When Hayley Barna (MBA 2010) launched the beauty startup Birchbox in 2010, she expected fundraising would be a challenge. Every entrepreneur knows the long odds: By some estimates, less than 1 percent of new companies receive that coveted venture capital check. What Barna wasn’t fully prepared for, though, was the additional obstacles that came from fundraising while female.
“Trying to explain the needs and consumer behavior of women buying beauty products to investors who are predominantly men,” Barna recalls, “you notice that they don’t necessarily empathize or understand the pain point. We were often asked by the investors to talk to their wives or their administrative assistants.”
Eventually, Barna and co-founder Katia Beauchamp (MBA 2010) closed a $1.4 million seed round that included two women VCs and several male investors “who got it.” Their success put them in a group even more exclusive than the approximately 7,000 companies worldwide that received a venture investment in 2010. Birchbox was among the just 823 companies—11.8 percent—that had at least one woman founder. The number with a woman of color on the leadership team was vanishingly small.
“If the people writing the checks are more reflective of the population, the people receiving the checks will become more representative of the population.”
—Hayley Barna (MBA 2010), general partner, First Round Capital
Today Barna sits on the other side of the table. After leaving her role as co-CEO of Birchbox (Beauchamp continues to run the company as CEO), Barna again beat the odds. In 2017 she became a general partner at First Round Capital, an early stage investor in Birchbox. She was the first woman to hold that title in the firm’s then-13-year history. Even today, according to research conducted by private-capital database PitchBook, just 12 percent of check-writing decision-makers at the largest VC firms in the United States are women. A survey by The Information, a tech-sector media outlet, found that just 1 percent were Black; they did not identify the gender of those seven people.
It’s clear that the engine of the country’s innovation sector is stuck in the past. Professional spaces such as hospitals, law offices, and boardrooms still have significant work to be done to achieve diversity in leadership, but they’ve made great progress compared to venture capital. For more than a quarter-century, the percentage of women entering the sector annually remained stubbornly stuck around 9 percent, according to findings by HBS professor Paul Gompers and Harvard University PhD candidate Sophie Calder-Wang.
This disparity in representation in both the number of venture capitalists and the amount invested in founders has its origins in the same historical forces that shaped most industries: When the VC model emerged in the 1940s, white men dominated the workforce. The persistence of the gender gap is harder to explain but is often credited, at least in part, to the sector’s famous reliance on personal relationships and pattern matching.
“We’re already seeing the current economic changes impacting women disproportionately as some women have to drop out of the labor force to look after children. It’s important that we not only keep bringing more women into the VC industry but that we also retain those currently in it.”
—Madeline Keulen (MBA 2019), vice president, Victress Capital
Prior to the coronavirus pandemic, general trends on gender diversity were moving, slowly, in the right direction: In 2018, venture investment in companies with at least one woman founder hit a record $46.3 billion worldwide; that number, though still small compared to the approximately $85 billion that went to all male teams, is 15 times the amount invested in women-led companies in 2010. The latest research from Gompers and Calder-Wang showed that 18 percent of the new hires in US venture capital firms in the first quarter of 2019 were women. The disparate impacts of the pandemic and the protests following the killing of George Floyd have focused national attention on the need for increased racial diversity.
2020 has presented economic challenges for entrepreneurs and slowing deal volume for VCs. But change cannot wait, says Barna, just one of many alumni and academics in the entrepreneurship and investing sectors who advocate steps toward inclusivity like the ideas offered here. “Innovation through startups is shaping the future of this country and this world,” she says. “There should be no monopoly on the ability to set that direction. No one gender or one race should control the flow of capital.”
Solution #1: Make the Business Case
“Women entrepreneurs are an untapped market.” That’s the pitch Kerry Rupp (MBA 1999) and her partner, Sara Brand, made to limited partners when they formed True Wealth Ventures in 2015, and it is the philosophy that drives the firm today. Its requirement that there be at least one woman in a decision-making role on the executive team of any startup it invests in is “not just a manifesto,” Rupp says. “We believe investing in women-led companies will make more money.”
The data back up that philosophy. A 2016 survey of publicly traded companies from the Peterson Institute for International Economics found that the presence of more women in top positions of corporate management correlated with increased profitability. And in the venture world, a Boston Consulting Group study found that startups with at least one woman on the founding team garner less investment but earn more revenue. For every dollar of funding, the study found, teams co-founded by women generated 78 cents, while those with all-male founding teams generated less than half as much—just 31 cents.
“We don’t want to put up barriers. We’re doing some things structurally to make sure we don’t exclude founders because of where they came from or what their prior experience is.”
—Kerry Rupp (MBA 1999), general partner, True Wealth Ventures
True Wealth Ventures also focuses specifically on the sustainable consumer and consumer health sectors, areas in which, Rupp estimates, women make 80 to 85 percent of the purchasing decisions. Considering all those factors, she says, “it just makes business sense to have at least one woman on the executive team.” It’s an argument that was persuasive to investors: In 2018 True Wealth Ventures closed its $19.1 million first fund, and it has now made eight early stage investments.
It’s also good business to have women as general partners, says Gompers. In a 2017 working paper, Gompers and Calder-Wang found that adding a woman to a team of senior investment professionals improved the firm’s fund return by approximately 10 percent and increased the percentage of startups with successful exits. Gompers speculates that this positive business impact is likely caused by a combination of factors: a relatively untapped pool of high-quality candidates, the introduction of various perspectives into the deal-evaluation process, and a new source of deal flow.
“When I get an all-Caucasian male team pitching me, one of the questions I ask myself is where is the diversity of thought coming from? It’s starting to be something that founders themselves bring up.”
—Rudina Seseri (MBA 2005), founder and managing partner, Glasswing Ventures
But, Gompers cautions, hiring a woman as “window dressing,” often in an effort to avoid negative publicity, may not produce the same effects. In his study, Gompers found that the gender of male venture capital partners’ children had an effect on hiring; parenting more daughters led to hiring more women partners. He posits that this shift in hiring was the result of the “true removal of gender bias”—that is, the opposite of window dressing—that came with parenting daughters and hypothesizes that this change in attitude is an important contributor to the economic benefit of gender diversity he observed.
It’s going to take years to ameliorate unconscious bias and close the gender gap in venture capital, Gompers says. “But convincing male-dominated firms that gender diversity is a strength and is going to improve their bottom line is a start.”
#2: Change the Image
The Perkins Fund does not invest exclusively in women founders, but in the 10 years since Sonja Hoel Perkins (MBA 1993) founded the firm, about 50 percent of the companies she has funded have had women founders. Perkins credits this balanced portfolio to her extended network, which includes more women entrepreneurs than that of the typical male venture capitalist. In her experience, the same pattern-matching and emphasis on personal relationships that have traditionally benefited male VCs and founders can play a role in leveling the playing field, too, as more women enter the sector. “The top women entrepreneurs really want to work with the top women VCs,” she says.
That’s the premise of All Raise, one of several new organizations addressing the gender gap. All Raise started with an email from Aileen Lee (MBA 1997), who founded Cowboy Ventures and originated the VC term “unicorn” to denote billion-dollar startups. When Lee joined Kleiner Perkins Caufield & Byers in 1999 she had been wary of the challenges that would come with being the first woman on the investment team and one of a handful in the VC world. Almost two decades later she had seen little progress and so, in 2017, spurred by the #MeToo movement, she wrote to a group of other women in venture capital: “Guessing we all have the same feelings...the stuff about the gender power dynamic and lack of women in VC is just not OK. We have a window to come up with changes. Could we get together to brainstorm constructive ways to improve our industry faster?” Within 48 hours, nearly everyone on the email chain agreed to participate.
“Founders are the customers of venture capital. If founders evaluate VC firms not only on money but also on leadership—who controls the firm, who is on the team—that changes the game significantly. I think that is a change we’re starting to see.”
—Aileen Lee (MBA 1997), founder and managing partner, Cowboy Ventures, and board member, All Raise
Another goal of All Raise is to change attitudes about what it takes to be a venture capitalist. Because most venture firms are small compared to their counterparts in law and banking, they do not hire frequently. And when they do hire, firms are often looking for a specific set of criteria, usually including an engineering degree and experience as CEO of a public company. These criteria can create unnecessary barriers for women, who are traditionally underrepresented in technical-education programs and hold only about 6 percent of CEO roles in S&P 500 companies. And these qualities may not even be a good barometer of success as a VC, but simply more pattern-matching, says Perkins, noting that venture capital firms often place a high value on “collegiality.” “I’ve heard this word used a lot before when describing the hiring of new partners,” Perkins says. “It’s much easier to hire someone who is like yourself because they seem collegial than it is to hire someone different.”
“The venture industry is a really great job for women—and for men too—because it’s right on the cutting edge. You’re shaping the future.”
—Sonja Hoel Perkins (MBA 1993), founder and managing director, Perkins Fund
Perkins did not look like the others at Menlo Ventures when she was hired in 1994. “I was really grateful that my partners took a bet on me because I did not have the traditional background of a venture capitalist,” she says. Although she didn’t have the typical engineering degree, within two years she became the youngest general partner in the firm’s history and went on to win the firm’s investor of the year award 6 times in 17 years. “I had a different background and a different point of view,” she says. “It made me pretty good at this.”
#3: Revamp the Pitch
In 2016, Leslie Feinzaig (MBA 2007) launched her first business: Venture Kits, an educational game that taught kids how to be entrepreneurs. A would-be bakery owner, for instance, could work through the necessary steps of calculating costs and doing market research on the way to selling chocolate-covered pretzels for a profit. Developing the game was also an education for Feinzaig, who learned some unexpected—and unwelcome—lessons about the entrepreneurship ecosystem in the process of fundraising for the company. “It honestly never occurred to me that I was having a different professional experience than my colleagues of a different gender,” she says of her early career. But pitching Venture Kits opened her eyes. “It was the first time I realized that it is really different for women.”
“We should stop talking about this as a gender gap and start talking about it as an arbitrage opportunity. Because then we start doing something with our heads and not just with our hearts—we start investing our money wisely.”
—Leslie Feinzaig (MBA 2007), founder and CEO, Female Founders Alliance
Research has begun to identify the myriad ways gender changes the pitch process. In a 2014 paper, HBS faculty members Laura Huang and Alison Wood Brooks, along with their coauthors Sarah Wood Kearney, who founded Prime Coalition, and Fiona Murray of MIT’s Sloan School, found that investors—men and women—prefer ventures pitched by men, especially those pitched by attractive men. This finding held true when the researchers evaluated the outcome of real-world pitch competitions—men were 60 percent more likely than women to succeed in a competition—and when they conducted experiments in which the same pitch was delivered by both men and women. In those experiments, participants found the pitches by men to be more persuasive, logical, and fact-based, although the script delivered by the women was identical.
The questions venture capitalists pose during the pitch process reflect this unconscious assumption that men have stronger pitches. Huang and co-authors Dana Kanze, Mark Conley, and Tory Higgins analyzed question-and-answer interactions that took place at TechCrunch Disrupt New York City between 2010 and 2016. “Men are more likely to get asked questions that are about the opportunity and their vision,” Huang says. “And women are more likely to get asked questions around the risks and the drawbacks.” Huang, who recently published Edge: Turning Adversity into Advantage, advises women that one way to avoid this trap is to answer the question that a male founder would be asked. “Redirect a question about risk with an answer about opportunity.”
“Now, more than ever, emphasis on diversity is critical to developing a respectful inclusive environment, not just in the venture capital industry, but in every industry and in our society.”
—Deborah Farrington (MBA 1976), co-founder and managing partner, StarVest Partners
Other studies—as well as anecdotal evidence from VCs—show that women are more likely to underestimate themselves and the financial potential of their company during the pitch, offering more conservative, obtainable estimates, while men are more likely to offer ambitious and optimistic numbers. And Huang’s research on “gut feel” has found that when VCs rely on instinct instead of hard data to evaluate startups, unconscious bias can creep into the decision-making process. “When you say things like, ‘It was just my gut feel,’ you don’t have to explain your decision,” explains Huang. “It provides a cover for discrimination.”
Faced with these and other challenges during her fundraising effort, Feinzaig turned to social media for support, creating a private Facebook group for entrepreneurs in 2017. What started as a group of 25 is now the 20,000-member Female Founders Alliance, a social purpose organization that provides guidance to founders and works to change elements of the venture capital structure that disadvantage women. During the pandemic, Feinzaig has been working diligently to re-create the Alliance’s offerings online.
The shift to digital interactions could exacerbate existing disparities if the transition is not made thoughtfully, Feinzaig says, but she and other alums also see ways in which this change can level the playing field. Social distancing has disrupted the traditional connection-based networks of venture capital. No one is going out for drinks anymore and there’s less small talk over Zoom. In the online environment, investors are necessarily more focused on the business at hand, and entrepreneurs can deliver their pitches from anywhere in the country. Similarly, as accelerators and conferences move online, they are more accessible to entrepreneurs whose financial or family situation limits travel. The Female Founders Alliance embraced the opportunity this presents by launching a paid virtual internship experience and debuting “office hours” with investors for Black women founders.
“I asked the founders in the Alliance, ‘What do you need now?’ ” Feinzaig says. “It was the exact same thing they have always needed, just socially distanced: access to investors.”
#4: Follow the Money
Lisa Skeete Tatum (MBA 1998) has watched the venture capital world change, slowly. When she got her start in the sector at the early stage health care fund Cardinal Partners in 1998, she was often the only woman and the only Black person in the room. The numbers are still low, she acknowledges, but today, as founder of the venture-backed startup Landit, a personalized career path platform, she sees more diversity in VC. “There are certainly more women,” she says. “There are more people of color, and there are more different types and stages of funds.” She finds this last point most encouraging: Recent years have seen a growth in funds focused on underserved populations, and limited partners have shown more interest in increasing the number of women and people of color in venture firms and within the venture-backed founder community.
“Whether it is in VC or entrepreneurship, you need to be proximate to and fluent in the markets and the people that you’re serving. If you’re looking to invest in the best, then you have to expand your horizons and your network.”
—Lisa Skeete Tatum (MBA 1998), founder and CEO, Landit
The role limited partners can play in remaking venture capital comes up in almost every conversation about the industry. Many HBS alumni believe that these investors could remake the venture capital sector more quickly and dramatically than any grassroots campaign and that they are only beginning to recognize the opportunity they have. Current limited partners can prioritize diversity by demanding better representation of women and people of color in decision-making roles at the funds they contribute to and on the founding teams those funds invest in, and they can contribute to early stage funds, which are often vital to the success of underrepresented entrepreneurs. There is also an opportunity—as Kerry Rupp discovered when establishing True Wealth Ventures—to foster diversity among limited partners by bringing in investors who are new to the venture ecosystem, especially women who have traditionally focused on philanthropy instead of investing. More than 80 percent of the limited partners in True Wealth Ventures’ first fund are women who were “financially motivated in the returns, but also felt like the impact of investing in other women was really important,” Rupp says.
“The challenges for women in VC have been going on for years. Since the early 2010s, people have been much more vocal about the need for change, and in the last three or four years, you are starting to see solutions emerge. Leading women in VC are asking, ‘How do we cultivate the next generation of VCs?’ ”
—Jodi Gernon (MBA 1991), director, Arthur Rock Center for Entrepreneurship at Harvard Business School
“My investors are diverse, including top-tier traditional venture funds and specialty funds that focus on diverse founders, and very experienced and successful angels, many of whom are women and people of color,” says Skeete Tatum. She was certainly motivated by the desire to encourage change within the venture sector, but mostly she was driven by the same consideration that has driven every entrepreneur since the founding of the venture capital system more than eight decades ago: What would give her the best advantage to build a successful company?
“Supporting diversity is the right thing to do,” she says. “But there’s also an ROI case here. It’s good business across the board when you have diverse representation throughout the ecosystem.”
Above: Illustration by Hannah Barczyk
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