Diverse-VC: Gender

Our Iraoho-Intern Kiri Lenagh-Glue has been critically analysing the state of diversity in the Venture Capital space – this is part 1 of a 4-part series. Click here to start at the introduction.

Author’s note: I would like to acknowledge the concept of gender as a spectrum, and the ongoing discussion around shifting away from a traditional gender binary of ‘male’ and ‘female’. An individual’s relationship and identification with gender is very personal, as well as the decision to publicly share their identification. While public consciousness and attitudes are growing and changing, there are still potential risks to safety, security, dignity, and livelihood to individuals who identify outside of the traditional gender binary. Additionally, within the literature published surrounding demographics of the investment ecosystem, there has been little work done to capture data surrounding gender-diverse individuals. Therefore, while gender-diverse individuals are active participants within the areas of innovation and investment, and critical when discussing diversity of gender within investment spaces, this article will not attempt to introduce the demographic into this article.

‘Diversity’ has been a buzzword as of late, in social, economic, and corporate jargon; diversity of thought, skill, and ability. However, it is not just in the intangible where diversity is being challenged and promoted, but in the tangible as well. Within the corporate context, diversity is being highlighted in the personnel who make up teams, from entry-level through to senior decision-makers. A key area recently has been the diversity of gender, and establishing more equitable representation in traditionally male dominated industries, such as investment.

In 2019, venture capital firms in the US and UK reported that women made up 21% and 20% respectively of all investment professionals. This percentage decreased significantly when looking at more senior roles, with only 11% of investing partners in the US being women, and 13% in the UK. Moreover, the same reports noted that nearly 75% of venture capital firms within the US and 63% of firms in the UK had no women in high level positions of any kind.1,2 Not only do these statistics present a grim picture of the makeup of those determining investment into future innovation, but there are significant tangible implications to firms and to the innovation sector from gender disparity.

The 2019 Harvard Kennedy School report, Advancing Gender Equality in Venture Capital, found that venture capital firms with greater gender diversity of investors outperformed firms with less, in all areas of investment. An analysis of over 14,000 venture capital investments between 1990 to 2016 found that firms which had a larger proportion of female partners experienced an increase in annual fund returns, more profitable exit values, and a larger proportion of profitable exits. The most significant finding, however, was that the gains were observed even within firms who grew their share of female partners by only 10%. Inversely, firms which lacked gender diversity amongst their partners saw a 20% or greater reduction in the likelihood of a successful exit.1 There are a number of reasons posited for the increased performance of more gender diverse firms, such as the shift away from ‘group think’ which can be prevalent in homogenous working environments. The introduction of partners with different background experiences and perspectives can allow for more comprehensive analysis and investment decisions, as well as allowing for recognition of opportunities which may have been traditionally overlooked or unrecognised.

It is not simply that the lack of representation of women in institutional investors has a tangible effect on venture capital firms, but it has critical implications on the wider innovation sector. While the number of female founders in the startup space has grown significantly in the past decade,3 this has not been reflected in investment deal flow or value in venture capital. The Q1 2020 Venture Monitor observed over the past 10 years in the US, teams with all-women founders, and teams with at least one female founder, combined accounted for a smaller proportion of investment deals and deal value than teams with all-male founders.4 This trend is reflected in the UK, where investment teams comprising all-male founders reportedly received 68% of investment capital between 2009 and 2019, with teams made up of all-women founders received 3% of all invested capital.5 In New Zealand and Australia, the proportion was higher, with the number of female-founded businesses in the USD$1m+ capital bracket accounting for 10.1% of investment capital share.6 A longitudinal study conducted by First Round Capital found that companies with at least one female founder performed 63% better than all-male teams in the same metrics.7 This trend holds true in later-stage companies, as well, with companies in the top quartile for gender diversity in their executive teams were 21% more likely to outperform their fourth quartile industry peers on EBIT margin, with strong correlations that gender diverse teams lead to stronger strategic and operational decisions.8

It is overly simplistic to say that the state of gender diversity, or a lack thereof, amongst founders is directly the result of the gender landscape of venture capital firms and key decision makers. However, to discount the importance that gender makeup within firms plays within this space is similarly harmful. Firms with female partners invest into female founding teams at nearly twice the frequency of their male counterparts in both Seed and Series A stages,9 and female-founded startups can significantly underperform when financed by all-male investors.1

It is clear, then, that the future of venture capital should include more women at all stages, as both a moral and strategic decision. The question remains, what are the steps forward for increasing gender diversity within the investment space? There are a number of key points of failure which analysts have identified, such as the perception that there is a dearth of qualified women within the field, the lack of successful female role models in venture capital, or the industry’s heavy reliance on networks which are predominantly male-driven.1 To give the venture capital and innovation sectors credit, there has been significant work throughout industries to challenge these preconceptions and traditional obstacles. Industry investors from cornerstone institutions, smaller firms, incubators, and investment networks have made significant strides in developing programmes that help promote women in venture capital and foster their networks and connections, as well as establishing internal standards and methods of practice to increase the hiring and promotion of women in firms.

It is worth acknowledging that these initiatives are integral, but not instantaneous. It takes time and significant resources to establish sustainable avenues for changing the gender diversity of the investment and innovation workforce, tackle ingrained attitudes and perceptions, and develop personnel pipelines which foster genuine experience and professional growth, rather than lip-service ‘diversity’ hires. Reflecting on Matū’s own position in this regard, the fund demonstrates its ongoing commitment to these ideals through our Whakatipu Tāngata policy, to facilitate the growth of diverse human capital. Through the creation of the Iramoe and Iraoho roles, Matū currently has equal representation of men and women internally. The growth and development of the investment workforce is the responsibility of the leaders within the ecosystem, and the General Partners at Matū have taken a position of direct accountability, actively growing the Iramoe and Iraoho roles to increase the engagement and professional development of women in investment in New Zealand. 

Whether you approach the lack of women in venture capital as a strategic, innovative, or moral issue, the fact remains that there are tangible effects stemming from the lack of gender diversity within the industry, both investment and innovation. While there are no ‘quick-fixes’, it appears that the investment industry has recognised this as an issue that not only should be addressed, but one that can be rectified, through the continuous working by all to dismantle industry-wide, organisational, and interpersonal biases and barriers.

Part 2 next week focuses on ethnic diversity, including the role of indigenous peoples in VC.

1. Harvard Kennedy School. Advancing Gender Equality in Venture Capital. https://wappp.hks.harvard.edu/files/wappp/files/gender_and_culture_in_vc_literature_review_final.pdf 
2. Diversity VC. Diversity in UK Venture Capital 2019. https://www.diversity.vc/wp-content/uploads/2019/07/DiversityInVC_Report_10.07.2019_for_Web.pdf 
3. Harvard Business Review. “Institutional Investors Must Help Close the Race and Gender Gaps in Venture Capital”. https://hbr.org/2020/08/institutional-investors-must-help-close-the-race-and-gender-gaps-in-venture-capital 
4. PitchBook. Venture Monitor Q1 2020. https://files.pitchbook.com/website/files/pdf/Q1_2020_PitchBook_NVCA_Venture_Monitor.pdf 
5. Extend Ventures. Diversity Beyond Gender. https://info.lse.ac.uk/staff/divisions/equity-diversity-and-inclusion/Staff-networks/EMBRACE/assets/documents/Diversity-Beyond-Gender-Nov-20-1.pdf 
6. Tide. Pioneering Women. https://www.tide.co/pioneering-women
7. First Round Capital. 10 Year Project. http://10years.firstround.com 
8. McKinsey & Company. Delivering through diversity. https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity 
9. Kauffman Fellows. “Women VCs Invest in Up to 2x More Female Founders”. https://www.kauffmanfellows.org/journal_posts/women-vcs-invest-in-up-to-2x-more-female-founders