If you look at the startup world today, there’s an undeniably distinct pattern in who gets the lion’s share of investor funding, year after year. Spoiler: It’s men. Specifically, white men.
For the past few years, we’ve heard from leaders at tech companies and venture capital firms around the world pledging to fund and hire more diverse founders and venture capitalists.
Unfortunately, reality paints a different picture: 98% of investor funding is allotted to startups founded by men, while funding for women-led startups is stalled at barely over 2%.
In 2019, we’ve wasted another year with too much talk and very little action. The startup world is stuck in a rut. We’re seeing the same types of products recycled and repackaged over and over again.
If diversity were a tech product, it would be considered a massive failure.
Stop with the “pipeline” line
As the founder of a nonprofit that works to advance women in the field of tech , I’m thrilled to say that over the past few years, we have actually seen a rise in startups with diverse leadership. Since 2015 we’ve gone from fielding around 200 applications from women-led startups to more than 800 per program.
I’ve witnessed this through programs such as our Women Startup Challenge, which helps facilitate a pipeline of more than 3,000 women-led startups. People are catching on to the fact that diverse founders provide much needed unique perspectives and solutions to the big problems tech innovators try to solve.
These startups have a huge impact on mass consumers. One example, Pathspot, co-founded by medical engineer Christine Schindler, created a hand-scanning system that detects invisible signs of bacteria and viruses that can cause foodborne illnesses. Imagine how many of the 48 million yearly cases of food poisoning would be avoided globally if every restaurant chain had access to that.
But if startups like Pathspot create viable products that can truly scale, and have a significant impact on consumers and areas like public health, why aren’t they being funded at nearly the same rate as startups founded by men?
The problem is that the venture capital community has an internal pipeline problem. This distinction—that the problem is a deeply-rooted internal one—makes all the difference. We have robust pipelines, and opportunities to create more. But there’s a cultural issue here that belies not the pipeline, but the entire system that the pipeline operates in.
At the end of the day, raising money for investment is based on pre-existing personal networks and interpersonal relationships. This is part of what makes a professional social network so valuable. It also creates social roadblocks that are nearly impossible for diverse founders to break through.
The venture capital ecosystem is small, insularly connected, and dominated by venture capitalists who don’t reflect the diversity of many startups that seek funding. Venture capitalists typically rely on arbitrary pattern recognition to find and fund startups, which they assume will generate 10 times returns.
Their personal networks are often comprised of others who share similar interests, who look like them, and went to the same top-tier schools as them. Because of this behavioral bias, most fall into a vicious cycle and perpetuate the continued funding of the same types of founders—while passing over all the others.
This is one of the core reasons why the startup ecosystem is failing to close the gender funding gap. But we need to, and can, do better.
But how do we fix a pipeline from the inside?
Craig Newmark, founder of Craigslist and Craig Newmark Philanthropies, said, “We need investors to start funding more women-led startups. We can’t continue to solve problems around the world without engaging diverse backgrounds and experiences,” (Newmark also sits on the board of my organization, Women Who Tech).
As I explore strategies to launch a fund to back the next billion-dollar startups, I’ll be testing different tactics to fix this broken system.
Limited Partners (LPs), which make up the main bodies of funding for venture capitalists, hold a lot of power. This means LPs are potentially a huge driving force in shaking up a culture that’s made it difficult for women founders to access capital. Some LPs are already leading this change with diverse portfolios of founders: Backstage Capital, Female Founders Fund, Plum Alley, Pique Ventures, Merge Lane, Rethink Impact, BBG Ventures, and Shatter Fund to name a few. By exerting their funding power, LPs can prioritize their investments in funds that are inclusive of startups led by women, people of color, LGBTQ+, people with disabilities, and others.
Talk more about the ROI of investing in diverse leadership
This isn’t a charitable task on the part of investors, it’s a value-led one. More diversity in startup founders has been linked to better financial performances.
Yes, we need more diverse angel investors and venture capitalists with more varied backgrounds and perspectives, but fixing the investment world’s failure to fund diverse startups should not solely fall on the shoulders of women and people of color.
It’s up to the entire community to educate themselves and each other on understanding the value that diverse founders bring to tech innovation and the strong return on investment that comes with funding them.
Right now, investors are leaving billions of dollars on the table by not investing in these startups. Data has shown that venture-backed private tech companies led by women achieve 35% higher return on investment and 12% more revenue than startups run by men. Companies founded by women outperformed companies founded by men by 63% according to First Round Capital’s portfolio.
Beside better profits, there’s a strong and statistically significant correlation between the diversity of management teams and overall innovation.
Open the networks
Closed networks have been an enormous barrier for women-led startups. Venture capitalists who want to increase diversity in their portfolios can set up better business processes to open their doors and networks. Fortunately, there are several ways to address this: Venture capitalists and angels can partner with organizations that work with diverse founders to co-host events, demo days, workshops, mentoring programs, and other collaborative events, to make sure they meet founders they haven’t been exposed to before.
Look beyond recruiting from top tier schools and programs. Go into communities nationwide, and globally, and partner with local accelerators, community colleges, and other overlooked places to find strong startups and founders.
Set up processes to provide feedback to startups who pitch you—even if you don’t fund them. One of the biggest complaints I’ve heard from women-led startups is that when they try to pitch investors and get rejected, they’re often met with zero feedback beyond: “It’s just not a good fit. Have a nice day.” Many women-led startups I talked with said they did not get any response from firms they pitched.
We’ve read reports that indicate harassment of women founders is rampant in the tech startup world. In our Women Who Tech survey of nearly 1,000 founders and other people working in tech, 44% of all the women founders we surveyed had experienced sexual harassment, while 44% of people of color working in tech had experienced racial harassment in the workplace.
These numbers reinforce an endemic cultural pattern. The startup community has a huge opportunity to take the lead here and root out harassers, and hold them accountable for their actions.
We need to go far beyond implementing trainings that teach people not to harass others, (yes, we still need to teach people how to be decent human beings) and how to address their unconscious biases.
Take a money shot
Right or wrong, the most motivating tactic will be to hit the venture capital community where it hurts the most—right in the money.
LPs need to fully vet all venture capital firms they’re considering investing in to ensure they don’t support a toxic culture of harassment. Since the community is small and connected, it’s actually not difficult to research a firm’s reputation. Note: if your network is not diverse to begin with, you’ll need to expand it first if you want to truly gain an understanding of the firm or its reputation. Filter bubbles cause blind spots and can lead you to believe everything is perfect—or at least fine—when it is not.
Firms need to adopt a zero-tolerance policy for harassment for themselves and for their portfolio companies. LPs should be prepared to pull their remaining funds from any VC firms that don’t fix their toxic culture, once it’s called out.
A harasser needs to get fired no matter who they are, including those at partner and founder levels. And if LPs are harassing founders, then firms should return their remaining funding. No one should get a pass, no matter how senior or influential they are.
Remember that startup founders have power, too. While it’s hard to walk away from money that you need to scale, it’s imperative that we be the change we want to see. The bigger risk here is maintaining an investment culture that consistently denies opportunity to people based on the fact that they don’t “fit in.”
So, turn down funding from angels and firms who have toxic cultures. This is especially important for allies in the space, who often receive much more investment funding than women and people of color. If allies take a stand against harassment and refuse funding by these investors who harass or discriminate against non-white, non-male startup founders, this will put even more pressure on the entire tech industry. This is our chance to force tangible change.