Gender diversity in venture capital

Why is gender diversity is still such an issue when most investors champion the need for diverse business skills?

When it comes to early stage investing, there are many different approaches but a few consistent principles are almost universally accepted. One is that the founding team is always more important than the business plan or idea. The business almost never goes to plan and it’s up to the team to react and adapt faster and more successfully than the competition. For this reason, most venture capitalists look for a strong founding team with a diverse and complementary skill- set. So, given that most investors not only accept the need for diverse business skills in a founding team but actively champion it, why is it that gender diversity is still such an issue?

The internet is awash with statistics and data on the topic. Unfortunately, with such an opaque industry, almost all of it is inaccurate and most of it could be described as misleading at best. Public information is skewed towards the largest, most high-profile transactions and even then much of the analysis is subjective. Should an outlier like the recent $14bn raise by Ant Financial be included when it distorts the average by so much? Is it an example of capital raised by a female founder, Ant’s Lucy Peng (who stepped down as executive chairwoman two months before the raise)? Or is it further evidence that it is still male teams that secure the bigger backers? In spite of these difficulties with the data, there are a few trends that do shine through very clearly. The first of these is that female founders are massively underrepresented when it comes to attracting investment from venture capital. Given the historic imbalance, it’s no surprise that later stage businesses, which have taken years to be ready for larger investment rounds, are hugely skewed towards to all-male teams. The frustration is that it also holds true at seed stage and Series A.

Many explanations have been put forward for the imbalance. One of the more convincing arguments is that females are also underrepresented in the venture capital industry as only about 8% of venture capital investors are female. Most investors suffer from an unconscious bias and so will back teams that are like them, ideas they identify with personally or something that really resonates with them. Most of the other proposed explanations are either the perpetuation of myths that have been categorically debunked or the suggestion that venture capitalists still believe in these myths at all. Those include outdated stereotypes suggesting female founders are too conservative with their forecasts, not ambitious enough, too shy to ask for a larger amount or that they don’t build big companies because they are more risk- averse and so focused only on cutting costs, not growing revenues.

The good news is that things are changing significantly. Many, if not most, venture capital firms are now actively seeking to address gender imbalance both in their own teams and in their investments. Some new funds are going so far as to invest only, or primarily, in female founders.

Over the next few years, we’ll be able to see the results of these investments. Success breeds success and that is how the positive changes we’re seeing today will really gather momentum. Hopefully, the debate will move away from the merits of male teams versus female teams and focus instead on the benefits of diversity in all its forms as a predictor of genuine business success.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.