Addressing the Gender Imbalance in Venture Capital and Entrepreneurship

The strength of the United States’ robust innovation system is driven by a well-functioning venture capital (VC) market that is key in maintaining the strength of U.S. global economic leadership. Venture funding plays a major role in de-risking the innovation process by taking a bet on promising concepts by furnishing bright individuals with the resources to bring their ideas to market. This in turn promotes innovative technologies, grows businesses, and contributes to economic development and competitiveness by helping firms commercialize new ideas and bring them to market.  

The famous U.S. venture capital ecosystem today has its intellectual origins in the 1957 creation of Fairchild Semiconductor in Silicon Valley by eight defectors from semiconductor creator William Shockley’s team, who started their own firm with encouragement and funding by iconoclastic New York broker and noted outsider Arthur Rock. Yet, while venture capital was once seen as a radical approach catering to out-of-the-box thinkers outside the usual business networks, there is now a growing recognition that the industry has grown settled and is not doing enough to address the need for more diverse participation in the innovation system. Greater inclusion today means harnessing the talents of more Americans and giving them a stake as founders in the innovation economy—a critical priority in an era of increasing strategic, technology-based geopolitical competition.

Notably, women are starkly underrepresented among the ranks of entrepreneurs and venture capitalists today. Women own only 36 percent of U.S. firms. According to a 2016 working paper from the Harvard Business School, nearly 81 percent of venture capital firms have never hired a female employee—let alone chosen to fund a female-led startup. Only 2.7 percent of venture capital dollars went toward female-founded companies in 2019 according to a report from the Female Founders Fund, a women-led, early-stage investment firm.

Roughly 80 percent of female tech startup leaders reported using personal savings as their primary source of funding in starting a new business, according to a survey conducted by the Kauffman Foundation. Even when they do receive funding, female entrepreneurs typically receive capital for traditionally “feminine” areas, such as fashion or children’s products.

Roadblocks Facing Women in the VC Industry

Female-founded businesses face greater roadblocks to success than their male counterparts. A 2017 report by Third Way, a think tank, describes the primary roadblocks to women’s success as deficiencies in “human capital (education and experience), social capital (networks), financial capital (sources of funding), and the need for role models.”

Limited Social Networks: The U.S. venture capital industry remains male-dominated, with women only representing 8.6 percent of all venture capitalists, 8 percent of firm partners, and 7 percent of board seats at venture capital firms across the country. Fewer than 5 percent of all VC-funded firms have women on their executive teams, and only 2.7 percent had a female CEO.

The aforementioned report from the Female Founders Fund, an early-stage investment firm, found that of more than 200 Bay Area startups that received series A funding—or early-stage investment between $3 million and $15 million led by an institutional investor—only 8 percent were led by women. While would-be women inventors and founders will likely need successful role models to aspire to, they will also need peers on the other side of the conference room when they are pitching to VCs.

As investors, VCs seek to minimize risk and, for this reason, have traditionally invested in networks that they are most familiar with (i.e., mostly local, male startups). So, if business decisions are to revolve around the trust-based relationships built around personal networks, then greater diversity in the venture capital industry can help cast a wider network of trusted collaborators. It is important to note in this regard that most women-led businesses have been funded by female founders themselves or by friends and family. Furthermore, VC firms tend to rely on familiar social networks when hiring, with only about 68 percent looking externally for new hires. This often places female candidates, who are hired externally at a rate of only 50 percent, at a disadvantage.

Fewer Role Models: According to research conducted at the Harvard Business School, the female participation entry rate into entrepreneurship has increased from 7.16 percent in the early 1990s to just under 11 percent after 2010. Furthermore, women make up only 6 percent of information technology entrepreneurs, which is the industry most backed by venture capital. While many attribute this to a small percentage of female entrepreneurs not seeking VC funding, it has also been argued that having fewer female founders as role models contributes to fewer women seeking VC funding.

Skew in Fields of Education: Women are, overall, more highly educated than their male peers in technical fields but are less involved in areas like business and finance. According to the National Center for Education Statistics, women received 57.2 percent of undergraduate college degrees, 60.1 percent of masters degrees, and 51.4 percent of doctorates in 2010–2011; the numbers are likely higher today.

In the world of tech startups, however, these degrees are often not fields targeted by the VC industry for hires. A study conducted in 2018 found that 27 percent of VC investors had undergraduate degrees in engineering or technology, 26 percent social sciences (with economics outnumbering other disciplines), and 18 percent in business (with a majority studying finance). However, women are marginally outnumbered by men in these fields, which may partially explain why there are fewer women employed as investors at VC firms.

Limited Availability of Senior Position Candidates: Finally, a human capital survey conducted by the National Venture Capital Association in 2020 found that while representation of women in investment positions was substantially lower than men at 23 percent, female employees accounted for 94 percent of administration positions. The survey concluded that the limited representation of women in these investment positions cannot be explained solely by a lack of potential candidates, as women account for 34.8 percent of MBA classes at leading universities, but this smaller pool is likely a contributing cause.

Addressing the Problem

So, what can be done to help solve this problem? The National Venture Capital Association (NVCA) has identified three potential action items to increase gender diversity among employees at VC firms.

Develop a Strategy: The first of these is to implement Diversity, Equity, and Inclusion (DEI) strategies and programs. The NVCA 2020 survey found that among firms who have a DEI strategy, 25 percent of their investment professionals were women, compared with 20 percent at firms with no strategies in place. Furthermore, these firms reported more women holding leadership positions, at about 20 percent of investment partners, compared with 14 percent at firms without DEI strategies. To address the prevalent gender gap at VC firms, companies could implement DEI-specific accountability metrics for leadership.

Address Harassment: Second, NVCA recommends that VC firms should implement policies to address harassment and discrimination in their organizations. The NVCA found that only 77 percent  of VC firms reported having HR policies and processes (e.g., code of conduct, employee handbook, anti-harassment policy) in 2020. The percentage of firms who identified internal contacts to whom employees report alleged misconduct is 66 percent, with only 27 percent having an external contact. Only 33 percent of firms have mandatory prevention programs that address harassment and discrimination and 28 percent said they lacked these programs and were not likely to offer them in the future. As such, firms and governing bodies or associations should work to implement policies addressing harassment and discrimination across the board.

Recruit Externally: Third, the NVCA survey found that 67 percent of VC firms execute human resource functions and recruitment internally, rather than externally. Out of firms surveyed, only 65 percent seek external candidates for junior investment positions, and 45 percent for senior positions. However, about 50 percent of female VC professionals are hired externally, compared to 37 percent of men. Additionally, low turnover tends to present a challenge to increasing firms’ gender diversity, and the NVCA survey found that there was only a 24 percent turnover for investment professionals in 2020. To increase hiring diversity, firms should actively seek external candidates for openings using a skills-based approach, as opposed to seeking and sourcing talent through existing social networks.

Implications for Global Competition

At the current rate of technological change, the United States cannot afford to lose the dynamism and innovative thinking that has kept it at the cutting edge of technological innovation. As key engines in a market-driven innovation ecosystem, the diversity of entrepreneurship and VC leadership is not only a moral imperative but also an issue of national security and global competitiveness. As Americans celebrate their entrepreneurs and how figures like Steve Jobs and Elon Musk have changed the world, they cannot afford to ignore the pivotal role that venture capitalists played, and continue to play, in shepherding individuals and their exceptional ideas out of obscurity. The vitality of the U.S. innovation economy in this century will rely on the success of good ideas and the fresh thinkers behind them.

Alexander Kersten is the deputy director and fellow with the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Gabrielle Athanasia is a program coordinator and research assistant with the CSIS Renewing American Innovation Project.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Alexander Kersten
Deputy Director and Fellow, Renewing American Innovation Project
Gabrielle Athanasia

Gabrielle Athanasia

Former Program Coordinator and Research Assistant, Renewing American Innovation Project