When Diversity Becomes a Problem in Start-ups

In the modern business landscape, diversity is hailed almost as a universal good, so much so that organisations of almost every stripe and colour tout their diversity credentials, be it based on gender, age, ethnicity or sexual orientation. Supposedly, being an organisation that embraces diversity carries with it a slew of benefits, from improved productivity and creativity, to lower turnover and better access to a wider talent pool, and even better optics for the brand.

That may be so. However, this well-acknowledged consensus comes with it an important caveat: If not properly managed, diversity has potential to hamper decision making and damage organisational performance. That’s the idea behind the study United or divided? Entrepreneurial passion and faultlines in new venture teams, which sought to look at whether and how diversity affects the performance of teams in an entrepreneurial setting.

“Strong entrepreneurial passion helps teams to overcome the formation of faultlines.”

Prof. Dora Lau

The paper was written by Dora Lau, Associate Professor (Teaching) at the Department of Management at The Chinese University of Hong Kong (CUHK) Business School, in collaboration with Prof. Qin Su at Xi’an Jiaotong-Liverpool University, Prof. Lingli Luo at Zhejiang University, and Prof. Bart de Jong at the Durham University.

Prof. Lau notes that on the one hand, diversity in start-ups is believed by some to be generally beneficial as it enables a fledging business organisation to gain from the complementary skills and resources of its individual members. However, this very same diversity can also lead to the formation of a conflict-laden work environment that damages the ability of start-up teams to make effective decisions.

A Multi-Attribute Approach

Past research into the topic, however, has tended to focus on specific single attributes (such as gender, age or race), while failing to account for the fact that in an actual start-up environment, team members would differ in multiple attributes and that this jumble of attributes may align to create factions within the team. Prof. Lau says the majority of previous studies tend to neglect that the entrepreneurial process is dynamic in nature, with teams facing continuous evaluation and selection both from the market and investors.

To address these shortcomings, the researchers chose to examine the issue from the perspective of demographic “faultlines”. Faultlines form when individuals in a group share and align themselves along attributes such as gender, age and ethnicity, leading to problems from challenges in communication and lack of trust, to increased conflict.

“We propose that the formation of strong demographic faultlines can and in many cases do hinder the performance of teams in new ventures above and beyond the impact of any one single attribute,” says Prof. Lau. “When faultlines form within a team because of divergent individual attributes, its effect on start-ups would be especially salient given the environment is one where fewer organisational or group norms have been established,” the professor adds.

“On the other hand, these very same teams still must make critical decisions that draw on their collective and complementary strengths,” Prof. Lau says, adding that faultiness within start-up teams may hinder key tasks such as the generation of new ideas, or the sharing of information or resources quickly enough to respond to rapidly evolving business situations.

The Effect of Entrepreneurial Passion

While researchers have in recent years identified the level of entrepreneurial passion amongst founders as something that can significantly impact start-up performance, there has been scant research on how this interacts with more traditional demographic attributes in the functioning of entrepreneurial teams.

To go about their study, the researchers studied 48 entrepreneurial teams that participated in a one-year incubation programme in Hong Kong organised jointly by search giant Google in collaboration with CUHK and held in 2014. They pored through the demographic information of the participants of the programme, and conducted surveys to find out how team entrepreneurial passion interacted with other demographic attributes to affect how well they performed during the incubation programme.

They found that the strength of faultlines that form within an entrepreneurial team had a significant and negative effect on performance. On the other hand, when all the members of a team in a start-up are equally and highly passionate about their new venture, then their shared passion tends to be successful in uniting individual members to work together to improve performance. This can effectively help to moderate the detrimental effect of faultlines on team performance within start-ups.

On the other hand, when there is a big difference in how the different members of a new venture team identify themselves (whether it be as an inventor coming up with new products, a founder launching new organisations, or a developer who seeks to grow start-ups beyond their initial size), then this tends to exaggerate the negative effect of faultlines on performance.

“When there is extreme dissimilarity in how individual members within a new venture team identify themselves as entrepreneurs, this can lead to increased sensitivity to emotional issues, worsened interpersonal relationships, and it lessens the chances that they can establish a common group identity they can unite themselves under,” says Prof. Lau. “What’s more, when the members strongly identify themselves with their specific passion domains, this further strengthens faultlines and weakens performance within entrepreneurial organisations.”

Passion Domains and Developmental Stages of Start-up Teams

By tracking the performance of start-up teams along the different stages of the incubation programme, the researchers also found that both the negative effect of faultlines on performance as well as the role of passion were strongest in the initial stages of the formation of a start-up team, and gradually decreased as time passed. This means that while teams with strong faultlines may suffer in the short-term, there is a good chance they can work to overcome internal polarisation given time, the Prof. Lau says.

Finally, the researchers found that different types of entrepreneurial passion had different effects at the different stages of a new venture. For example, passion for inventing had a bigger effect on moderating the negative relation between faultline strength and team performance during the initial stages of a new venture formation, compared to passion for founding or developing. Furthermore, they found that during this stage, when start-up teams were highly passionate about the three different passion domains equally, the effect was actually weaker than if they were passionate about inventing only.

“Our findings imply that at any stage of a new venture, strong entrepreneurial passion helps teams to overcome the formation of faultlines, and the effect is stronger when the passion domain is consistent with the developmental stage of the start-up itself,” Prof Lau adds.

Lessons for Start-ups

From a practical perspective, Prof. Lau says the results highlight the importance of entrepreneurs choosing the right partners in forming a new venture. Those seeking to launch a new venture should take care to choose members to avoid strong faultlines on demographic attributes, which can impair team performance. “Given the traditional belief in the value of demographic diversity, entrepreneurs should deliberately consider each team member’s characteristics and how they fit in the team. They would also do well to avoid building a team where members may align on multiple attributes,” she says.

Also, the study’s findings suggest that in teams that are suffering from the detrimental effects of strong faultlines, the individual entrepreneurs themselves should seek to cultivate a high level of passion towards their venture, as this would allow them to find common ground and ultimately enhance their overall performance. On a similar note, investors or organisations seeking to guide or incubate the development of start-ups may consider providing consultation services to help teams deal with faultlines and cultivate entrepreneurial passion. “Conversely, if team members are passionate about different parts of the entrepreneurial process, then it’s not likely they would be able to start off as a cohesive team, and the differences could make things worse rather than improve the overall working environment,” says Prof. Lau.