What’s the Cost of Bias in the Startup World?
Just two months into my tenure as a female founder and CEO driving business to make the workplace equitable for all, the startup world broke open with news of sexual harassment of female founders by male venture capitalists. First it was Justin Caldbeck, then Dave McClure and Chris Sacca; in an effort to help, both Reid Hoffman and Ashton Kutcher waded into the choppy waters. Reid faced backlash for the idea that men have to take a pledge to act decently and Ashton for asking impertinent questions. However, both were trying to help and it reminded me how important it is to have male voices in the gender equity conversation. Even when they’re not quite sure how to navigate the issue, they’re willing to step up and we need to let them step up imperfectly. Their efforts should be a springboard for conversations we need to have to close to the gender equity gap.
Less than a week after these events, I attended Y Combinator’s Female Founders Conference, where the tension was palpable. Jessica Livingston, co-founder of YC, thanked the women who bravely came forward. Later in the day, venture capitalist Aileen Lee provided a candid account of the differences in raising capital when you’re a female founder. For example, male founders are more likely to experience confirmation bias and pattern matching from venture capitalists and female founders are likely to have overcome the fact that they do not match the pattern.
Because Pipeline’s founding principle is the economics of gender equity and that, quite frankly, the lack of gender equity is a huge economic cost, we were asked to comment on the situation at hand. Being researchers, we dove into the data, which painted a very interesting picture with regard to the economic cost of bias in the startup world.
Our Current World
In 2016, only 17 percent of startups had a female founder and only 12 percent received venture capital funding. Yes, that’s a 5 percent funding gap. And, yet, startup teams with at least one female founder provided 63 percent better investment returns than all-male teams. For instance, if you were to take the average return for an all-male team and compare it against a team with one female founder, the investment returns for the team with the female founder are 63 percent better.
On the funding side, women make up 8 percent of partners in venture capital firms. The percent of female partners is important on many fronts; however, one is critical: having female partners improves the chances of success for the female-led startups. In this instance, success is defined as a successful exit (a liquidity event) where venture capitalists and other investors realize a return on their investment in the startup.
We also know that bias exists against female founders in terms of both the questions they are asked and how they are talked about behind closed doors. First, female founders are asked prevention questions that focus on preventing potential losses (while their male counterparts are asked promotion questions that focus on potential gains). This speaks to the biased belief that female founders are not as capable as their male counterparts. Second, behind closed doors, venture capitalists show bias in terms of pattern matching male entrepreneurs having entrepreneurial potential and not their female counterparts. In other words, they lift up the capabilities of male entrepreneurs and minimize the capabilities of female entrepreneurs. For instance, female founders are more likely to be asked to defend not only that their startup is viable (is it a defensible business?), but also that it will grow and produce a return (how predictable are your future cash flows?).
This bias costs venture capitalists and their limited partners — to the tune of an estimated $37MM over a three-year period.
Envisioning a New Future
What happens if we shore up the gap in the current state and what could happen in the long run?
As noted above, there is a 5 percent funding gap between the percent of startups with one female founder and those that receive venture capital funding. Pipeline did a quick calculation (note this is based on secondary research and should be considered an approximation) of the returns upside of closing the 5 percent gap in funding. In 2016, venture capitalists invested a total of $66B in startups with an average 19 percent rate of return over a three-year period. If we closed the 5 percent gap with a 63 percent improvement in investment returns on the gap, there is a $37MM improvement in returns.
Whether or not you believe gender inequity is a problem worth solving in the startup world, most of us can agree that fixing the leaky pipeline is an opportunity.
Related: The Optimistic Future
Fixing the Leaky Pipeline
There is an economic upside in fixing the system and immediately correcting the narrative on gender equity in the startup world. We need to shift our thinking from the construct that women are broken to the truth that the system is broken and needs fixing.
I am confident with the startup world’s rich history of perseverance and our innovative spirit, we can create a new future.
Let’s fix the leaky pipeline — share your thoughts on changing the narrative.
This article originally was published on SheWorx.com.
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