The Business Case to Fund More Gender Diverse Teams

With suggestions on how to take advantage of investing in this underserved market

Dear Mister VC,

I sometimes joke that my ultimate goal at Springboard is to put myself out of a job. And the same goes for a number of other organizations in the ecosystem supporting women-led companies. If there’s no gender gap, and we #changetheratio, then in theory we’re no longer needed.

But there’s an important role those of us in the “women-led” market still need to play, especially now that the sirens are blaring louder and louder about the gender issues faced by the startup and venture world. And that is to carry the momentum that’s been created by Ellen Pao’s gender discrimination case against Kleiner Perkins, and the infamous Newsweek article about women in tech, and drive change.

What began as something that women whispered about behind closed doors became part of a national conversation. — Katie Benner, BloombergView

Earlier this month, I joined a number of other leaders for a discussion with Kate Mitchell, partner at Scale Ventures and board member at the NVCA, who is leading the NVCA’s Diversity Task Force. Its mission is to do exactly that: convert the attention into action.

And one of the critical issues we discussed is that men need to be a part of this conversation. This article is for them.

FACT: Male-run VC firms are missing great investment opportunities because those companies are led by women

Maybe you are thinking that this doesn’t apply to you. That you invest in the best founders, regardless of gender.

Maybe you aren’t aware of the unintended biases you bring to every investment decisions.

Maybe you’re driven by data and still need to be convinced of the business value of diversity.

Maybe you want to take steps to address the diversity problem within your own fund but you don’t know where to begin.

Whichever category you fall into, I hope this article provides you with a compelling argument why you should take proactive steps to fund more diverse teams, and some ideas of how to do it.

Two big problems VC firms should attack head on if they want to invest in more gender diverse companies

There are any number of reasons a VC firm might not be investing in gender diverse teams. Since you are reading this, it probably isn’t a lack of interest, but rather a roadblock at some point in the investment process: from sourcing to due diligence to offering a term sheet to closing the investment.

The only way to identify the problem within your firm is to start tracking the data.

  1. Pipeline Problem: Is the problem at the top of the funnel, with the pipeline (% diverse teams with which you take a meeting)?

In today’s world, asking “Where are the women entrepreneurs?” should be a laughable question. VCs asked that question 15 years ago and that’s what led to Springboard. VCs ask that question today and it’s a sign they have a problem with their pipeline.

If you’re not seeing women-led companies in your deal flow, it’s because you aren’t finding them AND because they aren’t finding you. But they are out there.

To address this problem you need to proactively address the top of your pipeline to find and attract more diverse teams. And you need to start tracking the gender composition of the deals you are exposed to so you have a measurable way to define progress.

2. Pattern Recognition Problem: Is the problem in the selection process (% diverse teams you offer a term sheet)?

Pattern recognition is an important VC skill: the ability to recognize the factors of an investment opportunity that predict its future success.

The problem with using pattern recognition when the companies in your portfolio are predominantly led by men, is that the patterns you consciously and unconsciously seek are based on the way men communicate and lead.

And because women and men communicate and lead differently, it means that you need to increase your exposure to women entrepreneurs so you can better understand these subtle differences. Otherwise you will miss good investment opportunities because you don’t know what success looks like when it is presented by a woman.

The economics of diversity: data to support why you should seek out diverse teams in the companies you back

This isn’t philanthropy. Building out your pipeline or addressing the way you use pattern recognition should be an imperative because it represents a business opportunity.

As the data has shown, greater diversity of all sorts — age, gender, education, ethnicity — increases the likelihood of finding that unicorn, or driving better decisions in our investments and on our company boards — Jennifer Fonstad, Aspect Ventures

Women-led is a market that is getting the backing from an increasing number of LPs convinced there is money to be made by investing in funds that target women: BBG Ventures, Merian Ventures, Female Founders Fund, Springboard Fund to name a few.

There is a business case that’s driven by a number of facts, surveys, and studies (please comment if you know of others that should be added):

  • Women entrepreneurs have 21st leadership skills like learning agility. According to the Korn Ferry Institute, women entrepreneurs score higher in “agile learning” and other key leadership attributes than either male or female executives holding C-level and VP positions.

For the smart early stage investor, be it VC or angel, that disparity should spell just one word — opportunity. — Adam Quinton, Lucas Point Ventures

  • Women entrepreneurs still cite access to funding as a primary challenge, making this funding gap an opportunity to differentiate. According to this survey conducted by the Kauffman Foundation in November 2014 and also supported by this research conducted by Sarah Thébaud in December 2014.

Are women being recruited to our firms? In what ways can they advance in their careers here? Do they get real, viable opportunities to succeed? Are they among the first staff cut during a market downturn when the venture industry invariably contracts? The answers to these types of questions are the ultimate litmus test of our firms’ dedication to its female colleagues.

What you can do to take action

I won’t pretend to have all the answers, but in my conversations with friends and colleagues I have pulled together some things VC firms can do if they are serious about taking advantage of investing in this underserved market:

  1. Hire a female investor. 4% VCs are women and 77% VC firms have never had a woman investor. And yet, according to the Diana Project research, VC firms with women partners are twice as likely to invest in companies with a woman on the management team and three times more likely to invest in companies with women CEOs.

Change is already in progress. The pace of new funds led by women is growing. There are more funds and accelerators and communities backing women-led companies starting every day. Women are kicking ass and not just leaning in.

Now we just need more men need to do the same.

1000% committed to helping women innovators transform industries, cure diseases, and build scalable businesses

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