates to address this. All the data is treated confidentially and anonymised when presented to the investment committee.
Figure 3: Example of new applicant dashboard presented to the investment committee
Challenges
We have faced some challenges in implementing our DEI initiatives. Without a DEI expert on the team it can be hard to know where to begin and what to prioritise, while limited resources can make it hard to dedicate time to tracking and measuring DEI metrics. It can also be hard to get consistent reporting on non-financial metrics from early-stage companies if they largely focus on financial metrics. Despite these challenges, committing to the DEI initiatives described has helped our firm see notable results.
Results
Our initiatives have:
1. Led to more diverse team hires at our firm: Committing to equal opportunity in the application process has led to having the most diverse investment team in our history, with 42% investment committee members identifying as women. This compares to an industry average of 13%, according to the Women in Venture Report 2019. We are also now classified as a diverse manager by some of our investors as we allocate 40% of carry economics to investment committee members from underrepresented groups.
2. Enabled more women founders in our fund’s portfolio: Tracking the gender in our deal flow has enabled us to include more women founders in our due diligence pipeline. In the first stage of our due diligence process (Source and Screen), we have increased the percentage of women founders by 11 percentage points (from 8% in 2020 to 19% in 2021). Additionally, 50% of the deals that reached the final Term Sheet due diligence stage in 2021 had a female co-founder/CEO:
Figure 4: Westly Group 2021 pipeline
3. Increased diversity at C-level and in board roles: There has been an increase in awareness and discussion with firms since we have started including the DEI term sheet clause. We have started collecting the gender and ethnic breakdowns of our portfolio companies’ C-level and board diversity.
This is only the beginning and there is a lot of work ahead for us and the venture capital industry.
Many DEI metrics focus on gender. This is aligned to the UN Sustainable Development Goal 5 on Gender Equity and Women Empowerment as well as other SDGs that cannot be achieved without delivering on gender equity, as highlighted by UN Secretary-General António Guterres.[5]
Nonetheless, we recognise the importance of intersectionality (where the effects of multiple forms of discrimination (such as racism, sexism, and classism) combine, overlap or intersect) and inclusion – which goes beyond representation to the level of empowerment and participation individuals have within a given setting.
We will work to drive initiatives beyond diversity and gender for our portfolio companies and at the Westly Group in the coming year. This will include helping portfolio companies set targets for improvement based on the ethnicity and gender data we have started collecting and exploring how our deal flow tracking can expand beyond gender.
References
[1] Multiple studies directly note the negative effects of homogeneity on individual investments and total fund returns (Gompers & Kovvali, 2018).
[2] A 2020 report from McKinsey found that companies in the top quartile of racial/ethnic diversity were 36%more likely to have above-average returns. Furthermore, companies that were in the top quartile for gender diversity were 25% more likely to have above-average profitability than companies in the fourth quartile.
[3] By 2055, the US will have no racial or ethnic majority group (Pew Research Center, 2015). Companies will need to have a diverse employee base that builds products that will benefit people with different needs and preferences.
[4] Over 75% of consumers are motivated to purchase from companies committed to making the world a better place (Aflac, 2019), while 87% of millennials and 94% of Generation Z expect companies to address pressing social and environmental issues.
[5] United Nations Press (2021) We Cannot Achieve Sustainable Development Goals without Gender Equality, Secretary-General Stresses in Remarks to ‘SDG Moment’ Event
