A few weeks ago, I met with a top investment banker for the technology industry; I wanted to learn about alternative ways to raise capital, to perhaps bring in more women investors to Ellevest. While crowd-funding is making strides, he said, the truth is that the venture capital business is “not broken,” and so the need for an alternative model isn’t really there. Really??
Ok, I guess it’s not broken if you’re a venture capitalist or an entrepreneur who has been funded.
But, as the news over the past couple of weeks has made clear, it’s awfully broken if you’re a woman working at certain start-ups (looking at you, Uber) or pitching your business to certain venture capitalists. (Chris Sacca’s Medium post “I Have More Work To Do” certainly read differently after the New York Times identified him as making unwanted advances on a woman than it did on first read … in which he positioned himself as one of the good guys who just needs to do more, darn it. And revelations about Dave McClure’s alleged behavior – “I was getting confused figuring out whether to hire you or hit on you” – in the same New York Times article makes his Medium post “I’m a Creep. I’m Sorry.” seem pretty accurately titled.)
But it doesn’t start and stop with a few guys acting badly; it is clear that there are more systemic issues at play. Last year, male entrepreneurs received $58.2bn in venture capital funding; women received $1.5bn, or just 2.5% of the total, according to Pitchbook. Yikes.
But, hey, this is capitalism at work, right? If women built such great businesses, they would surely get funded. And, everyone knows that the industry makes a lot of money for its investors: think Facebook, Uber, AirBnB, Snap, the list goes on.
Not so fast.
According to Cambridge Associates, while venture capital returns have been superior over longer periods of time, returns for investors have been just sort of ok over a series of periods in the last 15 years; for some periods the net returns have been a bit better than simply investing in the S&P500, and for some periods they have been worse.
For example, over the past five years, the Cambridge Associates LLC US Venture Capital Index returned a net 14.03%, while the S&P500 returned 14.66%. This is despite the tremendous amount of effort that goes into generating those returns – and it’s despite the masterful storytelling by the industry and the press on the great investments (while not saying much about the many more investments do not do well).
As for the dynasty-level wealth that we always hear is being generated by the industry, a lot of it has instead been earned by a handful of venture capitalists and successful entrepreneurs.
(It’s hard not to think of Wall Street when writing this; that’s another business in which it has historically been better to work in the industry than to be an investor in it. One is tempted to ask: “Where are the shareholders’ yachts?”)
How to improve these meh returns?
Here’s one way: stop hitting on women and start investing in their businesses instead.
Perhaps women don’t found as many rocketships like Facebook as men do; but they also don’t strike out as often. The net result is that, according to First Round Capital, their investments in companies with women in senior leadership positions have delivered 63% better returns than men-only. 63% better. That’s a lot of performance.
So investing in businesses run by women can improve venture capital’s investment performance, grow the economy (as more new businesses are started) and create jobs. Not to mention that it’s just … you know … fair.
So how do we get from here to there?
Perhaps the groundswell of attention to this issue will direct the focus of venture capitalists.
Certainly the #DecencyPledge that Reid Hoffman is championing is a step in the right direction. Next step: a #FundingPledge, please … not just for women, but for all people with great ideas who don’t fit the white-or-Asian-male-entrepreneur archetype.
So maybe the recent revelations are the wake-up call that’s needed. Or maybe that moment is still some time away, and will be driven by even more stories of discrimination and poor behaviour.
Perhaps venture firms’ LPs will sit up and take notice. After all, it’s their money that has funded the industry – and thus has funded the industry’s behaviour. Will they begin to ask the hard questions about returns – and about fairness – that can drive change?
I left an investment committee not so long ago because they wouldn’t; maybe others will start to feel the same way and the pressure will build.
Or maybe the whole industry won’t change, but a handful of large investors will. Their pressure will make a difference for some existing funds; and they will fund a number of new venture capital funds that are emerging to invest for both returns and impact.
It feels like there is a growing drumbeat on this front, particularly among a number of prominent family offices. And they will then reap the returns that are available “from taking women seriously” (h/t to Cindy Gallop on this concept), and entrepreneurs will steer away from firms that don’t “get it” … because “Why should we make money for a**holes?” (h/t to Aileen Lee on this one).
Regardless of how it changes, I believe the possibility for superior returns – and the economic growth from all of those un-started businesses – mean that the way businesses are funded will inevitably change.
And this candid, overdue national conversation on what is broken – driven by a few brave women – is an important step in that direction.
Sallie Krawcheck is the CEO and Co-Founder of Ellevest, a (venture-capital-funded) digital investment platform for women. She is also the Chair of Ellevate Network and the Pax Ellevate Global Women’s Index Fund and the best-selling author of Own It: The Power of Women at Work.