Small gains, but slow progress for women in venture capital

Women are edging their way into the ranks of venture capital executives who can make investments, but the road to getting control of the firm's checkbook is a long one and often filled with potholes.

Over the past two years, the number of female venture capital executives able to make investments — called check writers — is up 3 percentage points to 15.4% nationally, a Nov. 3 PitchBook Data report shows. And most women in venture capital are white, according to a 2020 report by the organization Women in VC.

"A lot of the venture capital firms, post-George Floyd, have been working toward ... diversity and inclusion," said Sarah Chen, co-founder and managing partner of Beyond the Billion, a global consortium of more than 100 venture funds and limited partners investing in companies founded by women.

Beyond the Billion co-sponsored the PitchBook report.

PitchBook's research also found that the percentage of female check writers, which includes partners and general partners, also increased in four of the main hubs in the U.S. venture capital ecosystem.

The growth was the largest in New York where 16.8% of check writers were women as of Sept. 30, up from 11.8% in 2019. In Silicon Valley, 17.1% of check writers were women, up from 15.4%; in Boston, 14.5%, increasing from 13.6%; and in Los Angeles, 12.9%, a slight bump up from 12.1%.

Some venture capital managers have already made diversity and inclusion a priority in the makeup of their staff as well as their investments, with a few recently hiring notable partners in line with their commitment to diversity, Ms. Chen said.

For example, in 2020, Lightspeed Venture Partners hired Shelley Chu, a 20-year venture capital veteran who holds an M.D., a Ph.D. in biochemistry and biophysics, and a bachelor's degree in molecular biology, to lead the firm's biotech business.

Hiring diverse investment executives has to increase at the mainstream venture capital firms, said Robert L. Greene, Washington-based president and CEO of the National Association of Investment Companies.

Studies have shown that diverse groups of investors perform as well as or better than all-white, male teams. In private equity, 29% of managers providing investors top-quartile returns were women-owned firms and 34% of top-quartile managers were minority-owned in 2017, according to a 2019 study commissioned by the John S. and James L. Knight Foundation.

"Nationwide, there are probably less than 200 jobs at venture capital firms for investment professionals," Mr. Greene said. "If you add up all the venture capital firms and the people in the pipeline of writing checks ... there is a high concentration of capital in the hands of a few people and by and large 90% of them are white males."

According to the 2020 Women in VC report, only 4.9% of partners at venture capital firms are women, with just 0.2% female partners who are Hispanic and 0.2% who are Black women. A study by the National Venture Capital Association and Deloitte released in March shows that women account for 23% of investment professionals in venture capital and 16% of partners in 2020. This is up from 15% and 11%, respectively, in 2016, the first year NVCA and Deloitte conducted the biennial survey. Black and Hispanic investment professionals make up 3% and 4% of partners, respectively.

"While the percentage of investment partners who are women has steadily increased, the percentage of investment partners who are women of color has not," said Maryam Haque, executive director of Venture Forward, a non-profit launched by the NVCA in 2020 to promote inclusion in the VC industry, in an email.

Some 43% of firms have a diversity strategy, up from 24% in 2016 and 41% have an inclusion strategy, up from 17% in 2016. Firms with those strategies have a higher percentage of female investment partners, 20% vs 14%, and Black investment professionals, 5% vs. 3%, the NVCA/Deloitte survey showed.

But recruiting diverse talent is just the first step; retention with access to opportunities to succeed and support as well as promotion practices "define the success and impact," she said.

One reason for this lack of representation is that it is not easy for members of unrepresented groups to get in the door at more established firms, said Brandon Zeigler, a director on the impact investment team of OCIO firm Global Endowment Management, which has $12 billion in assets under management.

Forty percent of venture capital executives attended either Harvard University or Stanford University, Mr. Zeigler said, quoting from a 2018 survey of 1,500 venture capital firms by Richard Kerby, co-founder and general partner at venture capital firm Equal Ventures. The same survey showed that 58% of venture capital leaders were white males, compared with 11% white women, 6% Asian women, 1% Black women and zero Hispanic women, with the remainder Asian, Black and Hispanic males.

It's difficult to create a more diverse venture capital management team when "4 out of 10 people come out of highly exclusive universities that aren't diverse," Mr. Zeigler said.

Heads of venture capital firms should expand their networks and the places they look for investment professional candidates, he said.

"Investors of color are not hard to find ... but you have to open the aperture," Mr. Zeigler said. "Does the industry have the courage to do it?"

Groups are starting to crop up to help support women and minority venture capital investment executives advance in their careers, he said. One example is Black VC, a non-profit aiming to provide Black investors with access to education and the community they need to accelerate in their venture capital careers, which can stagnate if investment professionals are not provided opportunities, mentorship and training at their firms, he said.

Venture capital firms need to re-examine how they "retain their talent ... and create pathways to grow new investors and associates into" decision-making, partner roles, Mr. Zeigler said.

Still, a number of women have decided to skip the bureaucracy and start their own venture capital firms, leading to a 73% increase to 275 in the number of female-led venture capital firms founded in the last five years, the Women in VC report shows.

There are three "proven" paths for a woman or minority to become a check writer at a venture capital firm with a fourth just emerging, Mr. Greene said.

The top three paths are hiring and promotion at a venture capital firm; an executive leaves a venture capital firm with a track record and starts her own firm; and an angel investor starts a venture capital firm, he said. The fourth and newest path is when a founder at an established venture capital firm hires a female and/or minority celebrity, entertainer, athlete or a corporate development or consulting executive to run a new fund, Mr. Greene said.

But creating a successful venture capital firm and getting the first commitments from limited partners is not an easy road either, according to speakers on a panel at the Milken Institute Global Conference in October. Women and minority investment executives face extra hurdles in fundraising for their firms because investors see them as bringing another element of risk to their calculations, said Meme Scherr, an investor, former hedge fund executive and member of venture capital firm Plum Alley Investments, at the Milken Institute panel.

It can take longer, sometimes three to four years, for women- and minority-owned venture capital firms to raise a first fund, which puts up a barrier to entry, said Tracy Gray, founder and managing partner at venture capital firm The 22 Fund, speaking on the same panel.

Firms do not get access to management fees until they close a fund and investors don't want executives at new firms to hold down a second job, Ms. Gray said.

"It's very difficult if you don't have personal wealth," which is a barrier for aspiring new venture capital firm founders, Ms. Gray said.

What's more, most investors don't want to be a manager's first investor, she said. And women- and minority-owned firms are held to a higher standard, Ms. Gray said.

"I'm not sure LPs trust women of color. ... We're constantly having to bring up research" that women-owned firms perform as well or better than firms owned by white men, Ms. Gray said.

Ms. Gray is also a lead partner at venture capital investment and investment education company Portfolia Inc.'s Green & Sustainability Fund and an executive-in-residence at the Los Angeles Cleantech Incubator. She is also the first social impact fellow at the UC Berkeley Haas School of Business' Center for Equity, Gender, and Leadership. She is also an engineer who worked on the space shuttle program at NASA.

Ms. Gray said two white male classmates who hadn't worked together and didn't have a traditional track record were able to score a commitment from a limited partner weeks after that LP turned her firm down, citing those reasons.

"That, right there, is where I could see real-time bias," Ms. Gray said. "It is surprising to me because we are all doing" innovative investment strategies.

What's more, women- and minority-owned venture capital firms that get a commitment through an asset owner's emerging manager program can have a difficult time graduating to the larger commitment sizes offered to managers in the investor's stable of non-emerging venture capital managers, Beyond the Billion's Ms. Chen said.

Emerging managers can have up to three funds and remain in the program, she said. "When is the right time to graduate from emerging managers?" Ms. Chen said.

Asset owners and managers should do "a deep evaluation of ... the systems and structures in place that are holding women back."