Affirmative action (Qualifying by Quota) for startups does not engender success

Ed: By now if you have been reading my blog for a while you will know that I tend to try and write controversial headings to generate some reaction from the greater community. My hope is that the heading draws you in and the body of the post actually makes you want to express your opinion (which I am perfectly ok with being different from mine).

I had a very difficult question to answer 3 friends and investors last week who questioned how and why we chose a specific company in our batch at the accelerator. The fault was entirely mine, so it was very challenging to “justify” my position. Any way you looked at the situation, I could not tell them with a straight face that I really believed that the company we chose, would do a great job and they deserved to be picked. If I did, then they would question my judgment, and if I did not they’d question my ethics. Not a great position to be in either way. I would rather be an ethical person with poor judgment than the other way around.

Here’s the situation and the analysis from my standpoint.

As with most companies, institutions and organizations, we really want to be inclusive and diverse in our selection of companies at the accelerator. I dont think anyone would argue that we need to include many more women, students with no experience or entrepreneurs from tier-2 and tier-3 cities in our startup ecosystem.

We do try to keep the bar extremely high and that ensures only the best (according to our criteria) get to participate with us.

The trouble is when we try to meet specific numbers and commitments prescribed by the MBO (Management by objectives) and metrics driven management culture that most of us use as a guiding principle.

While many other accelerators and investors will tell you that they are not compelled to do a single deal if they dont like it or dont believe it will succeed, they also will tell you that they are driven by the same metrics, judged by the same criteria and “scorecard-ed” by the same characteristics as the rest of us. Let me give you an example.

Yesterday I had a chance to talk to an investor from a relatively passive fund. He was bemoaning the fact that they are hardly known in the ecosystem and most entrepreneurs dont even know that they invest in the early stage. Well, the reason most entrepreneurs dont know their fund, is because in 5 years they have invested in 8 companies. Compare that to an active fund, that invests in about 20 over a 5 year period and you can easily understand why this fund is “unknown”. So he was being judged and scorecard-ed by entrepreneurs and the media, and relegated to being a “passive, niche fund”.

We dont want to be a passive, niche accelerator.

That can only mean, that we “compromise” and include companies that serve the diversity mix but end up with a sub optimal set and lower the bar for certain sets of entrepreneurs so we can comply with our affirmative action criteria.

Luckily we know (or at least I think this to be the case) that deserving companies are not being ignored or being cast-aside to make room for those to meet our affirmative action goals.

I have though come to the realization that the amount of work needed to get high quality startups that also moves the ball forward progressively on affirmative action does not generate the returns from those efforts.

The same effort towards helping all high quality companies, generates more if not better returns.

So the question is: should we care only about returns.

Unfortunately while that was not the case a few months ago, it is becoming increasingly the case going forward.

Its disappointing and not a great situation to be in.

I am pained when in a batch of 50+ companies shortlisted we see not a single person who is a woman, or a very young, inexperienced student or a person who has a significant disadvantage relative to entrepreneurs from large metros. I feel its my responsibility to make room for them so we can create a few successes which will motivate more of them to join our “religion”, but I am at loss to figure out how to ensure that the ones we chose dont feel a tinge of disappointment when in doing so we lower the bar somehow.

To be clear, not all companies that are founded by these groups are “lowering the bar”. My issue is that there’s very few of them. If there are more than a handful, I’d be thrilled.

10 thoughts on “Affirmative action (Qualifying by Quota) for startups does not engender success”

  1. I sometime wonder if so called experts who act between the person who is spending his own money and entrepreneurs are really having any idea of what business is all about, they are safest who have nothing at stake .They seems expert in making fool both the sides , experts in blah blah………..

    1. Dont understand your comment Rajesh. You have to be more specific. Are you referring to me as the “go between person” or someone else?

  2. Hi Mukund: Here’s a thought on your note.

    Not including greater diversity in the mix of startups chosen for incubation/accelerator is a short-term feel good factor (we did not compromise on the MBO and metrics-driven culture, yaaaaaay we rock!!!), but could turn out to be a huge pain-point in the long run when the so called “only the best” that meet all judgement criteria fail for whatever reasons (and they do from time to time) and in the current economic climate, are most certainly likely to…..since none of the old business mantras are working… seems to me that lowering the bar and picking a more diverse set of companies to invest in – is not only necessary, but is the smartest and only way to cover risk.

    Earlier, this may have been a choice that is up to the investors, presently its the only way forward.

    Here’s an interesting article on why companies are picking more women on the board.
    This is generically applicable to all areas of diversity such as students with no experience, start-ups from tier1 and tier2 cities, etc…..

    To be able to include more diversity, one has to simply change the bar (redefine the criteria for measurement), not necessarily “lower” the bar. “Lowering” implies superiority and inferiority, whereas changing the bar to be more inclusive means its a level playing field…….just the parameters/criteria have changed to reflect changing times. Its a small matter of semantics at one level, and a HUGE mindset change at another, a paradigm shift if you will.

    Have a good day…

  3. Pulling is always better than pushing and a small percentage of such instances can often open up the floodgates. I apologize for being crude in the analogy, often the first few fish caught are used up as bait for far more/bigger fish. Of course if the first one turns out to be a catch, you are lucky, but in general it is the amortized return that matters more. You have given someone a fair chance but have opened up possibilities for more people who have so far been thinking that it cannot even be done. You may get a 50lbs fish from an unlikely source solving a problem that the current crop has no connection with.

    Of course, you cannot have all of the first few become bad examples, that would be counter productive, but then again its not like you are choosing at random. You are playing a move, it may not work out. In the very least, it will setup more and diverse precedents and fatten up the pipeline soon.

  4. Apologies for this Long Rant 🙂

    The treatment meted out to entrepreneurs by VC”s, Angels and Incubators needs to improve and once entrepreneurs are treated with the respect they deserve, I am sure you will see more woman and young experienced students becoming entrepreneurs. I have been on the VC/Angel/Incubator chase (with a few successes here and there) for some time and the following are some of my observations.

    1. VC/Angel/Incubator need to treat entrepreneurs with a bit more respect and have the basic courtesy to at least check the projects that are submitted. Many a time VC’s do not even read the projects submitted after inviting entrepreneurs to submit projects on their websites. The common refrain is – We get a Large Number of Submissions and hence unable to reply to each one. – If that was the case they should not be accepting the projects on their websites.

    2. Many incubators invite entrepreneurs and do not have the courtesy to send a rejection letter to rejected applicants and the reason for rejection. I guess not providing a reason is because either they have not understood what the project is about or they have not gone through the business plan at all.

    3. The $10 per minute of Andreessen Horowitz. Am sure many know of this culture of $10 per minute fine at Andreessen Horowitz. If the VC is late to meet an entrepreneur he is fined US $ 10 a minute. Well, if this rule is implemented here in India , many of the VC’s/Angels will shut shop. 🙂

    So if you are a VC/Angel/Incubator reading this, the following is a request from someone who would like the entrepreneur culture to thrive here in India.

    1. If you are accepting Business Plans (BP) on your website – Please acknowledge receipt (Not by an Auto Responder ) and please read the submissions. In case you get large number of submissions and unable to acknowledge/read the BP’s – Please Stop receiving the BP”s from your website.

    2. We understand that not all BP”S can be accepted, so in case the BP is rejected, will be good to hear why it was rejected and your comments on the project.

    3. Please value the time and commitment of the entrepreneur. And also remember that a VC/Angel/Incubator exists because of the entrepreneur and not the other way around.

  5. Be inclusive in entry. Be selective in graduation (you can give firms which are not ready longer incubation). IITs have quota but folks from SC/ST used to (in my time or may be even now) spend upto an year preparing before they would join regular engineering curriculum

  6. Mukund,
    I believe the right question to ask here is what an accelerator (yours included) needs to do to attract more teams which will meet the said management objective without diluting your standards- which i note remain unspecified not surprising given data is yet to fully establish a comprehensive list of determinants of a startup’s success. For example, you bemoan the lack of women entrepreneurs in your shortlist; As a women entrepreneur in SMB market (both SMB and Women missing from MS accelerator from what i can see) I don’t see a compelling rationale for apply other than MS being a good name to mention in funding discussions. I know you frequently go for reverse pitches but most VC/Seed/incubators don’t and hence don’t reach the diverse and qualified audience they seek.
    Also,it would be good to know the criteria you found yourself compromising on when choosing the said company (or similar ones) based on management objectives. A disservice to individuals and teams if you deem them unfit without even specifying the critical goal post.

    1. Shipra. Here is our team page and you say there are no women? Dont understand. Here are our startups All of them are SMB.

      Here is our selection criteria

      Where we compromised: Founders who were not committed to the venture’s ups and downs and also those that were going after smaller markets. We felt it was ok to have women who we could coach to tackle a larger market than the one they were pursuing. They chose to fold the company instead.

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