As an active participant in the fintech ecosystem, the Financial Solutions Lab shares in the responsibility to create a more inclusive industry, especially for female founders and people of color. Last year, we published our early thinking on the Financial Solutions Lab’s role to support and encourage diversity within the early-stage fintech space, and candidly shared data on the diversity of our own entrepreneur support program.
Of the 57% of Americans who struggle with their financial health, we know from the Financial Health Network’s research that some segments of the population–including low-income women and people of color–struggle disproportionately. This is despite the fact that today, more women than ever are providing the sole or primary income for their families and 43% of millennials today are people of color (and will drive much of the growth in the U.S. consumer market by 2020).
While we’re fortunate to meet hundreds of entrepreneurs each year who are working to solve important problems related to consumer financial health, there continues to be a significant lack of diversity among the founders and teams we meet, as well as a clear funding bias against female and minority entrepreneurs, especially at the earliest stages. This reality, combined with the many recent reports of sexism and harassment throughout Silicon Valley and among other industries, only stresses the gravity of the situation.
As an investor and supporter of early-stage startups, we believe that diverse teams simply build better products. By having a more comprehensive understanding of the market, diverse teams are more likely to build products that address the needs of a broad swath of consumers, including those who are historically underserved. And it’s those companies that are much more likely to grow and scale to reach millions of customers.
While seeding the market for a greater breadth of ideas, perspectives, and talent takes time, we will continue to candidly share our progress–no matter how incremental–to push ourselves and our peers towards a more inclusive industry.
Building a diverse pipeline
Because the nature of venture capital tends to be heavily relationship-based and network-centric, founders from underrepresented backgrounds are less likely to be a part of such circles and thus less likely to raise capital compared to their (white) male peers. For these reasons, we intentionally sought to expand the Financial Solutions Lab’s digital and physical footprint during our 2017 recruitment season.
We first unveiled Financial Health as the broad theme of our challenge focus, with a special interest in solutions targeting often overlooked segments, including people of color, the aging, people with disabilities, and low-income women.
We also partnered with leading organizations to help us find entrepreneurs for whom these populations were an important part of their target customer base. For example, we co-authored a blog post with Kapor Capital to talk about fintech’s missed opportunity in serving the needs of people of color. We shared research from the Asset Funder’s Network on the gender wealth gap and joined a new national initiative called Closing the Women’s Wealth Gap. We partnered with AARP and the Stanford Center on Longevity and were invited to judge the AARP Innovation@50+ Demo Day. We also shared research from the World Institute on Disability on why good design is accessible design. In addition, we traveled to cities outside of the traditional tech hubs to meet with a number of entrepreneurs and support organizations. These efforts led us to meet a more diverse pool of applicants than in years past.
Diversity among the 2017 FinLab applicant pool
In all, the Financial Solutions Lab received a total of 361 applications in 2017, representing 36 states and both for-profit and nonprofit providers. Of the for-profit applicants, 17% reported at least one female founder and of the nonprofit providers, 43% reported a female founder, CEO or executive director.
While we don’t collect data on race or ethnicity from our application, we do send an optional survey to all applicants at the close of our selection process. This year, 46 companies responded, representing 13% of the total applicant pool. While only a small sample, we believe sharing this information–even if anecdotal–can help advance our collective understanding of diversity in the early stage fintech sector.
Here’s a look at what we learned:
- 96% of survey respondents said team diversity is important or very important to their company
- Racial diversity of founders is similar to last year’s survey results (of which 35 companies participated): 23% reported 1 or more founders who identify as black or African American, 12% as Asian or Pacific Islander, 6% as Hispanic, Latino or Spanish origin and 4% as American Indian or Alaska Native.
- Founders continue to skew male: Of for-profit survey respondents, 22% identified 1 or more founders as female. Of nonprofit respondents, 33% reported 1 or more founders as female.
- Applicants with female founders have more balanced employee gender ratios. In companies with no female founders, the average gender ratio of employees was reported as 72% male vs. 28% female. However, companies with at least one female founder had a gender ratio of 50/50. While anecdotal, this seems to support the hypothesis that greater diversity among leadership results in more diverse organizations.
This year, we also categorized all 361 applicants based on whether their solution was geared towards one or more of the often overlooked segments we highlighted during our call for innovators. While this categorization was not a factor in our selection process, it will serve as a useful benchmark going forward. We hope to see more innovators identify the massive impact potential and market opportunity that underserved consumers represent.
This year, we were curious to see what funding levels looked like for the 78 applicants who self-identified as targeting at least one undeserved community. Notably, 32 of the 78 companies had not yet raised any capital and 22 had raised less than $500,000. For the sake of comparison, the average amount of capital raised across our total applicant pool was $630,000.
This analysis reinforces our observation that more robust investment is required to seed and strengthen the early stage market–especially for new and unproven entrepreneurs who are at a significant disadvantage in securing investment capital. For this reason, the Lab has built relationships with a number of seed and pre-seed accelerators and we are working on a concept to further expand our efforts in this space as we believe there is much more work to be done to support diverse founders at the earliest stages.
Diversity among the 2017 Financial Solutions Lab class
In June, eight companies officially joined the 2017 Financial Solutions Lab class. Of the eight winners, three have at least one female founder, and three have products geared towards improving the financial health of aging Americans and their families–one of the population segments we highlighted in our call for innovators.
While none of the winners have a founder from an underrepresented racial minority, two of the sixteen finalists did identify as a person of color and earned a spot in the finalist pool based on the merits of their team, product and consumer impact–we do not screen for diversity in our review process. While the two finalists were ultimately not the strongest fit for our program at the time of selection, we were able to successfully refer one of the finalists to a peer accelerator focused exclusively on tech nonprofits, which was a better fit.
It’s important to note here the diversity of our final selection committee that chose the eight winners. Of the five judges, two were women and one was a person of color. A much larger review team of 30+ people narrowed the total applicant pool of 361 to the top 16. 51% of this review team was female and 19% identified as a person of color. While we improved the diversity of our first round review team over previous years, we acknowledge the need to improve the racial diversity of our final selection committee.
The cohort experience
Throughout the Financial Solutions Lab’s 8-month program, we bring in a wide range of people and experiences to help our founders connect with and deepen their understanding of the financial challenges low-income and historically underserved consumers face.
At the very first meeting, founders participated in a signature Financial Health Network workshop called FinX. This activity mirrors a “day-in-the-life” of an underserved consumer where participants go out into a local community to perform a series of real-time financial transactions such as cashing a check, buying and loading a prepaid card, and sending a money order.
We also organized a roundtable meeting with national consumer advocacy organizations in Washington D.C. These organizations, with their laser-sharp focus on the consumer, directly questioned our founders about their user demographics, the transparency of their pricing models, and on data protection and security. While these conversations can be tense and direct, they help everyone at the table develop a greater appreciation and understanding of the challenges and concerns in building financial products that can scale to reach millions of people, including the most vulnerable.
The hard conversations don’t end there. We also organized a dinner to discuss how to build culturally relevant products for communities of color, as well as diverse organizational teams and invited several respected practitioners to help facilitate the conversation. Throughout the dinner, our founders were asked to candidly share how they think about these issues and how they can improve the relevancy and reach of their own products as well as the makeup of their teams.
While we understand these issues are multifaceted and will never be solved in a single conversation over dinner, creating a safe space and the opportunity to have these discussions is one way that we can regularly check our individual and collective blind spots. Where are the missed partnership opportunities or design decisions that could open up your customer base to those who have the most to gain from your product? It takes a little extra effort to make sure we’re creating a safe space to discuss these kinds of questions, but it’s an investment we’re willing to make.
As we approach the launch of our fourth Financial Solutions Lab class in early 2018, we will again be working to expand our network to look outside the traditional tech hubs for talented, diverse entrepreneurs who are building products with mass market appeal–including those populations who are the most vulnerable.
Candidly sharing data on the diversity of our entrepreneur support program is helpful in holding ourselves accountable, but it’s also helpful in identifying areas where we need to continue to make stronger progress. For example, we will continue to assess how we can further remove bias from our selection process and explore ways we can help our companies recruit, hire, and support diverse talent. We welcome your ideas and suggestions and hope you’ll join us in taking stronger action to create an inclusive industry.