What are investors focusing on?

Cybersecurity insurance is essential for startups to obtain but startup founder perception and plans surrounding risk mitigation are shifting rapidly. From a previously heavy-handed focus on cybersecurity, startups are now placing more focus on the potential impact of social issues in the workplace.

Our recent report conducted in February 2022, the 2022 Startup Risk Index, of over 500 VC-backed startup founders revealed that 37% believe their investors are more concerned with their startup’s Diversity, Equity and Inclusion (DEI) initiatives rather than with their cybersecurity or pace of innovation. In fact, only 19% of founders listed cyber attacks as an external risk they expected to impact their business in 2022. 

A follow up survey in June of 2022, Risk, Reputation and Reproductive Rights, asked which top external risks VC-backed founders expected to impact their business either positively or negatively – and cyber attacks did not make it into the top five. 

While cybersecurity related incidents still pose a threat, these findings indicate that veteran startup founders are shifting their focus to managing risks surrounding reputation and social responsibility. 

DEI and Environmental, Social and Governance issues are now at the forefront of every founder’s mind. It has forced founders to consider the longtail business operations and personnel effects of complex social issues.

VC-backed startup founders must not only manage expectations with employees but also with their investors. Our 2022 Risk Index revealed that the top risks founders are least likely to take as they grow their startup in 2022 include: doing things that may impact reputation (33%) and jeopardizing or risking a business relationship (30%). 

Across the board, 38% of founders said their investors’ primary concerns are financial: funding, profitability and cash flow. But as companies grow, investors’ primary concerns begin to reflect growing responsibility of the startup, with DEI at the top of the list.

Series A founders ranked DEI as their investors’ top priority (39%) when thinking about risks to their business. Late stage founders ranked DEI amongst their investors’ top two priorities (37%) when thinking about risks to their business. It’s clear that with expansion and maturity comes greater responsibility for startups to operate like industry leaders. Founders in Series A and Late Stage cite their investors’ number one priority as DEI, indicating that they are feeling significant, growing pressure from them to increase their DEI-related initiatives.

What’s ahead?
DEI commitments need to start with leadership. Founders should allocate enough resources to create an inclusive environment in a startup. One way to do this is to focus on hiring practices. It’s important to set specific diversity hiring goals and have the recruitment and leadership teams take unconscious bias training. There are a variety of recruitment engines and companies that have a diverse pool of candidates that startups can tap into to help meet diversity hiring goals. 

Another way to promote diversity is to create a workplace culture that promotes inclusion. Creating an inclusive culture is no easy task, and you will need to perform regular check-ins with your team to ensure you are on the right track. 

Inclusive workplace culture also means that your policies and procedures need to reflect those efforts, as well as performing regular pay audits. For example, creating a family and parental leave policy that is equitable to all your employees will show your LGBTQ+ employees that their rights as parents or caregivers are no different than those of their colleagues.

Startup founders can no longer ignore issues that exist outside of their business. Consciously deciding that your company culture, policies and hiring process will build on the concept of diversity, equity and inclusion is a good first step.