Diversity: The Sacramento Tech Sector's Advantage

Written by Victor A. Patten

Sacramento Business Journal - August 3, 2017

Diversity in technology for Sacramento investor Kwame Anku isn’t just a moral issue — it’s good business that he’s willing to bank on.

Anku, 45, is co-founder of Black Angel Tech Fund, a national investment fund focused on startups with at least one African-American founder. The fund is currently raising $5 million, and plans to begin raising another $50 million in the fall. It has so far invested $750,000 in four tech startups outside of the Sacramento area.

And it plans to open an office at McClellan Park later this month.

Anku argues that a greater emphasis should be placed on funding startups where women and people of color are founders or in executive positions, as opposed to merely advocating for large tech companies to diversify their numbers.

“That’s not from the standpoint of a social charity,” he said. “Quite frankly when we looked at the numbers, and knowing the ecosystem very well globally, we saw that there is an incredible opportunity that’s being overlooked and undervalued. The focus is coming from a very typical venture business mindset, and that’s to create outsized returns for the investors.”

The lack of diversity in the tech industry nationwide has received renewed attention in recent months with sexual-harassment and gender discrimination scandals at Uber Technologies Inc. and several Silicon Valley venture capital firms.

Sacramento’s tech sector is still in its early stages of development, but here, startup founders, investors like Anku and others say the city may be poised to create a technology economy where people of color and women play active leadership roles.

Recent data seems to support those claims.

Last year, Sacramento ranked first in the nation for the ethnic diversity of its STEM (science, technology, engineering and mathematics) workforce, according to a study by personal finance website SmartAsset. It cited government initiatives that further fair hiring practices and the city’s Innovation and Growth Fund, which currently stands at $14 million, as possible reasons for the diversity of Sacramento’s tech work force.

Commercial real estate brokerage CBRE last week released a study ranking Sacramento as No. 4 in the nation for gender diversity in tech (Washington, D.C., ranked first, followed by Baltimore and Hartford, Connecticut).

Other recent studies suggest that diverse companies tend to outperform those that aren’t. Some investors agree.

“Diversity always brings better decisions and better ideas because you are looking at (business) from a very different angle,” said Lokesh Sikaria, managing partner at Folsom-based Moneta Ventures LLC.

At least 20 percent of the just-over-150 startups in the Sacramento area appear to have a female founder or co-founder, based on the startup directory on StartupSac, a website for the region’s startup community.

Tracy Saville, co-founder of the nonprofit startup incubator FourthWave, says she believes the percentage of female founded or co-founded startups in the area is likely closer to 30 percent.

“I think the startups, the companies and newer companies that have been founded by younger generations, and frankly by people of color and by women... tend to have a much greater diversity for both race and gender,” said Saville, adding that the life experiences of those groups tend to give them a greater sensitivity to the importance of diversity.

Still, those numbers are tempered by statistics that indicate room for improvement.

A report by the Sacramento Employment and Training Agency showed that the information technology and telecommunications sector in the six-county Sacramento region, as of 2016, was 68.4 percent male and 31.6 percent female.

Ethnically, the report showed the sector to be 59.5 percent white, 19.8 percent Asian, 12.9 percent Hispanic or Latino, 5 percent African American, 1.9 percent two or more races, .5 percent American Indian and .5 percent Pacific Islander.

In comparison, Sacramento’s population is 45 percent white, 26.9 percent Hispanic/Latino, 18.3 percent Asian, 14.6 percent black and 7.1 percent two or more races, according to the most recent U.S. Census Bureau data.

Diversity’s revenue generating potential

Investors like Anku point to studies conducted by McKinsey & Co. that show there is a linear relationship between ethnic diversity and financial performance.

The studies indicate that for every 10 percent increase in ethnic diversity on a company’s senior executive team, earnings before interest and taxes rise .8 percent.

In addition, companies in the top quartile for ethnic diversity are 35 percent more likely to have financial returns above their respective industry medians, while companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians, according to McKinsey.

Given those numbers, Anku says that investing in diverse startups may prove more effective than trying to persuade large tech companies to diversify.

“Right now you have kind of a perspective, ‘How can we get Google to employ more black people?’ Google is one of the most powerful companies in the world, and Google is going to do what it wants, how it wants, when it wants, and they’ve been outrageously successful in that. If they have an employment base that happens to be 2 percent African American, (and) only 1 percent on the tech side, and they’ve been as successful as they’ve been, there’s probably not an incentive for them to have some radical change,” Anku said.

“However, imagine having some companies that begin to emerge on the tech scene that have an African-American female CEO. And imagine those companies doing hundreds of millions of dollars in revenue. And imagine those companies employing 2,000 to 4,000 people. What do you think those workforces are going to look like? They are going to look very different. What do you think those boards of directors are going to look like? Very, very different.”

Yet the advantages suggested by the data haven’t necessarily translated into more opportunities for women and people of color.

Bari A. Williams, head of North American business operations for StubHub, wrote an article earlier this year titled “The Tech Industry’s Missed Opportunity: Funding Black Women Founders.” Citing research by First Round Capital, she wrote that founding teams including a woman outperform their all-male peers by 63 percent. Still, female CEOs get only 2.7 of all venture funding, while women of color get only .2 percent.

Moneta Ventures’ Sikaria is another investor taking the issue of diversity seriously. His Folsom-based fund has $65 million under management. Since its launch in 2014, nine of the 22 companies Moneta has invested in have been owned by women or people of color.

Sikaria said Moneta’s primary approach to diversity is to make a conscious effort to ensure that cultural bias or stereotypes do not play a role in the investment process.

“A lot of us have biases that we might not even be aware of. We want to ensure that those biases don’t come into play,” Sikaria said.

Born and raised in India, Sikaria said he’s never felt that his ethnic background kept him from opportunities in the U.S.

However, he is aware of how stereotypes and assumptions that people make about different groups can influence hiring and other business decisions. For example, some people might stereotype certain groups as being good with numbers, while other groups might be stereotyped as being better communicators.

Those kinds of assumptions, Sikaria said, can limit potential opportunities.

“That’s what we’re watching for as a team, and that’s why we probably ended up with a pretty diverse CEO group,” he said.

Additionally, Sikaria said having a plethora of ideas usually yields better results, and putting together a diverse group from different backgrounds and genders is a way to achieve that. “From a (business-to-consumer) company standpoint... how are you going to understand your consumers if you don’t have anybody who thinks like them, or have gone through similar experiences? So there is a clear advantage there for having diversity,” Sikaria said.

“When it comes to (business-to-business) company standpoint, that aspect may not be true, but the key factor there is generally when you bring a diverse group of people together... they generally outperform.”

Others say more educational resources are needed to reach young people, to increase diversity at larger tech companies.

Simeon Gant is executive director of Green Technical Education and Employment, a nonprofit that received a $50,000 grant from the city’s Rapid Acceleration, Innovation and Leadership in Sacramento (RAILS) program last year. He said he’s particularly concerned that blacks are still coming in last, in terms of jobs in Sacramento’s tech sector.

Gant’s organization provides life skills and job training to young people of color in Sacramento, including computer coding. Despite the statistics as they apply to black people, Gant said he’s encouraged by this city’s hiring of Louis Stewart as the city’s chief innovation officer, and other initiatives to increase tech diversity, like the RAILS grant program. Stewart has said that increasing diversity in Sacramento’s tech sector is key to its success.

Gant said only time will tell if the city’s strategies to increase diversity are successful. “But I think there is certainly an effort to increase visibility for African-Americans to get more involved in the STEM industry,” he said.

Some in Sacramento’s startup community, like Mariah Lichtenstern, founder of DiverseCity Ventures and Cineshares, and Jouell Wright, who runs iPhone repair business iGalaxy, say the relatively young age of Sacramento’s technology sector, compared to Silicon Valley, is an asset. Because the River City’s tech culture is new and evolving, Lichtenstern and Wright say that now is the optimal moment to make sure gender and ethnic diversity are part of its values.

“I think the opportunity lies in the fact that we are at this foundational level and we are working as a region to attract startups,” Lichtenstern said. “Because we are so diverse, there is so much opportunity to build a diverse ecosystem that is inclusive. There needs to be a culture shift, and I think that’s happening.”

Wright, 27, organized the NASA Apps Space Challenge at Hacker Lab in midtown Sacramento earlier this year. She suggested that larger tech companies in the region could do more outreach to high schools, to get more young people of color thinking about tech. “You have to just put yourself out there and push your boundaries,” she said.

In addition to leading Cineshares, which helps filmmakers raise capital through crowdfunding and other alternative resources, Lichtenstern is spearheading an effort to bring a startup accelerator to Sacramento, sponsored by Palo Alto-based Founder Institute. That program is expected to launch later this year.

As a black woman in Sacramento’s tech sector, Lichtenstern said she has been embraced by the tech community. Achieving true diversity, however, where the playing field is level, will still be a challenge, she said. Lichtenstern, like Sikaria, said that’s because all people have biases — even at an unconscious level. The question remains whether those in the local tech industry honestly address those biases in a meaningful way.

“We have been trained to be passive about ethnic and gender diversity. And people like to jump on gender diversity quicker because (women are) 51 percent of the population. Everyone has a mom, and a sister and an auntie they can identify with. But culturally we are more segregated, so that’s a harder pill to swallow,” she said.

Victor Patton covers technology and health care.

Photo Credit: Dennis McCoy