Morgan Stanley
  • Inclusive Ventures Group
  • Dec 27, 2022

Investing in Diverse Startups: A Reassessment

Our latest survey of venture capitalists reveals mixed signals when it comes to their commitment to startups led by women and multicultural founders.

The investing landscape has clearly changed in the last two years. Along with continued market volatility and the lingering fallout from the pandemic, a social reckoning in 2020 around issues of race has caused venture capitalists to take an even harder look at how diverse their portfolios are and how committed they are to ensuring equal access to funding.

But how has this new scrutiny played out in real terms? Venture Capital and Social Equity, Morgan Stanley’s third survey of venture capitalists (VCs) reveals that VCs’ increased focus on addressing the funding gap disparities for multicultural- and women-founded companies in the 18 months following the start of the pandemic has led to some positive outcomes, as well as some setbacks. Here are a few of the key takeaways from our latest research.

There are signs of positive movement when it comes to VCs’ attempts to prioritize diversity.

This suggests that concentrated effort and accountability over time can build toward more sustainable change within the industry.


  •  A growing percentage report changes in practices that may help close the funding gap 

Of the 42% of VC firms that made public pledges around diversity and inclusion over the last 12 months, over eight in ten of them followed through with all or most of the commitments (including over half that followed through with all the pledges)

The share of VC firms that hired or worked with more women or multicultural Limited Partners (LPs), fund managers, partners, or board members continues to trend up, with a 7-point increase from 2019.

Figure 1: Hired more women or multicultural LPs, fund managers, partners, or board members*


  • Diverse founders are recognizing some of this progress at VC firms 

A majority of diverse founders say they have received increased interest (52%) and have noted an increase in conversations (50%) with VCs in the last year, and 36% report increased investments from VCs in the last year.

52% of diverse founders say VC firms have become more gender diverse over the last five years, and 39% say VC firms have become more racially/ethnically diverse in that time frame.

However, as social pressure wanes from the peaks of 2020, the energy to close the investment funding gap is also slowing down.

During the 2020 social justice movement, there was an increase in VCs’ optimism and energy around addressing disparities in funding for multicultural- and women-founded companies. Yet, this year, much of that enthusiasm to close the funding gap reverted to 2019 levels.

  • In 2020, 43% of VCs said it was a top priority for their firm to find opportunities with multicultural-founded companies. This dropped to 32% in our most recent survey. 

Figure 2: To what extent does your firm prioritize finding opportunities with multicultural-founded companies?

  •  In 2020, 75% of VCs said they strongly agree it is possible to have an investment strategy that intentionally invests in female and multicultural entrepreneurs while still maximizing returns. While this dropped to 56% in 2021-2022, which closely matches the 55% that said the same in 2019, the percentage of VCs who disagreed with this statement has also dropped since 2019, from 13% to 7%.

Figure 3: To what extent do you agree or disagree with the following: "It is possible to have an investment strategy that intentionally invests in women and multicultural entrepreneurs while still maximizing returns?"

  • 42% of VCs report they are more likely to invest in multicultural-founded companies in the next 12 months, down from 69% in 2020.

Figure 4: To what extent are you more or less likely to invest in the following types of companies in the next 12 months?

  • While three-in-five (62%) of VCs in 2020 strongly agreed that fund managers have a responsibility to their clients to actively explore investing in women- and multicultural-founded companies, that number is down to 50% now.

What’s more, LPs may not be sending a clear and consistent message when it comes to investing in diverse founders.

Many VCs are not hearing from LPs that it is a priority to invest more in diverse companies.

  • While 54% of VCs say that investing in companies with women and/or multicultural founders is a priority to their LPs this is down from 59% in 2020 and closely mirrors the 55% that said the same in 2019. This also leaves nearly half (46%) of VC firms who are not hearing from LPs to prioritize investments in women or multicultural founders.
  • Diverse founders see an approach focused on VC management as having the greatest potential for success. Founders are most likely to say that the most effective action VC firms can take to reach and invest in more diverse-founded companies is to hire or work with more women or multicultural LPs, fund managers, partners, or board members.

These mixed signals remain despite the fact that it has been repeatedly shown it is possible to prioritize investing in diverse founders and potentially generate competitive returns, as demonstrated by VC firms such as:

  • Kapor Capital – According to its 2019 Impact Report, its “impact portfolio” companies (inclusive of companies closing the gaps of access, opportunity, and outcomes for low-income communities and communities of color in the US) exceeds IRR and TVPI benchmarks set by PitchBook and Cambridge.1
  • Ulu – Today, Ulu has one of the most diverse portfolios of entrepreneurs in Silicon Valley, with 38% women, 29% minority, and 19% immigrant CEOs.2 And Ulu’s first fund is a 5x multiplier. “We’re not sacrificing anything by investing in women and minorities,” says Ulu CEO and Co-Founder Miriam Rivera. “Our ability to look at startups objectively and pick the ones with great potential makes us a top-performing fund.”
  • Starlight Ventures – At this Miami-based VC firm founded in 2017, which does not have a mandate to invest in a particular type of founder, at least 40% of its founders are women and/or people from diverse backgrounds.3 Its returns are in the top quartile of IRR from its 2017 fund.
  • ·As of 2020, there were 14 Black- and Latino-owned companies that had reached unicorn status, which raised a combined $5.7 billion totaling in $28.3 billion in value.4

Similarly, many of the founders who participated in the Morgan Stanley Multicultural Innovation Lab (MCIL), our in-house accelerator for multicultural and women-owned startups, have achieved significant success.

  • 59 companies, 32 of which are women-led, have completed the MCIL to date and have received $160M in additional funding.
  • 22 of the companies that have participated in the MCIL have raised $1M since they took part in the program, including 12 led by women. 
  • The combined valuation to date of companies that have participated in the MCIL is $673M.

In conclusion, we believe that pressure from LPs may be key for sustained progress. Our survey findings, taken together over the past three years, suggest that social pressure alone may not be enough to effect sustained change in closing the funding gap. Rather, VCs need to feel that investing in women and multicultural entrepreneurs is in the interest of long-term profitability, much like we’ve seen in recent years with Private Equity (PE) firms appreciating the importance of environmental, social and governance (ESG) investing. As robust data on returns of diverse-owned startups continues to be gathered, LPs can lead the charge on prioritizing diversity. They are increasingly concerned  about the system-level effects of inequality and LPs have been critical to impacting change with ESG among PE firms. We can apply many of the ESG principles, and build off of the VC Playbook developed by Morgan Stanley in 2019, to help increase investments in women- and multicultural-owned businesses, including:  

  • Ensuring the right talent within the VC firm—including more diverse representation within value creation teams and GPs who are well-versed in investment opportunity with diverse-owned companies
  • Ensuring LPs screen their own investment decisions in VCs based on diversity criteria
  • Ensuring LPs require general partnerships (GPs) to offer more granularity and transparency on the diversity metrics of portfolio companies
  • Increasing the prominence of co-investing to put pressure on GPs to focus on diverse founders

By following these steps, we believe that those who influence decisions directly affecting the diversity of their portfolios will help ensure an approach that more clearly mirrors their intentions.

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