This article was first published in the August 2015 issue of WIRED magazine. Be the first to read WIRED's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online
There is an uncomfortable truth in the venture capital industry that runs awkwardly against its meritocratic aspirations: it is harder for women to raise money than it is for men. Since 2005, only 9.7 per cent of venture-backed founding teams in the US have included a woman, and far fewer were led by one. Other data suggests a similar conclusion.
What's the reason for this? Rarely, but sometimes, I've seen it come from an unabashed bias about women's ability to be as productive as men. Generally this relates to concerns that having or raising children will be a distraction. I believe this kind of bias is in substantial decline, however, as younger generations of investors rise to prominence.
More often, I've seen it result from a bias rooted in the primary way venture capitalists make decisions, which is through pattern recognition. As one investor puts it: "Most successful startups are started by men in their 20s and 30s; the number of successful startups founded by women is much smaller." Yes, but most startups throughout history were started by men in their 20s and 30s. This doesn't speak to the likelihood of women succeeding, particularly since more women are starting companies today than ever before.
Social scientists call this logical flaw selecting on your dependent variable: determining that A is a principal cause of B by looking only at cases of B. Used as a lens for evaluating investments, it is the reason most venture capitalists are late to promising new trends and only jump on board when there is a significant pattern of success.
This is the cause of the biggest challenge that female entrepreneurs face in raising money. Most venture capitalists haven't internalised the success of female entrepreneurs to a sufficient degree to have it influence their intuitive pattern recognition, partly due to what they perceive as a lack of a large enough n (or sample size) and partly no doubt because they have not worked with female founders directly.
The number of women entrepreneurs is growing, however, as is the success of the companies they've founded. Consider just the following handful of companies, together worth more than $60 billion (£38bn): Epic Systems, VMWare, EventBrite, Theranos, Genomic Health, Net-a-Porter, lynda.com, Gilt Groupe, Minted, Care.com and Houzz. If one does not see a pattern in these examples, I think it may be due to lack of awareness of the facts.
The success of these and other female-founded companies is precisely what will finally move the needle for the silent majority of venture capitalists stuck on historical pattern recognition. They will represent a pattern to be ignored only at one's peril. It's only when venture capitalists fear they are going to miss out on something big that their behaviour changes. More women in the venture capital industry will definitely help as well, in particular because they tend to spot trends in female-dominated industries faster than men.
Remember all those VCs who thought it would be a challenge to make money on the internet, in social media or in mobile? Those debates have been definitively won and lost, and today everyone invests in these areas. Those harbouring concerns about investing in female entrepreneurs will increasingly abandon those concerns in the face of significant and growing data relating to their success.
For all the problems the venture industry has investing in female entrepreneurs, there are some investors who do support them. And often this works out particularly well for them, given the biases mentioned above. I've made five investments in companies founded by women, and they include some of my best. In the long term, markets do tend to be efficient. The success of these and other female entrepreneurs will erase the biases that women have to fight today.
This article was originally published by WIRED UK
