ADVANCING GENDER EQUALITY IN VENTURE CAPITAL WHAT THE EVIDENCE SAYS ABOUT THE CURRENT STATE OF THE INDUSTRY AND HOW TO PROMOTE MORE GENDER DIVERSITY, EQUALITY, AND INCLUSION Women and Public Policy Program Harvard Kennedy School October 2019 ADVANCING GENDER EQUALITY IN VENTURE CAPITAL WHAT THE EVIDENCE SAYS ABOUT THE CURRENT STATE OF THE INDUSTRY AND HOW TO PROMOTE MORE DIVERSITY, EQUALITY, AND INCLUSION This report was authored by Siri Chilazi, Research Fellow at the Women and Public Policy Program at Harvard Kennedy School. Please direct any correspondence to: Women and Public Policy Program Harvard Kennedy SchoolWomen and Public Policy Program 79 JFK Street Harvard Kennedy School Cambridge, MA 02138 October 2019 [email protected] TABLE OF CONTENTS THE CASE FOR CHANGE Foreword .................................................................................................................................................... 1 Why Should VCs Care About Gender Equality? .................................................................................. 2 An Ecosystem Approach to Advancing Gender Equality in Venture Capital .................................... 5 RESEARCH REPORT: ADVANCING GENDER EQUALITY IN VENTURE CAPITAL Venture Capitalists and Gender Equality .............................................................................................. 8 Industry-Wide Barriers to Gender Equality ............................................................................................ 9 What Works: Dismantling Industry-Wide Barriers .............................................................................. 16 Organizational Barriers to Gender Equality ......................................................................................... 18 What Works: Dismantling Organizational Barriers .............................................................................. 24 Interpersonal Barriers to Gender Equality ............................................................................................ 29 What Works: Dismantling Interpersonal Barriers ................................................................................ 36 Entrepreneurs and Gender Equality .................................................................................................... 38 Entrepreneurship as an Inherently Male-Typed Domain ...................................................................... 38 The Gender Gap in Venture Funding.................................................................................................... 42 What Causes the Gender Gap in Venture Funding? ......................................................................... 46 Entrepreneur-Driven Explanations for the Funding Gap .................................................................. 47 Investor-Driven Explanations for the Funding Gap.......................................................................... 48 What Works: Increasing Gender Equality in Venture Funding and Entrepreneurship ........................ 56 Why Is Change so Slow? ........................................................................................................................ 59 References ................................................................................................................................................ 60 APPENDICES Appendix A. Checklist for Structured Interviews ............................................................................... 75 Appendix B. Recommended Diversity Data to Track in VC Firms and Portfolio Companies ....... 77 Appendix C. Supplemental Data on Women’s Representation in the Venture Ecosystem ............. 78 Appendix D. Desirable Founder Characteristics ................................................................................. 82 FOREWORD Purpose. This research report describes the current state of gender equality in the U.S. venture capital (VC) industry and offers a practical way forward to close its significant gender gaps. It is intended to be an accessible resource for practitioners in the venture ecosystem, as well as a helpful reference document for journalists, scholars, and others interested in understanding gender dynamics in venture capital. This document draws on an 18-month academic research project by the Women and Public Policy Program at Harvard Kennedy School as part of its gender and technology research portfolio. This document also incorporates an extensive review of existing academic and popular literature related to gender in venture capital and entrepreneurship. The research team thanks the New England Venture Capital Association and Culturintel for their collaboration on the study. Navigating this document. This report begins with a case for change highlighting why we should care about gender equality in VC in the first place, followed by an introduction to an ecosystem approach to advancing gender equality and diversity and inclusion (D&I) in venture capital. After that, two main sections – on venture capitalists and on entrepreneurs, respectively – delve into the detailed causes and effects of the gender gaps we observe in the venture ecosystem, as well as suggested actions to close these gaps based on research. We conclude with a discussion on why progress on gender equality in VC has been so slow, and how it can be accelerated going forward. Our focus is intentionally on organizational and individual levers to promote change. Scholarship from the last 10-20 years is emphasized in the literature review, although earlier, seminal works are included where their influence continues to be felt and where they remain relevant to the discourse. Footnotes contain additional detail. The author takes full responsibility for any errors. Throughout the document, colored and highlighted summary text boxes offer key takeaways from each section for speed of perusal. A note on gender and race. We acknowledge that the concept of gender is complex and does not exist on a binary. We also acknowledge that biological sex as assigned at birth and gender or gender identity are distinct. Nonetheless, today’s empirical research and the vast majority of the popular literature on the venture capital industry still generally exists on the woman-man or female-male gender binary because this is how most data are collected. As such, this document examines gender in the binary context and uses “female” and “woman” interchangeably to refer to individuals who self-identify as female, and likewise for male. Moreover, given the extremely small numbers of women in venture capital to begin with, very little academic research exists on the intersectional experiences of women (and for that matter, men) of different races and ethnicities. This is a major limitation since extant research in other contexts suggests that women of different races have meaningfully different experiences. In this document, intersectional data are highlighted wherever possible; however, it is important to acknowledge that the analyses presented are primarily based on white, heterosexual women and men’s experiences and the generalizability of the findings to other demographic groups is as of yet unknown. 1 WHY SHOULD VCS CARE ABOUT GENDER EQUALITY? Gender equality in venture capital is important not only because it is the right thing to do, but also because it is the smart thing to do. Academic research shows that VC firms with 10% more female investing partner hires make more successful investments at the portfolio company level; have 1.5% higher fund returns; and see 9.7% more profitable exits. As for investments, there is some evidence to suggest that startups (co-)founded by women perform better over time than those founded by men. On the flipside, studies show that lack of demographic diversity among venture investing teams is associated with around 20% lower investment performance. What’s more, female-founded startups perform 24% worse when financed by all-male VCs compared to gender-diverse VCs. Adding more women into the venture ecosystem – as investors, as founders, and as leaders of portfolio companies – is thus an evidence-based way to increase returns across the whole industry. Gender diversity and gender equality in venture capital is fundamentally a moral issue. Excluding half of the population from a sector of the economy that is responsible for substantial wealth generation, job creation, and wage growth (Gompers & Wang, 2017a) is, quite simply, unfair and wrong. But it is also unwise. While there is overall only a small amount of research on the relationship between gender diversity and financial performance in the venture capital industry, the evidence we do have very strongly suggests that including more women in VC is the smart thing to do financially. Not only does increasing gender diversity improve financial performance for VC firms; homogeneity in venture capital, including in investments made and among portfolio companies, also harms financial performance. Gender diversity among investors boosts financial performance for VC firms. The most robust, convincing evidence supporting gender diversity’s positive effects on VC returns comes from Paul Gompers and colleagues, who analyze commercial data on 14,000 VC investments in 42,000 individual startups from 1990 to 2016 – essentially all venture deals in that time period (Blanding, 2018). They find that VC firms that grow their share of female partner hires by 10% experience a 1.5% increase in fund returns every year, as well as 9.7% more profitable