How is Venture Capital Failing to Fund a Gender Equal Future?
by Dr. Kristen Liesch, an interview with Siri Chilazi
“Venture investment has the privilege of granting companies runway with which to build the future.”
(Niklas Zennstrom, Founding Partner & CEO, Atomico)
When 90% of VCs are male, and 87% of VC funding goes to all-male founding teams, it’s safe to say the popular t-shirts are wrong. The future isn’t female. Or, at least, it isn’t being shaped by women in this regard. It’s certainly not being shaped by women of colour.
In her recently published report, Research Fellow Siri Chilazi - in collaboration with her colleagues, Research Fellow Anisha Asundi and Professor Iris Bohnet at Harvard Kennedy School’s Women and Public Policy Program - explores the state of (U.S.) venture capital in regards to gender equality, and lays out clear, actionable recommendations.
At Tidal Equality, we have always been committed to promoting and applying research-based approaches to designing a more equal world. We are proud to have Siri Chilazi as a member of our global Collaborative of professionals and equality champions.
In this article, we ask some provocative questions and tease out some key takeaways from her report.
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The business case for gender diversity in VC and entrepreneurship is clear:
gender-diverse VCs perform better, gender-diverse startups perform better.
This case is laid out comprehensively and compellingly in your report.
But, then again, the business case for gender diversity writ large is clear, as well. And it’s been made for just about every industry/sector/profession/geographical region, etc.
In our experience, leaders can hear the business case, believe the business case, and, when they put down the article or turn off the podcast, they can still say,
“That’s all well and good. But we’re different.”
When they say that, what they mean is:
We already make the best hires - it’s not about the gender of our applicants, it’s about the best person for the job.
We already make the best investments - it’s not about the gender of our founders, it’s about their business model.
It doesn’t seem to matter that the facts - the hard numbers, not anecdotes or opinions - prove them wrong.
QUESTION:
Did you encounter this kind of cognitive dissonance in your research? How would you describe investor reactions to the “business case”?
ANSWER:
I’ll never forget one interview my colleague, Anisha Asundi, and I conducted with a senior male venture capitalist as part of our study. He spoke at length about how he had personally experienced the joys of working on diverse teams and how he was familiar with all the studies detailing the numerous benefits of such teams. He went so far as to suggest that by investing in all-male teams, VCs were probably leaving money on the table. So he was a “true believer”.
And yet,
when we asked him how he squared this world view with the male-dominated investment portfolio of his own VC firm, there was a long silence followed by a rambling answer about how gender equality in VC won’t happen overnight and how bringing more women into the industry needs to be a long-term project.
So the cognitive dissonance about the benefits of diversity is a very real phenomenon, in venture capital and in virtually every other field.
It comes down to the essence of unconscious bias: our rational brains are constantly overridden in decision-making by our unconscious minds that are prone to shortcuts and pattern-based, categorical thinking. As much as we may “consciously” believe in the benefits of diverse teams, for example, we will continue to be drawn to work with people and invest in people who are similar to us (a common unconscious bias known in the academic literature as homophily).
So more data that appeals to the rational mind probably won’t help.
We need to try a different approach - one that doesn’t rely on changing people’s hearts and minds, but instead focuses on changing biased structures and processes.
DON’T DO UNCONSCIOUS BIAS TRAINING!
Your report identifies the various organizational barriers that prevent gender diversity from advancing in VC, including:
Lack of transparency re: diversity and inclusion data
Lack of prioritization re: diversity and inclusion
Lack of systematic, professionalized HR functions in VC firms
Unstructured processes and policies
You also lay out a series of clear, actionable recommendations that VC firms and individual investors can implement that - together - can begin to dismantle these significant and entrenched organizational barriers that prevent the advancement of women in the sector.
Many of these recommendations - structuring talent management processes, instituting blind evaluations, equalizing career advancement opportunities, to name a few - could be considered best practice, generally, for talent optimizing in just about every sector (which, wouldn’t ya know it, also lead to increases in gender equality and diversity).
QUESTION:
Given the VC world is as entrenched in its status quo bias and homophily as your report makes very clear, and given the fact VCs, broadly, consider gender equality and diversity among its lowest priorities, what do you think it will take to see change?
ANSWER:
One of the other key factors we highlight in the report as a barrier to change is the current lack of a meaningful industry-wide movement toward greater gender diversity and inclusion.
There are lots of (often female) investors who care deeply about gender inclusion and who are trying to mobilize their colleagues for change, and there are lots of great organizations like All Raise and Project Include who have helped to put this issue on the map in recent years.
But what we have not seen yet is a real shift in social norms around homogeneity and homophily in venture, such that it would actually be seen to be unacceptable to continue the current patterns of male domination.
In other words,
hiring and funding men nearly exclusively is still seen as default, acceptable behaviour,
and investors are not being penalized for it.
Behavioral science tells us that all of us humans are very susceptible to social pressure:
we want to follow the herd and “do the ‘right’ thing”,
and we will go to great lengths to avoid being called out for our behaviour.
So I think it will take an ecosystem-wide shift in norms and expectations to move the needle on gender diversity.
Everyone from VCs and entrepreneurs to the media and the LPs providing the capital for VC firms has a role to play in this change.
It won’t happen overnight, but I am convinced that it can happen.
My colleague, Iris Bohnet, wrote an excellent case study on the United Kingdom’s efforts in the 2010s to gender diversify the corporate boards of the country’s largest public companies. The way they succeeded was by pushing for change on all fronts at the same time, with company CEOs, advocacy groups, the UK government, executive search firms, media, and academics all doing their part.
In only a few years, they more than doubled the share of women on corporate boards and they haven’t stopped since.
I am a big believer in this type of “ecosystem approach” to solve complex problems like gender equality in a given industry.
In addition to identifying the systemic or organizational barriers to the advancement of women in VC, your report also lists the interpersonal barriers women face:
Gender stereotypes
Myth of meritocracy
Masculine “bro” culture
Harassment (50% of VCs and female entrepreneurs experiencing sexual harassment!)
Bias in feedback and mentorship (read this opinion piece on advice for female founders)
Bias from founders
These are some of the barriers Tidal Equality has identified in our work engaging women in other male-dominated industries and sectors, including STEM, energy, and tech.
If we can agree that
inequality,
expressed through bias,
in one shape or form,
is at the root of all these barriers,
some readers might be surprised your report doesn’t recommend widespread implementation of (implicit/unconscious) bias training.
After all, we see that sort of training is the go-to response by industries and organizations across the globe (think: California State Bar mandating bias training as continuing education requirement for attorneys, think: the bias training mandated after the Starbucks and Sephora when racial discrimination incidents went viral, as well as in response to the Gucci blackface sweater snafu, to name a few.)
In the US alone, upwards of $8B is invested annually in some form of bias training.
QUESTION:
What are your thoughts if the VC world follows suit and looks to (diversity/unconscious) bias training as a solution?
ANSWER:
The simple reason why we don’t recommend unconscious bias trainings is that there is a dearth of research evidence to suggest they work.
In fact, a review of over 50 years’ worth of data on diversity trainings shows that
they do not lead
to meaningful change
in organizational diversity.
Instead, the evidence shows - quite compellingly - that changing organizational processes and structures through behavioural design is a much more efficient and effective way to produce behaviour change.
This is because of the way our minds fundamentally work. As you point out, unconscious biases are one of the main causes of the inequality we observe in venture today. These biases are deep-rooted and extremely difficult, if not impossible, to eradicate from individual minds. But in addition to our brains, our organizations also contain built-in biases, and these organizational biases turn out to be much easier to dismantle than individual biases. So without de-biasing individuals, we can still see behaviour change by de-biasing environments and procedures. That is the essence of behavioural design, and that is the evidence-based approach we advocate for to create meaningful change on gender equality in venture capital.
not unconscious bias training:
For the organization that knows bias training doesn’t train the bias out of anyone.
READ:
“Don’t Do Unconscious Bias Training”
Your report doesn’t just look at the venture capital function of the ecosystem, but the venture side, as well. There, you identify numerous barriers that female founders face and articulate causes for the funding gap - which is significant.
Only 2% of all funding goes to female-founded ventures,
and 10% to mixed-gender founded teams.
You point to the nature of VC decision-making and the pitch process as a couple of the sticking points.
For example, your research shows
“venture investors are specifically negatively disposed towards female entrepreneurs.”
You cite an experiment where an identical pitch is given, but narrated either by a male voice or a female voice. In this case, 68% of evaluators prefer the male-narrated pitch and rated “his” pitch as “more persuasive, logical, and fact-based” than the identical female-narrated pitch.
You also point to how
female founders are asked different questions than male founders during pitches, and this difference correlates to a significant disparity in funding.
For example, male founders are asked “questions about the potential for gains 67% of the time, while female founders are asked prevention-oriented questions about the potential for losses 66% of the time” and that “a startup raises an average of $3.8 million less for every additional prevention question asked.”
It’s no surprise, then, that we see an increasing number of female-focused VC funds arguably hoping to close the gender gap in VC. Your report lists Backstage Capital, Female Founders Fund, and BBG Ventures as examples. She-EO comes to mind, as well.
You make it clear, though, that
these initiatives - while important - don’t make much of a dent.
Collectively, female-focused VCs leverage only about $1B in funds (shared between about 100 VCs), compared with the $130B in venture capital deployed by about 1,400 VCs in the U.S. industry.
QUESTION:
I’m curious to know, though, given the biases embedded in funding systems and processes (like pitch competitions, for example), how are female-focused VCs - or other VCs aiming to diversify their investments to include more female-(co-)founded ventures - working to (re-)design the processes that currently favour the male entrepreneur?
ANSWER:
This is an excellent question, and one I really wish I could answer!
But the lack of data and the lack of transparency around processes and outcomes in the venture capital industry is one of the key barriers to gender equality.
VC firms tend to be quite secretive regarding their internal processes and deliberations, so we haven’t been able to get detailed insights into how firms have designed and are redesigning their processes.
If there is one thing I would encourage firms to do, it would be to be more open about the things that they are trying to do to increase gender equality - and to measure the effects of those efforts. The industry could really accelerate its learning curve if individual investors and VC firms were more willing to share what has worked and what hasn’t.
SIRI CHILAZI
is a Research Fellow at Harvard Kennedy School’s Women and Public Policy Program, and a member of the Tidal Equality Collaborative.
DR. KRISTEN LIESCH
is co-CEO and co-Founder of Tidal Equality.
