Venture Capital's Next Venture? Women

Where do we go after Ellen Pao?

Ellen Pao’s gender discrimination suit against Kleiner Perkins is one data point in the discussion of diversity in Silicon Valley’s venture capital industry.

As two students in the Stanford Graduate School of Business, we set out to unpack the diversity issue as Pao’s trial unfolded last March. We spoke with more than 20 venture capitalists and Valley insiders to examine the numbers and anecdotal trends. In the coming weeks, we will release our data as part of an in-depth survey on bias in the industry.

The reality is that women make up as little as 4 percent of deal-making venture capitalists in the Valley. According to several assessments, this number is not improving, and we suspect that Ellen Pao’s case alone is not going to move the needle.

The spotlight is important, of course. We have heard the examples of overt sexual harassment, and we have read the media reports that paint the issue at its extremes.

Our aim is to shine a light on the space beyond these well-hashed narratives and to more broadly assess the industry’s lack of diversity — both the origins of this complex problem and some possible solutions.

And this lack of diversity is, indeed, a problem. Venture capitalists are not operating in a closed-off corner of the world, simply funding geeks who are making things for other geeks.

As technology has seeped into every area of our lives, so has the influence of venture capital. Women are missing a decision-making seat at this future-facing — and future-making — table of venture investing.

Here are our three takeaways:

1. The lack of diversity in venture capital boardrooms is far more than a STEM pipeline issue.

The low numbers of women in venture are stark — and according to some studies — getting worse. A Babson College study found that the total number of female partners in venture capital firms has declined from 10 percent in 1999 to 6 percent in 2014.

A 2014 Fortune magazine report says 92 firms have raised funds over $200 million since 2009. Among those 92 firms, there were 542 partner-level venture capitalists. Of those, only 23, or 4.2 percent, were women.

Many of the experts we spoke with point to tech entrepreneurship as the path to a venture capital partnership, primarily as a startup operator or CEO. Often, these operators have strong tech backgrounds.

“The thing that’s written about a lot is the dearth of women in technical fields, which is true, and also the dearth of successful women in operational roles on a ratio basis in technical companies,” said Robert Siegel, general partner at XSeed Capital. “Those are your primary feeders into venture.”

Some assessments of the industry highlight the low number of women coming out of science, technology, engineering and math (STEM) programs in their education tracks. Those numbers show a slightly wider funnel of girls and young women compared to the VC industry, but the ratio is still disproportionately small compared to men.

A 2011 study done by the U.S. Department of Commerce showed that 24 percent of STEM degrees were obtained by women.

Of course, the path from engineering school rarely leads directly to venture capital for both men and women. In fact, there are many more factors in the pipeline.

“[For] the entrepreneurs who create outcomes at the high end of the Power law, there’s an element of them where they’re willing to walk across Highway 101 blindfolded.”

One venture capital team offers a more nuanced view of the entrepreneurship pipeline — one that has less to do with STEM education and more to do with the Power law that governs startup success.

This team argued that men and women have different rates of tech entrepreneurship. Their distribution curves of success are simply different: Men’s curves are flatter and, therefore, have greater betas. These venture partners say that generally, more men will fall in as outliers on the confidence and bravado scales, and might be more likely to become CEOs of wildly successful startups.

According to a male co-founder of this venture firm:

“[For] the entrepreneurs who create outcomes at the high end of the Power law, there’s an element of them where they’re willing to walk across Highway 101 blindfolded. In fact, they’re willing to run across it, and they don’t think that it’s possible that they’ll fail. They don’t calculate the risk; they’re just outliers among people. … I think men are more likely to be like that, for better and worse, than women, in what I’ve seen.”

Optimism, self-confidence and a touch of naiveté, combined with a risk-loving nature, are characteristics found in many successful entrepreneurs. Typically, this venture team said, these traits are more commonly seen in men. And often, they lead to greater betas, which therefore lead to a higher probability of a runaway success (or huge failure).

Optimism, self-confidence and a touch of naiveté, combined with a risk-loving nature, are characteristics found in many successful entrepreneurs.

So, if it’s entrepreneurs with STEM backgrounds who are most likely to make up new hires at venture capital firms, then the pipeline flowchart can be summarized as follows:

Few Women in STEM Programs + More Risk Aversion for Women ⇒ Few Female Tech CEOs ⇒ Few Female VCs

This flowchart may seem logical, but according to our research, it vastly oversimplifies the issue. Patience, some say, is the answer to the pipeline problem. As more women enter science and engineering programs, the lack of diversity will fix itself, they argue.

At the Code Conference last month, Pao said she sees the pipeline problem as an excuse.

“I hate the pipeline issue,” she told Kara Swisher. “It allows people to say, ‘I’m doing my best, it’s out of my hands. There’s a whole slew of things that can make it more fair.’”

Improving this pipeline of women who have tech backgrounds will help, of course, but what women do with this education and how they apply it in the Valley is far more important.

The pipeline is one small piece of this vast diversity puzzle.

2. Networks matter. Relationships matter. Similarity biases negatively affect women. It is important to acknowledge to even the most subtle unconscious biases — head on.

The venture capital industry is tough for men and women. Deal flow is a challenge. When the market is hot, as it has been, a venture capitalist’s network is everything. And as VCs form relationships, often their closest bonds are with people who are just like them.

“People enjoy working with people they are comfortable with,” said Alda Leu Dennis, managing partner at 137 Ventures. “These are small partnerships with relationships that go back many many years.”

As VCs form relationships, often their closest bonds are with people who are just like them.

Since men have historically held power in these organizations, similarity biases often prompt them to bring on new hires who fit their mold.

There are many other factors that make the venture world unappealing to some women. It’s hard to be the first woman, or the only woman, in an organization where all key decision-makers are men — as is the case at some prominent VC firms.

Peter Ziebelman, a founding partner at Palo Alto Ventures, described an often intense VC environment dominated by “alpha guys”:

“When I think of my wife wanting to be in the sort of politics of it, the VC partnership dynamics, the alpha person type stuff that goes on, I could see she may say to herself, ‘Sure. I’m an accomplished startup CEO. I could do this, but this isn’t for me.’”

In a predominantly male context, blatant encounters with sexism and harassment are often discussed in the press. But many of the female VCs we spoke with said they had never experienced overt sexual harassment in the workplace.

Rather, these women frequently cited much subtler challenges to navigate. In fact, according to our interviews, it is the subtle, and in some cases unconscious, biases that make a VC environment most untenable for women. Some liken it to a death by a thousand small cuts.

In interviews, one woman described being handed a coat to hang up despite being equal or senior to all others in the room.

Many women describe being asked to do the “housekeeping” work of the office, whether that is handling note-taking at meetings or employee reviews of administrative staff.

In interviews, one woman described being handed a coat to hang up despite being equal or senior to all others in the room. Another said she was asked for coffee when someone mistook her for an administrative assistant, based solely on her gender.

One VC partner who has been in the industry for more than 15 years said she was often not invited to late afternoon meetings once she had children:

“There’s sort of this presumption that my priorities are different from theirs. They may very well be, but nobody’s asking me, they’re just assuming. You could say, ‘Oh, well that’s really considerate of them.’ But no, you should ask me. Don’t assume that I don’t want to do the meeting at 5:00 pm. If it’s an important meeting, I want to be there.”

Theresia Gouw, co-founder of Aspect Ventures, described a fundraising call where the woman representing the prospective LP asked how she and her partner would manage their fund as working mothers. Gouw laughed at the thought of that same question being directed toward a father.

One VC partner said she was often not invited to late afternoon meetings once she had children.


Despite challenges, women are succeeding in venture. How have they thrived?

Maha Ibrahim, a general partner at Canaan, talks about having to play the same game better and harder than men:  

“There’s no doubt that I have lost deals I believe because of my gender. No doubt. On the other hand, I will never wear it as a scarlet letter. It’s not something that is keeping me down. It’s just what I have to do.”

Ann Miura-Ko of Floodgate Capital, who Forbes called “the most powerful woman in startups,” pointed to her ability to play with the boys as a secret ingredient to her success. At Yale, she never shied away from all-male study groups or male teams at robot contests where she competed against mostly men.

But unlike Ibrahim and others, Miura-Ko spent little time at male-dominated VC firms before she co-founded Floodgate Capital with Mike Maples, her entrepreneur partner.

She and other women, like 137 Ventures’ Alda Leu Dennis, have found that coming on board with an upstart firm may be the fastest route to partnership.

Gouw was on Fortune’s 2014 Midas List of Top 100 Investors. After 15 years at Accel Partners, she left her role as partner there to co-found Aspect Ventures with fellow Midas List VC Jennifer Scott Fonstad. Gouw said the fact that she and Fonstad were able to create their own culture at their new firm was a big benefit.

This trend toward female founders in the VC industry is something Ibrahim noted:

“We’re seeing more and more [instances] where these women are high-performing. They’ve had great returns with their funds [and] for whatever reason have left, whether they’ve been disenfranchised by the predominantly male partnership, whether they just wanted to be a smaller firm, whatever the reason is, they left and they’ve banded together. … I hope that we see more and more of that and I hope that those women just hit the ball out of the park.”

3. Structural barriers are real. With small private partnerships, there is little incentive to change and limited internal mobility. Firms could benefit from more promotion from within and more metrics to measure short-term successes.

Venture capital firms are private partnerships. They operate like small law firms, not large public companies: Turnover is low; partnerships last for decades; it takes a lot to get in the door; and it takes a lot to get kicked out.

These institutional realities don’t promote diversity. Success takes years to unfold in the venture industry. The timing of investment results makes it challenging to measure merit-based performance year to year. Small firm size leads to a lack of protocol and structure, which large organizations often implement to combat biases.  

One male VC we spoke with said the best way to break into the VC industry is to wait for a partner to die.

One male VC we spoke with said the best way to break into the VC industry is to wait for a partner to die.

Dennis, of 137 Ventures, compared the industry to that of a university with tenured professors.

“It’s difficult when you’re dealing with positions that are entrenched … to try to get turnover for fresh blood — and to have that fresh blood be diverse,” she said.

Siegel summarizes VC recruiting:

“If [someone is] going to [become a] partner in a venture firm, it’s extremely serendipitous. You have to have a partnership that has room for a partner at a moment in time when somebody is on the market and that person has a skillset that’s needed in that partnership. … It’s all about the proverbial needle in a haystack. It’s complete luck getting into the business. Complete luck. There aren’t that many jobs [that come open each year].”

The largest Silicon Valley venture firm has fewer than 100 partners. Most are less than a quarter that size. Structurally, smaller firms are more nimble and agile and are able to snag the best business ideas quickly. As firms grow, they are saddled with trying to find more and more great ideas and having to dig further into the deal flow.

Silicon Valley has an appreciation for this small company dynamic. Not surprisingly, few want the red tape that comes with bigger organizations.

And yet, some level of protocol must exist to eliminate harassment, it seems. Increased rigor and additional processes around hiring and promotion is exactly what these firms need to create diversity. Studies show that when left to our devices, we sponsor, advocate and promote those who look like us.

What if a new set of KPIs allowed for partners to be promoted and demoted based on new factors that offered less chance for discrimination?

What if a new set of KPIs allowed for partners to be promoted and demoted based on new factors that offered less chance for discrimination? And what if VC firms hired more from within just as much as they looked outside the firm for the next CEO superstar to bring onboard?

Many current mid-career female VCs came up as analysts inside firms. This habit of internal hiring appears to be diminishing, which could negatively impact female representation in the future.

“The females that are coming in at the junior levels, they’re not getting promoted,” Ibrahim said. “I just see it anecdotally because I have many females, junior VCs at other firms, that come to me and tell me what’s going on in their firms.”

If there are few rock-star female entrepreneurs eligible for immediate partner status on the outside, and few women being promoted from junior analyst positions within, then there are few women in the ranks of the firms who could move into decision-making roles.

Will those who fund change find a way to change themselves?

Venture capitalists are the ultimate change agents. They fund disruption. They overturn industries. They spit at the status quo.

And yet, when it comes to gender diversity in this industry, very little is changing.

We believe there is hope. The men and women we spoke to for this report were already acting as change agents, simply by discussing the issue. No one suggested that low female representation was okay. All of them are thinking about how the industry will evolve, as so many other industries have during the last 30 years with respect to gender disparity.

There is money to be made through diversity. Women represent more than 50 percent of the spending power of consumers. Studies show that missing a female perspective in the board room will impact returns.  

If there is an opportunity for money to be made — and an opportunity to seek real disruption in the Valley — we trust venture capitalists will find it.

Illustration credit: Russell Werges