Smart Investors Use “Inclusion Premium” Thinking, and Here’s Why

By: Lisa Calhoun

September 30, 2019

If you’ve ever thought about spending your money with one brand instead of another because one of them had a better reputation, you’re an impact investor. Investors who want to scale their impact know every dollar under their influence can be part of their strategy to transform the world in a positive way. I care passionately that my “imprint” on this world is a positive one, from my lifestyle (vegan), to my conversation style (direct), to my car (electric), and to my work (venture capitalist).

The area I’m most passionate about is making sure investments I make have every opportunity to optimize ROI. One tool I use to do that is understanding the inclusion premium, a word we invented and invite you to use.

The inclusion premium is what happens when you manage the risks of group-think proactively instead of reactively. Everyone has experienced an episode of group-think. Maybe it’s a board you’re on, a sports team, a charitable organization, or a company you know well—but group-think is when everyone is so sure they’re right they do not seek to entertain contrary opinions.

Groups with different perspectives have inherently contrary opinions. They have to work through disagreements to wind up at a consensus. This tough process contributes to dramatically better financial outcomes.

Here are some of the financial statistics associated with using the inclusion premium to manage downside risk and optimize upside potential:

  • Racially and ethnically diverse startups outperform industry norms by 35%. (McKinsey, Why Diversity Matters)
  • In testing the performance of 2,360 public companies globally over the last 6 years, companies with one or more women on the board have delivered higher average returns on equity, lower gearing, better average growth and higher price/book value multiples. Racially and ethnically diverse startups outperform industry norms by 35%. (Credit Suisse, Gender Impact)
  • Among top quartile managers, there’s actually an overrepresentation of diverse managers, with 39% of diverse managers falling in the top quartile of performance, vs. 25% for non-diverse managers. And so it’s particularly interesting to note that you actually have a better chance of outperforming the benchmark by investing with diverse managers. (SuperReturn 2019, “Expansive viewpoints for better results: why you should consider diversity when choosing managers”)
  • Along all dimensions measured, the more similar the investment partners, the lower their investments’ performance. For example, the success rate of acquisitions and IPOs was 11.5% lower, on average, for investments by partners with shared school backgrounds than for those by partners from different schools. The effect of shared ethnicity was even stronger, reducing an investment’s comparative success rate by 26.4% to 32.2%. (Harvard Business Review, 2018, The Other Diversity Dividend)
  • This research utilized the Morningstar database to gather information on 5,000 US mutual funds to compare net alpha and value added between male funds and female funds. The present research found that female managers have statistically significantly higher net alpha and higher value added, compared to male managers, likely indicating that females are not allocated enough capital but have higher skill, as they are able to extract high value added even without proper capital allocation. (Natalie Borowski, Ph.D., “The Impact of Mutual Fund Manager Gender on Investor Capital Allocations”)

Research like this makes the reality of an “inclusion premium” for investors quite clear. At Valor, we’re actively using inclusion premium analysis as an additional layer of investment risk management and returns optimization.

Here are three ways we do it:

  • Sourcing Inclusion: We use industry benchmarks to make sure our funds source investments from across the full spectrum of founders seeking venture capital today. The end result is that Valor’s portfolio is led by 60% under-represented founders in a venture capital environment when the average is that less than 5% of venture capital is invested in under-represented founders. One of the ways we succeed at creating such clear alpha is through the nonprofit Foundation we started, Startup Runway. It is the largest pitch event for under-represented founders in the country. It has sourced many of our most interesting and innovative investment opportunities precisely because it sources from a group (startups led by women and people of color) that is historically under-invested in. See it for yourself—join us at the next Startup Runway Showcase and see the inclusion premium in action.
  • Recruiting Inclusion: When Valor makes an investment, the journey is just beginning. That team we invested in will be scaling quickly, and as they do that, we want them to be able to “see around corners.” That means making sure the next hires not only are exceptionally skilled, but also have exceptional perceptions and understandings not inherent in the core team’s DNA. We know more perspectives earlier in a company’s journey create an inclusive culture that is not only more effective in terms of financial performance, but also more attractive to acquirers.
  • Governing Inclusion: I was recently speaking with a successful Atlanta software company founder who walked away from a $100 million valuation and large investment at the 11th hour. He shared that when the final board composition was revealed, it “looked like a picture I didn’t want to be a part of”—all one race, all one gender. Smart founders—and investors—know that the board composition also has to also be informed by multiple perspectives, which is why when Valor takes a board seat, we pay attention not only to talents, skills and chemistry, but also to inclusion.

Inclusion is one of the risks controllable by investors and it is also one of the few risks that, if well managed, has a strong positive outcome for the investment. If topics like these get you going, and you want to join forces with us on the journey of inclusive innovation, please check out one of Valor’s upcoming events for investors at www.valor.vc.


Lisa Calhoun is founding general partner at Valor.VC, the first female-led venture capital firm in Georgia. Valor.VC is based in Atlanta, Georgia. The investment firm’s second fund invests in financial inclusion platforms outside of Silicon Valley at the first institutional round. Find out more at www.valor.vc

The Georgia Social Impact Collaborative (GSIC) provides resources to connect, educate and inspire stakeholders for the purpose of accelerating the development of Georgia’s impact investing ecosystem. Recently, GSIC announced the launch of the Georgia Social Impact Map (the “Map”), an interactive platform designed to connect and educate stakeholders interested in accelerating impact investing for social outcomes. Intended as a resource for communities around the state, the Map connects new forms of capital to sustaining and scaling solutions to social challenges. GSIC also provides workshops and programming for training specific groups of stakeholders on ways to leverage impact investing to achieve their impact goals.