According to PitchBook, things are still looking grim for women entrepreneurs and founders.
In 2016, just 17% of North American venture capital deals involved female founders. Furthermore, just 23% of global deals involving women had only female founders, with the other 77% involving mixed gender founding teams.
This implies that something around 4% of deals are going to female only founders, which isn’t great.
PitchBook also found that a higher proportion of female founders have attended top ten schools, and more of them have advanced degrees—it’s not for lack of education.
Gender bias in the business world
These findings are part of a longer, dimmer view of how things are playing out at the higher echelons of business. For example, the Harvard Business Review (HBR) found that VCs talk about female founders with less flattering language than their male counterparts.
Studies have repeatedly shown that women are underrepresented in technology, and it’s not a lack of education or experience that account for this imbalance. A study asking professors to rate applicants based on their resumes found ratings are higher when the applicant is named John as opposed to Jennifer—the name being only difference between the two resumes.
(By the way, that study also found that professors recommend a lower average salary for “Jennifer.”)
There are systemic problems left, right, and center. Honestly, I can’t imagine how to address or even highlight all of them. It’s a huge issue with no clear answer.
What I can do is draw attention to the two issues I believe are most problematic for the startup community and suggest ways we can overcome those issues.
These are problems, by the way, not just in broad social terms, but in terms of the industry’s overall health.
Not only do gender biases reward bad ideas and punish good ones, they also generate an artificial discount on female founder’s ideas, which only perpetuates the problem.
If I were a VC, I would be taking a very close look at women-led projects that had been passed over to find undervalued teams and products.
Challenge #1: Women’s networks need work
In that study from HBR, there were lots of unflattering terms thrown around about women founders, but the one that stuck with me was “Lacks network contacts.”
It stuck because it seems like a simple problem to solve, and it’s a tangible problem.
To illustrate that point, if I say that you’re “not a go-getter” or that you “lack vision,” we could just be stuck on terminology or perception. No amount of change on your part can fix that. On the other hand, if you come in with a network of five CEOs, and I say you need more, you can come back with a network of 600 CEOs and then we’re set. Discussion over.
Why networking matters
Bryce Keane, a startup observer and supporter, told the Economist, “If you don’t have an ecosystem of people you can tap into for support, to help out with, say, finding talent or just making contacts, it’s 20 to 30 times harder to get your business off the ground.”
That’s because networking uncovers opportunities where they may not be obvious, giving entrepreneurs access to capital and leadership when they need it. A person with a network of 75 people is less likely to know someone with a powerful friend than a person with 250 contacts in their network.
On top of the power connections, having a large network says something about you: A person with a large network knows how to interact with people and how to win them over. If you can confidently name drop, you demonstrate a “get out and meet people” attitude—the kind of thing that higher-ups typically love.
At its core, your network is a shortcut to demonstrating your value. If Tom thinks you’re a star, then you’re probably a star. It’s the system everyone who’s ever been set up on a date by a friend buys into. You’re more likely to get on with friends of your friends.
Why it’s harder for women to network
A study from McKinsey and LeanIn.org recently found that women have smaller networks than men, spend less face time with senior executives, and are more likely to have a network made up exclusively of other women. All of that adds up to fewer opportunities and the perception that female founders “[lack] network contacts.”
There are both internal and external reasons for the smaller networks.
- Internally, women are hindered in building networks because, in general, they tend to be more concerned about their work-life balance, and because they see networking as fake if it’s purely transactional. These are problems that a person could fix if they were alone in a vacuum.
- Externally, there are imposed problems. All the networking studies show that men tend to spend more time with men. While women often have very balanced networks, men have overwhelmingly male-heavy networks.
Women are stuck in a Catch-22. They don’t view networking in the transactional manner that men do, which means they don’t make as many connections with men. But, when they do treat relationships and business as transactional, they’re more likely to receive feedback that they’re “’intimidating,’ ‘too aggressive,’ or ‘bossy,'”
How to fix it
No matter how you look at it, there’s no simple solution to improving networking for women. It’s a system which two parties have to agree on for it to work.
Women who want to grow their networks need to think strategically and transactionally.
I’m not a woman, but I am generally socially anxious, which also makes me not great at networking. One trick I’ve found works well is to bring a buddy along to networking events. The buddy keeps you honest, and you keep them honest, and no one leaves the networking event early. This also gives you someone who can step in and gloat on your behalf, which is a big hurdle for me.
That’s a microlevel solution to addressing your own internal networking barriers. To address the larger systemic issues, we need to start thinking collectively about how networking fits into work. Events need to happen at times when people won’t have to give up their evenings to advance their careers.
I want to see more proactive networking on the behalf of CEOs and VCs.
- Bring people together during work hours
- Give your employees scheduled time to network
- Make connections on their behalf to support them
- Seek out people who don’t know how to seek you out
I would love to see VCs or successful founders just roll into a casual meetup of small business owners. Say hi, shake a hand, give out some business cards, and give people the confidence to go out and make more connections.
All it takes is a handshake and a smile. Well, and a few hours of time, which has a real cost, but which is also totally worth it for the good of the industry.
Challenge #2: Women’s access to capital needs to get better
Networks are a problem not just because they’re generally useful, but because networks are an important part of finding funding. Success in the startup world requires some amount of capital.
While Capterra and others may be able to do it on credit cards—or small personal loans or money from friends and family or personal savings or whatever—most businesses need a sharp influx of capital to scale.
Here, women get dinged again. While women start twice as many businesses as men, they get a tiny fraction of the available angel funding. The deals are smaller, less frequent, and overall under-representative of the population of founders.
This isn’t an argument about fairness. Fairness is the purview of sports, board games, and education. In business, we’re talking about a systemic failure that keeps diverse innovations and backgrounds out of production. That artificially decreases pressure on existing firms, makes it easier for weak ideas to succeed, and just generally makes everything worse.
How venture capitalists make investments
Before you even start talking about cash, you’ve got to show up on some VC radar.
Can you guess which pipeline delivers the largest number of deals to venture capitalists? If you said “their personal network,” you nailed it.
Putting the sourcing aside, most VC decisions rest on a combination of factors. According to the National Venture Capital Association (NVCA), the five biggest deciding factors in descending order of importance are:
- Business model
That means VCs are putting a huge amount of weight on the people behind a project, with the assumption being that VCs are good at reading people.
Other studies drive that point home, showing that investors overwhelmingly put the success or failure of a business on the shoulders of the people behind the business, relegating the role of market, product, and luck to the backseat.
Why VC decisions skew male
We’re coming full circle here. Remember how VCs viewed female founders as opposed to male founders? Now we can see how that actively hurts the business, because businesses with more women have a higher success rate and return more cash than their counterparts with more males.
The real story here is that VCs are relying on their judgements about a team, but their judgment is wrong all the time. Around seven out of every ten venture capitalist investments fail to return the initial investment.
Then you’ve got two out of ten that do fine, but “fine” is like your nephew, the 23-year-old high school senior becoming the starting quarterback for the varsity team. It’s not much to celebrate.
Then, that last little guy is the real winner, churning out five, ten, or fifteen times the VC’s initial investment. Sure, it makes a few people very wealthy, but there’s no way this can be the best possible system. If I set my house on fire, I fix my termite problem, but that can’t be the best way to do that.
A few years ago, Bill Gates summed it up nicely, saying:
“[Venture capital’s] hit rate is pathetic. But occasionally, you get successes, you fund a Google or something, and suddenly venture capital is vaunted as the most amazing field of all time.”
So here we are with a bunch of VCs—overwhelmingly men—who aren’t super good at making winning picks, but still believe they can make those picks by judging businesses based solely on who’s running the ship, but who also make their decisions with a heaping helping of gender bias.
How to fix it
My first inclination was to suggest a sort of veil of ignorance. Maybe people would make smarter investments if they didn’t know who was behind the wheel. In reality, though, I hate that idea.
Businesses are people, and investing is as much about choosing the right person as it is about choosing the right tech. A great idea for an app in my hands, for instance, would not do very well.
I think the real answer is a sort of revolution at some level. There are a relatively small number of women founders who are finding success and are getting access to the capital they need to grow their businesses.
They should turn around and plough some of that success back into the market in a more balanced and equitable way. There are some female founder-focused VC firms and communities out there, and I’d love to see more of that—Vicki Saunder at SheEO, The Female Founders Fund, and Belle Capital USA are great examples.
But I’d also like to see people who’ve been passed over set up new systems to keep this from happening. Maybe it means having more women in the room when decisions are made. Maybe it means having a common vocabulary to talk about merits and challenges and getting rid of this “Very competent innovator and already has money to play with” versus “Good-looking and careless with money” nonsense.
At some point, you end up with a system that doesn’t put gender on the scale, and you’re investing in the person without investing in their clothing choices.
Will it ever get better?
I know things even out over time, because continuing to ignore the talent available is insanity. It’s the sort of thing that an even a vaguely open market will have to account for eventually.
However, proactively addressing the failings of the current system can bring it into line more quickly.
We can make the VC world better by increasing the diversity of innovation it promotes.
All that said, the road is a long one. The numbers are so incredibly skewed right now that it’s going to take years of real, concerted effort just to move the needle halfway to its perfect position.
We need more transparency, more conscious action on the behalf of VCs and founders, and more education along the way to ensure people know what subconscious traps they’re likely to fall into.
If we can do all that, we might see change sooner rather than later.
If you’re interested in reading about my experience after the investments have come and gone, check out “7 Important Lessons I Learned When We Were Acquired.”