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More Than Just A Pay Gap: Imbalances in VC Investing
The discussion around gender pay discrepancies isn’t anything new. It’s still vitally important, but it’s not new. A stone we’ve left relatively unturned, though, is the gender gap when it comes to VC funding.
We’re seeing an imbalance in opportunities and exposure between men and women in the startup world. And it has some pretty significant implications — not just for women, but for the startups they’re leading, the investors supporting (or not supporting) them, and the economy as a whole.
I recently spoke with Julia Boorstin. Julia is CNBC’s Senior Media & Tech Correspondent; she covers media with a special focus on the intersection of media and technology. Not only that, but for over a decade now, she’s taken a vested interest in women in leadership.
Now, Julia’s one of those fantastic people who uses her passion for greatness; she’s even written a book about women and leadership. I was super excited to chat with her. Let’s just say, I was not disappointed.
Realities for Women in Leadership
Before we start, I want to mention: I’m not a woman. I haven’t had the experience of being one, nor do I claim to know what it’s like. But this is why I invite incredible people like Julia onto the show; so we can all understand other perspectives, and use that insight to shape the way we think and act.
Julia Boorstin grew up with parents who actively supported the Civil Rights Movement. They were proponents of change who wanted to see their daughter have all the opportunities in the world.
“I would always get encouragement from my parents, and particularly my mom, to just think about what I want to do when I grew up. ‘Don’t worry, you can do whatever you want. By the time you grow up, everything will be different.’ I felt that by the time I was in the workforce, things would be equal.”
While it’s true that the workplace made great strides while Julia was growing up, it hadn’t quite reached Utopia before she got there.
“I showed up at work the first day, and I was getting this informal orientation by one of the women who worked there. And she said something to me that I will never forget. She said, ‘Oh, the good news is there was just a sexual harassment lawsuit here. So everyone will be on their best behavior.’ And I was like, what are you talking about?”
It was a rude awakening. But it drove Julia to become incredibly passionate about women in leadership and the issues they face — and since then, it’s been nothing but net.
Throwing Out Stereotypes
Before we get to the topic of venture capital investing, let’s get one thing clear — women can be just as effective in leadership as men. And what’s more, they tend to take completely different approaches to see highly successful results.
“I started my book because I was so impressed by the female founders I was meeting,” Julia explained to me. “I thought their approach seemed different from the stereotype of what leaders are supposed to look like, and be like, and lead like.”
Picture the classic CEO stereotype — the one that’s been popularized in countless movies and TV shows. This person is usually shown as cutthroat, willing to do whatever it takes to get ahead. They’re always working, they’re rarely seen outside of the office, and they micromanage everything.
And let’s face it; in most peoples’ split-second imaginings, they are also male. But there are so many benefits to exploring the habits and strategies of female CEOs in particular.
“The archetype of aggressive top-down hierarchical management is really not the way things work — certainly not anymore. We should just throw out the stereotypes of what a leader looks like, because it has nothing to do with what in reality actually works.”
So, How Does This Relate To VC?
It’s hard to imagine that a simple stereotype — a default profile, often exaggerated in nature, that we attach to certain people and things — could be destructive. But there are so many devastating trends we can point to throughout history that have been shaped by just this.
White supremacy, for one. The marginalization of people with disabilities. The current global refugee crisis. Wage gaps. Political corruption. The list goes on.
But let’s talk about sexism. You know the funny little stereotype that ‘women suck at certain jobs’? Yeah, that one. You might see it as a harmless (if not poorly placed) joke, but it’s actually led to some serious implications for women.
Countless girls and young women felt discouraged from pursuing careers in science, technology, engineering, and mathematics (STEM). As a result, there are far fewer women than men working in these male-dominated fields.
And yes — now that men are by far the most prevalent in the tech startup space, they’re the recipients of the majority of venture capital investments. This is the issue Julia unpacked with me in our interview.
Do Men Really Receive More Funding?
Before my talk with Julia, I never realized put much thought into how important it is for VC firms to have a female presence. I mean, if asked, we’ll all say — of course, it’s important. But do any of us really know how large the gap is, and why we need to fix it?
She really brought to light how men and women approach leadership differently — and why that’s such an important thing to consider when it comes to investing.
But guess what? Startups with female founders are severely neglected in terms of investments.
“On average, female founders have gotten 3% or less of all venture capital funding in the past 10 years. So if you look at billions of dollars in venture capital, like $30 billion last year, 3% or so of that money goes to companies with female founders.”
Women-led companies actually receive 6% of deals — so the fact that they only get 3% of the funds means their offers are smaller, too.
When Julia found out about these insane figures, she decided (like a true journalist) to dig a little deeper. For her, the tech industry seemed like the logical place to start.
“Tech companies have massive influence over everything. And tech companies are funded by venture capital, because venture capital fuels them and allows them to grow massively. So I wanted to look at this sector, because this is the sector with the craziest gender gap.”
Why The Gap?
So, why is there such an obvious difference between the number of deals offered to women-led startups, and the amount of money these startups receive? I was eager to hear from the expert.
“I just want to be clear — I’m not pointing fingers at anyone,” Julia said. “I don’t think there’s one group, person, or organization to blame for any of this. Layers upon layers of structural, historical, and societal patterns have established this system. And it’s very hard to break them.
“It doesn’t necessarily seem to have anything to do with performance; it can have to do with how much women are pushing for promotions, or maybe they are inadvertently penalized for taking maternity leave. There are many different reasons.”
Pattern Matching
Interestingly, Julia focused on one particular reason she referred to as ‘pattern matching’.
“Pattern matching is this idea that if you’re a VC, and you want to make an investment in a founder, your instinct and the data would indicate that you should invest in someone who matches a pattern,” Julia explained.
“Maybe you have a pattern of investing in people who were engineers at an Ivy League school, and then founded an enterprise software company, which they sold. And now you want to invest in these second-time founders. If you’re looking at that subset of founder, you’re going to be looking mostly at men.”
It’s not that more men go through business school. The numbers are pretty even there — and actually, more women go through college than men on average. But these are the trends we’re seeing regardless.
“It becomes this feedback loop where people invest in more and more of the same types of people. Part of it is that if you’re a venture investor, you’re making some big bets and you want to control every factor you can control.
“There’s also this instinct to invest in people who feel like your friends. Maybe they went to your fraternity, or the same college.”
From Julia’s perspective, it’s not so much a conscious, intentional prejudice as it is a series of small subconscious choices that add up. But the result is a very clear gender gap — one that’s difficult to ignore.
“There’s some crazy quotes in my book from VCs saying, ‘I’ll invest in anyone who reminds me of Mark Zuckerberg!’ But I think it’s just this instinct to go with the familiar.”
How To Side-Step Prejudice as an Investor
In our interview, Julia shared a super interesting anecdote about one particular VC firm called First Round Capital in Philadelphia. I think it sheds some incredible insight into how we can side-step prejudice, both as individuals and organizations.
See, Julia interviewed someone from the firm named Josh Coleman who had been actively working to diversify the kinds of investments First Round Capital was making. And he was having a lot of success by working from the inside out.
“Josh found that the female-founded investments — there weren’t very many of them — tended to perform better. And he thought, ‘This is crazy. If the female founders and their companies are doing better, why aren’t we investing in more of them?’
“He took a step back and realized that there were systems investors could put in place to make sure they weren’t just investing in the obvious thing based on the pattern.”
Already, I love this way of thinking. You can’t hope to tackle large-scale problems when there are systemic issues running right through your organization.
“Josh said, ‘Why do we only hire people if we’ve invested in their company? Let’s broaden the pool.’ So they started hiring more women, and all of a sudden got this different pool of companies coming to them with their ideas, because they diversified, who their venture partners were.”
First Round Capital also made some crucial changes to their internal processes, like board meetings and investment pitches.
“Interestingly, they put these systems in place in their meetings to make sure they’re getting rid of bias; they’d hear a pitch, and then instead of just opening the floor for conversation, they’d have everyone write down what they thought about the company. One dominating person couldn’t railroad everyone else into listening to their opinion.
“This way, you can get people who are more introverted — maybe women who are less likely to want to go out on a limb in a male-dominated room — and you could just let everyone share their opinion without it having to be a public performance.”
So, What Can You Do?
Pretty cool, right? But I know you’re looking for more practicals — and I’m glad you are. Because while it’s great to see organizations like First Round Capital making these kinds of changes, we can’t just rely on other companies to do the work for us.
Here are some things you can do right now to diversify your hires and portfolio, whether you’re a VC firm or an entrepreneur running a startup.
1. Be aware of unconscious bias.
“I think there’s so much upside to recognizing and stripping out the pattern matching and the unconscious bias.”
When you make a hire or invest in a company, idea, or product, take a step back and examine why you’re doing it. Is it because you genuinely believe in the merits of what they’re doing? Or is it because they remind you of someone who was successful in the past?
2. Look at the data.
“Every company in the world benefits from reading the data. If you’re relying on the data, and it’s not about your ego, then you’re not going to be distracted by your feelings about the plan you made.”
Julia based all of her research on cold hard facts and data — and that’s what we should be doing when scrutinizing our own biases. How many of your investment companies have male CEOs? How many of your hires into leadership positions are people who fit the ‘male CEO’ stereotypes?
3. Talk to your people.
“It’s one thing to have the CEO say, ‘I know what we should do.’ It’s another thing to say, ‘Okay, let’s go talk to people.’ Every situation is different, and you’ll only benefit by being humble as you gather information.”
This is something I’m constantly practicing, whether it’s in the context of business or personal relationships. You can’t make assumptions about what people want or how they’ll react to things — you have to base every decision on the real data you collect from talking to them.
4. Seek out women entrepreneurs.
This one is easier said than done, but it’s so important. We need to be intentional about finding and investing in female entrepreneurs, because they’re not always the ones who are naturally pitching their businesses to VC firms.
Likewise, go the extra mile to interview female applicants for prominent leadership roles in your organization. Make sure you’re not just hiring someone because they’re a woman, but that you genuinely believe they’re the best candidate for the job.
5. Practice servant leadership.
“Servant leadership is putting your customers and your employees first; thinking about what is going to be best for these groups of people. It’s about diminishing the leader’s role in the organization, because they’re trying to elevate the needs and the impact of their people.”
If you haven’t heard of servant leadership before, it’s a philosophy that puts the needs of others above your own. As a leader in your organization, think about how you can serve your employees and customers instead of just thinking about what’s best for yourself or your shareholders.
This is by no means an exhaustive list, but it’s a good starting point. We need to do better as an industry when it comes to gender diversity — and we can only accomplish that if we’re intentional about making changes in the way we operate.
Wrap-Up
It was delightful speaking to Julia about the issues facing women in the VC world. I’ll admit that it’s something I hadn’t thought on too deeply prior to this conversation, but now I see that we have to be intentional with this. We have to be aware of our unconscious biases and act in opposition to them.
I’d highly recommend listening to our full interview — there’s no way I could have unpacked all of Julia’s wisdom and insights here — and I’ll also leave a link to her book. Let me know your thoughts on this issue in the comments; do you have any other suggestions for how we can close the gender gap in VC funding?
Thanks as always for reading!
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Thank you for reading,
-Scott
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