Past studies have proven that diversity is good for business, but new research suggests that startups with diverse founders are more likely to successfully sell their business at a profit, which is often their primary objective.

According to the study, titled “Diversity in National Culture and Financial Harvest Exit Strategy in New Technology Ventures,” the presence of immigrant founders among tech startups “substantially increases the chances” of cashing out of the business by way of an acquisition or a initial public offering (IPO), which the authors call a successful exit.

The research, which was led by Rotman professor Ramy Elitzur, together with Ilanit Gavious and Orit Milo from Ben Gurion University, explored the outcomes of Israeli technology startups against a range of demographic data points in search of patterns that could help predict outcomes. Among the research’s findings, being situated within a major startup hub had no significant effect on exit outcomes; and larger companies were less likely to see an acquisition.

“We found that prior business experience did not have any effect, interestingly enough, but prior experience abroad did,” Elitzur says. “Prior startup experience had a much stronger effect. Gender had no effect, which was surprising. The level of education had positive effect but was not statistically significant. Whether the CEO is also the founder had a negative effect; [founder] team size had no effect, and getting money from venture capitalists had a strong positive correlation with exits.” Elitzur notes that while the effect of education was not statistically significant, one possible explanation could be that most founding team members have some level of higher education, and as result the type of higher education (undergrad, masters or PhD) made little difference on future venture success.

Of all the factors that were considered, however, the most significant determinant of a startup’s likelihood of success was the diversity of its founders.                            

Not only were founding teams with any members born outside of the country more likely to have a successful exit, but the higher the proportion of immigrant founders — and the higher the founding team scored on the widely used Blau Index of Diversity (a formulaic measure of diversity in teams) in this case of ethnic diversity of founding team members — the more likely they were to be acquired.

Elitzur, an Israeli immigrant himself, suggests several explanations for the findings.

“One is that immigration, like any other form of diversity, adds different viewpoints to the decision making, so the founders make better decisions and it helps avoid 'groupthink,'” he says.

Elitzur adds that there is also significant overlap between the talents and traits that inspire someone to immigrate and start a business. Like entrepreneurship, it typically takes a high degree of resilience, patience and optimism to move to another country, suggesting those who have done so successful have at least some of the necessary skills to start a company, he says. Furthermore, many immigrants are motivated by the economic opportunities of their adoptive homeland, giving them both a stronger work ethic and a higher risk tolerance.

“Also, maybe part of it, if you think about the history, they would be less employable than other people,” Elitzur says. Immigrants often struggle to find traditional employment due to bias and institutional challenges, like the lack of recognition of foreign experience and credentials. That lack of safety net, he suggests, could make them more competitive as entrepreneurs compared to those who can fall back on other opportunities.

While the research was based on startups in Israel, Elitzur says there’s no reason to believe the results would be any different on this side of the world. Not only have similar studies found similar results in Canada, but both countries are sparsely populated immigrant nations with well-established startup ecosystems, he says.

Elitzur adds that the findings have significant implications for startup founders, investors, and even lawmakers.

“If you’re founding a company, maybe you should have some people who come from different places [on your founding team],” he says. “If you’re an investor, maybe you should look for more diverse founding teams because the chances of you maximizing your returns on investment is higher with such a team.”

Similarly, Elitzur believes this research could help policymakers make better, more targeted investments, and perhaps inform immigration policy decisions in the future. “If you want to support startups as a government, you should look at diversity because it will mean you’ll get a better bang for your buck,” he says.

Elitzur says this research helps build a growing case for the power of diversity in improving outcomes in business, and beyond.

“One of the worst things that can happen in any organizations is having groupthink,” he says. “If you have different angles — and I would say diversity adds such angles — you should get better quality decisions.”