Do Investors Have Unconscious Bias?

As an investor, are you always looking for a good investment opportunity? Do you feel that you have an eye for a good investment? Or are you missing out because Investment Selection Criteria have unconscious bias?

The reality is that investors are always looking for opportunities to invest their money to generate a return on investment. However, investors may be missing out on potentially profitable investments due to unconscious bias in their investment selection criteria.

Unconscious bias is when individuals make judgments or decisions based on their implicit attitudes and stereotypes rather than objective facts or data. Unconscious biases can be formed based on various factors, such as one’s upbringing, cultural background, and experiences.

In investing, unconscious bias can manifest itself in several ways. For example, investors may be biased towards investing in companies similar to their own background or experiences. This can lead to a preference for investing in companies that are led by individuals of the same gender, ethnicity, or nationality as the investor.

Unconscious bias can also influence the way investors evaluate companies and their potential for success. For example, investors may place too much emphasis on certain metrics, such as revenue growth or profitability, while overlooking other important factors, such as a company’s social or environmental impact.

The consequences of unconscious bias in investing can be significant. Investors unaware of their biases may miss out on potentially profitable investments while also contributing to the lack of diversity and representation in the investment landscape.

Ellect Stars

This is where Ellect Stars in Gender Equality come in.  

So, what is Ellect Stars in Gender Equality? Ellect Stars in Gender Equality acknowledges that the company has practices in place to support gender equality in their board and their senior leadership team.

The qualifying companies are then eligible to receive a digital badge (using blockchain technology and cannot be copied by others) that they can proudly showcase their achievement on their website or social media.

Companies must achieve each of the following to receive a point:

1. Have at least one woman CEO or CFO
2. Have one woman board chair
3. Have at least 25% women on the board of directors
4. Have at least 25% women on the senior leadership team

If the company achieves three or four points, they are awarded Ellect Stars in Gender Equality. The badge is a digital badge that uses blockchain technology to prevent others from copying it. Companies that receive this badge can proudly showcase their achievement on their website or social media.

By offering this program, Ellect is promoting gender equality in the workplace and recognizing companies that prioritize diversity and inclusion in their leadership positions. This recognition can help companies attract top talent and improve their reputation as an inclusive and equitable workplace.

Companies with Ellect Stars can help investors with their investment criteria in several ways. Firstly, by achieving the Ellect Stars in Gender Equality badge, a company demonstrates that it has a diverse and inclusive leadership team, which can be an indicator of good corporate governance. This may make the company a more attractive investment opportunity for investors who prioritize diversity and inclusion in their investment strategy.

Secondly, companies with diverse leadership teams may be better positioned to capitalize on market opportunities. Research has shown that diverse teams tend to be more innovative, make better decisions, and have better financial performance than non-diverse teams. Therefore, investors prioritizing diversity and inclusion may view companies with Ellect Stars as having greater potential for long-term growth and profitability.

Thirdly, companies with Ellect Stars may be more likely to have strong sustainability practices. Gender equality and diversity are important components of corporate social responsibility, and companies that prioritize these values may be more likely to have strong environmental, social, and governance (ESG) practices. As ESG factors become increasingly important to investors, companies with Ellect Stars may be a better fit for investors prioritizing sustainability and responsible investing.

Overall, companies with Ellect Stars can help investors by demonstrating their commitment to diversity, equity, and inclusion, which can be an indicator of good corporate governance, greater innovation, and long-term growth potential. By promoting sustainable and responsible business practices, companies with Ellect Stars may be more attractive to investors who prioritize ESG factors in their investment criteria.

Some of many

If you are looking for examples, one area where unconscious bias in investing is particularly prevalent is the venture capital industry. Venture capital firms are known for investing in early-stage startups that have the potential to disrupt industries and generate significant returns on investment. However, the venture capital industry is also notorious for its lack of diversity and representation.

According to a report by the National Venture Capital Association, only 3% of venture capital firms have a female partner, and only 1% have a partner who is Black. This lack of diversity can lead to unconscious bias in the investment selection process, where investors may overlook potentially profitable startups led by individuals who do not fit the traditional mold of a successful entrepreneur.

Research has shown that diverse teams are more effective at problem-solving and decision-making and are more likely to generate innovative solutions. Therefore, the lack of diversity in the venture capital industry can also result in missed opportunities for investors to invest in innovative startups that are led by underrepresented groups.

One example from Australia is the case of Canva, a graphic design platform founded by Melanie Perkins. In 2019, Canva was valued at $3.2 billion, making Perkins Australia’s third richest woman. However, when Perkins was trying to raise capital for Canva in the early days, she faced numerous rejections from investors who didn’t believe in her vision. Perkins has spoken about how she faced unconscious bias from investors who didn’t take her seriously because of her age and gender. It wasn’t until she found a female investor who believed in her vision that she was able to raise the capital she needed to grow her company.

Another example from Australia is the case of Airtree Ventures, a venture capital firm that has made a commitment to invest in female-led startups. Airtree Ventures recognized the lack of diversity in the startup ecosystem and made a conscious effort to address it. By investing in female-led startups, Airtree Ventures has been able to generate significant returns while also promoting diversity and inclusion in the startup ecosystem.

In the USA, one example of unconscious bias in investing is the case of the video conferencing company Zoom. In 2013, Zoom founder Eric Yuan pitched his idea to several venture capital firms in Silicon Valley but was rejected by all of them. Yuan faced unconscious bias from investors who didn’t believe him. However, Yuan persisted and eventually raised capital from a group of investors who saw the potential of his idea. Today, Zoom is valued at over $100 billion and has become an essential tool for remote work and communication.

Another example from the USA is the case of Arlan Hamilton, a venture capitalist who founded Backstage Capital, a fund that invests in underrepresented founders. Hamilton, who is Black and LGBTQ, faced numerous obstacles when trying to raise capital for her fund. She faced unconscious bias from investors who didn’t believe in her vision and didn’t see the potential in investing in underrepresented founders. However, Hamilton persisted and has since raised millions of dollars to invest in startups led by underrepresented groups.

These examples highlight the impact of unconscious bias on investment selection criteria and how it can lead to missed opportunities for investors and underrepresented groups.

What you can do

To overcome unconscious bias in investing, investors need to be aware of their biases and take steps to mitigate them. One way to do this is by diversifying one’s investment portfolio. By investing in a variety of companies in different sectors and led by individuals from diverse backgrounds, investors can reduce the impact of unconscious bias on their investment decisions.

Another way to overcome unconscious bias in investing is by using data-driven approaches to evaluate companies. By relying on objective data and metrics, investors can reduce the impact of implicit attitudes and stereotypes on their investment decisions.

Investors can also take steps to increase diversity and representation in the investment landscape. This can include investing in startups led by underrepresented groups, or partnering with organizations that support diversity and inclusion in the startup ecosystem.

The road to conscious inclusion

There are several strategies that investors can use to overcome unconscious bias in their investment selection criteria. Here are a few examples:

Diversify your network: One of the main drivers of unconscious bias is homophily, or the tendency to prefer people who are similar to ourselves. To counteract this, investors should actively seek out connections and relationships with people from diverse backgrounds. This can include attending events and conferences that attract a diverse crowd, joining groups and organizations that promote diversity and inclusion, and seeking out mentors and advisors who have different perspectives and experiences.

Use data-driven approaches: Another way to combat unconscious bias is to use data-driven approaches to evaluate companies. This can include looking at a range of metrics and indicators, such as revenue growth, customer acquisition, and user engagement, to make investment decisions. By relying on data rather than personal biases, investors can make more objective and informed decisions about which companies to invest in.

Conduct blind evaluations: Another strategy is to conduct blind evaluations of companies, where investors evaluate companies based solely on their performance and potential, rather than on factors such as the founder’s gender, race, or age. This can involve removing identifying information from pitch decks, resumes, and other materials so that investors are not swayed by unconscious biases.

Adopt a growth mindset: Investors can also adopt a growth mindset, which involves viewing failures and setbacks as opportunities for learning and growth, rather than as evidence of incompetence or lack of potential. By embracing a growth mindset, investors can be more open to investing in founders who may not fit the traditional mold of a successful entrepreneur, but who have the drive and resilience to succeed.

Seek out diverse perspectives: Finally, investors can seek out diverse perspectives and feedback when evaluating companies. This can include seeking out opinions from people with different backgrounds, experiences, and perspectives, such as advisors, mentors, and experts in the industry. By considering a range of viewpoints, investors can avoid relying solely on their own biases and assumptions when evaluating investment opportunities.

Overall, by being aware of the impact of unconscious bias and taking proactive steps to overcome it, investors can make more informed and objective investment decisions and avoid missing out on potentially valuable opportunities.

Profit and promote

In summary, unconscious bias in investing can lead to missed opportunities for investors, while also contributing to the lack of diversity and representation in the investment landscape. Investors need to be aware of their biases and take steps to mitigate them, such as diversifying their investment portfolio, using data-driven approaches, and supporting diversity and inclusion in the startup ecosystem. By doing so, investors can generate profitable returns while also promoting diversity.

By Sandra D’Souza – CEO/Founder – Ellect | Gender Equality Advocate | Diversity and Inclusion Advisor | Public Speaker. Sydney.