The female startup CEO was emailing again. It was the final stage of a potential funding deal with a venture capital firm, and she was negotiating hard to close it. “I saw that as a CEO she was doing her damnedest for her company,” one young female venture capitalist told us during a recent interview. “But the general discussion, even from internal women at our organization, was ‘I don’t want to work with someone like that. She’s too pushy. She’s too aggressive.’ I really don’t think anyone would [have said] that if she was a guy.”
It’s just one example of gender bias that we found in our recent research into the venture capital (VC) industry, which is one of the most male-dominated in the United States today: only approximately 10 percent of VC investors are women, and less than 5 percent of all VC funding goes to female entrepreneurs.
Besides being a moral issue, gender equality in venture is a huge business opportunity that most VC firms are ignoring.
Besides being a moral issue, gender equality in venture is a huge business opportunity that most VC firms are ignoring. Paul Gompers and colleagues have shown that diversity significantly increases both overall fund returns and the profitability of investments at the individual portfolio company level. In fact, VC firms that increased their proportion of female partner hires by 10 percent had 9.7 percent more profitable exits and 1.5 percent higher overall fund returns each year, on average.
So far, the prescriptions for increasing the proportion of women have generally focused on fixing individual behaviors: male investors should diversify their networks and make a greater effort to mentor and elevate their female colleagues; female investors should support and coach each other; and female entrepreneurs should learn to pitch like their more successful male counterparts. Despite this advice, the number of women in the industry has not increased markedly, nor has VC’s famously hypermasculine culture changed meaningfully. Could this be because by emphasizing individual behaviors we have been trying to solve the wrong problem?
To answer this question, we partnered with the New England Venture Capital Association to conduct 21 in-depth one-on-one interviews (like the one above) with female and male venture capitalists. In collaboration with CulturIntel, we also examined more than 500,000 open-source online conversations about gender and diversity between venture capitalists and entrepreneurs. What we discovered was both entirely expected and utterly surprising.
Our research reinforced that the well-documented unconscious biases in VC play an important role in keeping women out of the industry and its top ranks. For instance, venture investors prefer to associate and invest with similar others (a tendency known as homophily), and female investors are treated differently from their male counterparts in myriad ways. In their interactions with entrepreneurs, investors ask female and male founders different questions; punish entrepreneurs for stereotypically feminine behaviors; evaluate female- and male-founded ventures using different criteria; and, generally, prefer pitches by male founders even when the content of the pitch is exactly the same.
So far, the prescriptions for increasing the proportion of women have generally focused on fixing individual behaviors…but the number of women in the industry has not increased markedly.
In addition to individual-level bias, we also uncovered numerous examples of organizational and system-level biases that disadvantage women. The problems often start with the size of VC firms—most are small and lack a systematic and professional HR function. As a result, talent management processes and other organizational procedures are unstructured, overseen by people with little subject-matter expertise, and not evidence-based. Though many other companies keen to increase firm diversity now make hiring decisions with data and algorithms, for instance, most VCs still trust their guts and their (largely male-dominated) networks to help them find the right candidate. The recruitment process is “more happenstance than anything else,” one of the male venture capitalists told us.
New investors are hired based on personal preference, which a female venture capitalist recognized doesn’t help to diversify the industry: “[The way] we all hire people is do I like that person? Do I have things in common with them? If you hire people that way, you do not end up with diversity.” Performance assessments and promotions often happen ad hoc with no consistent or objective evaluation criteria. Diversity and inclusion metrics, such as the percentage of women in the VC firm and its portfolio companies across different levels, are rarely tracked and hardly ever reported. Most VC firms lack organizational policies around things like parental leave, flexible work arrangements, and sexual harassment.
That these types of organizational practices would lead to gender-biased outcomes is not news to behavioral scientists—in other words, this was largely expected. But there is good news for VC firms: as one of us (Iris Bohnet) explains in her book, What Works: Gender Equality by Design, organizational systems turn out to be much easier to de-bias than mindsets, and well-designed processes allow even inherently biased minds to make better, fairer decisions. We think it’s time to address venture capital’s gender disparity in a new way: by redesigning organizational processes, rather than only relying on people to think differently.
What genuinely surprised us: this is a new line of thought in the venture community. But it holds tremendous potential not only for closing gender gaps in venture capital but also for shifting the conversation toward evidence-based strategies. Based on our research, we propose the following behavioral design interventions for VC firms to overcome the effects of systemic unconscious biases and improve gender diversity in their industry.
Professionalize and centralize HR procedures. Behavioral science has proven that lack of structure allows unconscious biases to flourish. For this reason, VC firms should institute more structure into their HR and talent management processes. In hiring, companies should use formal job descriptions and predetermined evaluation criteria that focus on skills and competencies rather than, for example, a specific educational pedigree. Job interviews should be standardized with the same questions asked of all candidates. Better yet, instead of interviews, VC firms could evaluate prospective investor candidates using work-sample tests that are designed to mimic the work as closely as possible. In larger firms, candidates could be hired in batches rather than one by one by different partners, a move that would take advantage of the cognitive benefits of joint rather than separate decision-making, which has been shown to lead to less biased outcomes. Similarly, performance evaluation processes should be systematized with guidelines for giving specific, actionable (and gender-neutral) feedback consistently.
“We were sort of nervous about introducing (more structured organizational processes) at first…The feedback we got when we first did it was, like, ‘Oh my God, this is amazing, why haven’t we been doing this for, like, ever.’”
While redesigning internal processes this way may sound like a daunting task, a senior male venture capitalist told us that it can indeed work: “We were sort of nervous about introducing (more structured organizational processes) at first because we didn’t know whether the older guys would want to do it. Honestly, the feedback we got when we first did it was, like, ‘Oh my God, this is amazing, why haven’t we been doing this for, like, ever.’ I think it’s been really good for our firm.”
Equalize access to opportunity. By its nature, venture capital is an apprenticeship-based industry where newcomers learn through mentorship and access to senior role models over time. In a historically male-dominated industry, this favors those who fit the mold and look like the people who have been successful before—in other words, white heterosexual men. VC firms, though, can equalize the playing field by formalizing their onboarding processes; instituting firm-wide mentorship and sponsorship; and ensuring that opportunities to shine on the job are distributed evenly to all employees. Otherwise, counterstereotypical investors are likely to suffer from the thin file phenomenon where some individuals get many more chances to demonstrate their skills and impress their superiors than others. As behavioral science has long suggested, seeing really is believing, so giving all junior investors access to supportive role models is critical.
Track and report gender metrics. Research suggests transparency and disclosure requirements can reduce biased behaviors, so VC firms should start tracking their diversity-related metrics to expose and fix gender gaps. Besides tracking gender representation in their own firms, VCs should collect data for their portfolio companies as well as all the entrepreneurs they meet with during the deal-sourcing process. As one male investor suggested, “Every venture firm should be measuring their opportunity set (the companies and founders a VC meets with) and looking at it with a diversity lens, and asking themselves if it’s a classic 90 percent White male opportunity set, and why. Firms should be asking themselves how they expand their networks and open up new doors because it’s good business for them. They’re gonna build better companies and they’re gonna see more opportunities.” Better yet, VC firms should set gender-diversity targets for their own firm and portfolio companies.
Standardize the pitch process. As in talent management processes, informality in the funding process is a breeding ground for biases. Increasing standardization in the deal-making process will enable investors to make more objective decisions and ensure they do not overlook counterstereotypical but promising deal opportunities. Firms should standardize the questions they ask of founders and develop a consistent set of de-biased evaluation criteria for all pitches. Investors should assess each pitch individually before coming to a final decision as a group. Moreover, pitches should be assessed jointly rather than separately—such as by comparing and calibrating all pitches within a given week against each other. To de-bias pitching even further, firms could consider instituting blind evaluations. In 2017, Social Capital announced that it would experiment with a blind, online-only pitch process for smaller investments. Fuel Ventures also announced, upon realizing that female founders represented only four percent of the pitches it received, that for three months it would anonymize entrepreneurs’ pitch decks. While it is too early to judge the model’s success, these experiments at VC firms suggest that some investors are already taking our recommendations to heart.
Why should other VC firms follow their lead? Unconscious bias can lead venture capitalists to leave a lot of money and (female) talent on the table. Fortunately, behavioral science offers us a proven roadmap to sustainable, systemic improvement on gender diversity in the industry. Now, it is time for venture capitalists to stop trying to change hearts and minds and start redesigning their firms.
