Where do women fall out in the innovation pipeline?
Written by Spring and Summer DigitalDx Ventures Fellow Shreya Dwarakanath
Introduction
To stay competitive, organizations should be continually innovating. Success stories of innovative entrepreneurial ventures fuel economic growth. Venture money plays an important role in the innovation life cycle, when commercialization begins and the business begins to grow. In this article, we look at the entire pipeline of innovation from technology conceptualization in academia, creating and growing a viable business, to the decision making process of venture investors, discussed through a gender lens.
Part 1 — Conceptualization of idea
Universities often offer young entrepreneurs the funding, safety, and flexibility to dream big and create world-changing innovations. The new technologies of this decade grow directly out of this ecosystem, and usually start off as academic research. The merits of scientific research is linked to its’ ability to better the lives of individuals, communities and nations of the world by solving challenging problems where there is no obvious answer. Scientists formulate a hypothesis after carefully critiquing existing work, conducting experiments to test hypotheses, examining the results and drawing logical conclusions. This series of steps, also known as the scientific method, provides an objective approach to conducting experiments and minimizes bias.
When the question of the effectiveness of the diversity in the scientific workplace comes into debate, there is a popular notion that diversity is at odds with the idea of meritocracy. Do efforts in creating a diverse scientific workplace create better or worse results? This section highlights studies which show the effects of a diverse workplace with a gender lens.
As the world becomes more connected, it is changing ways in which scientists from diverse backgrounds can collaborate on the same problem. In the early 1900s, only 20% of the top cited papers were generated by collaborative teams, while that number has increased to over 90% in this century. This collaboration has helped us look at problems from different angles contributing to a more complete understanding of the topic. A community that is able to generate diverse research methods and ideas can shed new light on old problems. A study in management science finds that scholarly articles written by women-dominated author groups typically pose different questions. An economics study of the science and engineering workforce by Harvard University examined the ethnic identity of authors of 1.5 million scientific papers written between 1995 and 2008 using the web of science database. They found that a) papers written by diverse groups receive more citations, b) stronger, intellectually diverse papers were associated with greater references and number of author addresses, a reflection of geographic variation. Another study used text-mining tools to identify potential connections between women’s level of participation in medical science and sex-related research. Understanding health-related physiological and behavioral differences between people of different genders is crucial in clinical decision-making, but remains largely neglected. Thus, emphasis on gender diverse teams in science can lead to increased productivity of the innovation process and promote positive health outcomes, by reducing bias.
Large data-set studies can show only that diversity is correlated with better performance, not that it causes better performance. But, smaller control studies show that, for the most creative and effective research teams, diversity matters. A study of the National Science Foundation’s (NSFs) efforts to broaden participation in STEM fields highlighted that strong networks are essential to success. As seen in the figure above, broad range of prominent research networks emerge from an analysis of award recipients. Creating pathways for diverse candidates into these networks is necessary to support the success of establishing a diverse scientific workforce.
We are now in a time where women are receiving more than half of the undergrad engineering degrees from top schools. The barriers to retention and success are understood and there are systems in place to promote the pipeline. Given the pathways for STEM women in education are in place, we must now turn our attention to the venture ecosystem and look at whether or not it’s set up to support women entrepreneurs creating innovative solutions (or companies).
Part 2 — Commercialization of idea
Men and women start businesses for different reasons. A survey to the alumni of an MBA program at a high-ranking business school found that women entrepreneurs were twice as likely to cite family and lifestyle as entrepreneurial motivation than their male counterparts, who were likely to cite advancement and wealth as primary motivators.
Entrepreneurial motivations relate to the industries of focus — such as retail or finance, in which they are started. GEM’s study of industry participation across countries and regions showed that the largest number of businesses, over 40% are concentrated in the wholesale/retail trade. When starting businesses, women tend to start fewer high technology businesses compared to men. Women business owners are generally concentrated in retail and service industries, which are typically smaller in terms of total revenue generated and employed. One of the driving factors for this difference has been because of varying access to capital and networks. A 2018 report by BCG reported that businesses founded by women deliver higher revenue, more than twice as much per dollar invested, than those founded by men. This figure was determined by a study with MassChallenge and reports that there is a clear gender-gap in new-business funding that fuels this disparity. Although there has been a decrease in gender bias, there are perceptions that persist and can limit advancement. A field study conducted on interactions at a TechCrunch event in New York from 2010–2016 reveals that investors tend to ask male entrepreneurs promotions-focused questions where they were asked about hopes, achievements, advancement, and ideals, and female entrepreneurs prevention-focused questions where they were asked about safety, responsibility, security and vigilance. On examining comparable companies, entrepreneurs who fielded prevention questions went on to raise seven times less than those who were asked promotion questions. These findings were consistent for male and female VCs. A study from Harvard, the University of Pennsylvania and MIT looked at the role of gender in entrepreneurial pitches. They played hundreds of identical pitch presentations to equally-distributed groups of investors, but changed whether they had a male or female narrator. When investors were asked to pick which ones they thought would be successful, 68.3 % participants favored pitches by male voices, while only 31.67% chose female-voiced pitches. These studies suggest that the gender gap in funding is not likely to narrow simply with more women becoming VCs.
During the past decade, the percentage of deals with women on founding teams has nearly doubled according to a pitchbook update, with software taking the major forefront in terms of industry. However, the total deal value of VC investments in female founders as shown by the pitchbook data in Figure 2 is stagnating. Further, female founded startups just received 2.8% of the total VC funding.
Currently, women-owned businesses represent 42% of all businesses in the US employing 9.4m workers and generating a revenue of $1.9 trillion. Research published by the Centre of Entrepreneurs think tank with Barclays Bank which looked into UK-based entrepreneurs suggests that female entrepreneurs are more likely to work towards controlled, profitable growth rather than a profitable exit. Studies on the performance of large organizations over a period of 1992–2006 suggest that female representation in top management leads to an increase in $42 million in firm value. Companies with a female founder performed 63% better than investments with all-male founding teams, based on First Round’s investments.
Thus, we see that although female founded businesses perform well and generate value, they see low amounts of funding from the venture capital industry. Next, we will look at investor profiles to understand the pattern of investing and investigate the reasons for the funding gap.
Part 3 — Investing in the idea
The gender and racial makeup of the venture capital industry is staggeringly homogeneous. A comprehensive data set of every VC organization and investor in the United States since 1990 shows that the industry has remained relatively uniform for the past 28 years. Only 8% of the investors are women, as of 2018 and that number has increased to just 13% as of 2019. Most investors specialize in a particular industry or sector, so potential partners are easy to identify: They are investing in the same types of deals at around the same time. And, venture capitalists are prone to pattern recognition and are far more likely to partner with people if they share their gender or race. They’re also significantly more likely to collaborate with people if they share their educational background or a previous employer. Not only is the likelihood of collaborating on any one deal greater, but VCs tend to keep teaming up with those who share their traits. Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though the desire to associate with similar people — a tendency called homophily — can bring social benefits to those who exhibit it, including a sense of shared culture and belonging, it can also lead investors and firms to leave a lot of money on the table.
Historians acknowledge that women were financial investors before the twentieth century, typically as speculators, income-seekers or family investors. Currently, the proportion of angel investors is higher that ever before and is at 20% compared to 5% in 2004. In venture capital, 4% of partners who make investment decisions are women. Almost half of all women in VC hold roles below the partner level, and there exists an enormous opportunity to create a pipeline for nurturing junior talent. Also, only a small subset of women partners founded their own fund, this represents a compelling opportunity to offer support and funding initiatives to continue to increase the number of first-time female fund managers around the world.
Sector spotlight: Healthcare
Healthcare is often known as one of the best industries for women and has one of the highest rates of gender representation, so we look at this sector to understand the innovation pipeline. It has a huge advantage, a workforce wherein far more frontline employees and managers are women. However, although equal numbers of men and women now graduate from medical school, only a small fraction of female physicians become medical leaders. Currently, in the US only 3% of healthcare CEOs are women despite them comprising 80% of the healthcare workforce. The figure below highlights women representation in healthcare in 2019, which shows a slow progress from the previous years. According to a 2019 BCG report, retention and advancement are the challenges in achieving parity at all levels.
Within healthcare, subsectors which need a STEM background are particularly underrepresented. In medtech, there is just one female CEO among the 50 largest companies in that subsector. With artificial intelligence permeating healthcare, drastic changes are expected in the way medicine is practiced in a clinical practice.
In the first stage of formulation of new AI-driven ideas to tackle problems in medicine and society, existing concerns of gender bias could become entrenched in AI algorithms. One analysis found that 8 of 10 drugs withdrawn from the United States market between 1997 and 2000 posed “greater health risks for women than for men”, risks that could have been avoided if more attention had been devoted to gender and sex variation. By analyzing gender and sex in all stages of the research process, from the initial considerations of problem choice to the development of methodological design and data analysis, scientists may add important new dimensions to research. The way AI algorithms are designed and the data they were trained on, will have an enormous outcome on learning outcomes. Deliberate measures to incorporate a feedback system to check for negative biases in the data are required for technology to do better than we as humans are doing currently. An AI system designed for a particular health system and patient population must be created by a team that is representative of this population including gender, race, and socioeconomic status. This is crucial to maintain the health service as accessible and acceptable to all members of the population.
If we look at the second-stage of commercialization of an idea, there are a growing number of AI-based startups offering solutions for data-driven drug discovery, early detection and diagnosis and treatment which are game changers in healthcare. This list of over 50 startups led by women are disrupting healthtech with innovative ideas such as a VR rehab center, early stage breast cancer detection, and other digital health solutions with special focus on women-centric problems.
However, only 9.7% of the funding goes to healthtech startups led by women. A study by rock health found that if starting in 2020, 50% of all healthcare VC partners are women it will take 94 years to achieve gender parity by numbers. Thus, clearly there is a problem in closed circles for female-led funds, which is further exacerbated with a first-time fund.
Conclusion
Innovation can transform the world, and make it a better place. We have structural problems that inhibit half the population from contributing to progress. Research is clear that diverse, inclusive teams are better in identifying creative solutions, focusing on holistic problems and diverse companies are more profitable. Women can bring a different perspective, and woman innovators can create new products and processes that meet the needs of the whole population, not just one half. Although targeted measures to increase the number of women in STEM are working in the top engineering institutions, entrepreneurs face structural problems such as lack of access to capital and networks, when they try to commercialize their inventions.
As shown in this graphic, clearly there are gaps in the innovation pipeline where lack of access to capital and networks are affecting the growth of female founders.
- Female entrepreneurs need to be empowered to be able to make an impact in their communities, to grow their businesses beyond their region and scale in this digital age. Action items include investing in female-led startups, mentorship and creating an open community.
- Women are significantly underrepresented as investors at venture capital firms. There needs to be a push to support female GPs by opening up investor networks and constructing pathways for access to capital, early support and championing. The decision making process by investors appears to be biased even when there is significant evidence that “diversifying” investments yield dividends.
Technology can be taught to not have the same bias as humans, as long as we acknowledge the existence of our prejudice and bias. The industry poised for the most immediate disruption by artificial intelligence (AI)-driven technology is healthcare, where there appears to be a good foundation for women to close the gender gap. This year brings new challenges to healthcare systems around the world, and this presents an opportunity to change mindsets, rethink our future strategy and move forward.
About the author: Shreya Dwarakanath is a Ph.D/MBA graduate from Georgia Tech and is currently a venture fellow at Digital Dx Ventures. She is hopeful that technology has the power to transform lives by enabling women and girls to recognize their potential. This paper was written with guidance and feedback from Michele Colucci and Caroline Gezon and was inspired by discussions at Digital Dx Ventures.
