VCs That Back Women Outperform Those That Don't

There are people who object, reflexively, to articles like this. They resent what they perceive to be the 'politically correct' message or that anyone would or could favor one group, race, religion, gender, nationality or species over another - though research suggests that is usually the case because the type being favored is not one to which they belong.

But the larger point is not so much that women are inherently smarter, better managers or generate more profitable investments (though that all may well be true). The larger point is that in this global, technologically dominated economy, no one can afford to overlook anyone or anything. Bias is morally questionable but it is stupid because it is unprofitable. As the following article explains, one of the reasons why the research results it reports may have turned out the way they did is because there are so few investors chasing so many deals.

Whether it's women or Chileans or Buddhists, investors have to get past the superficial to find the essential. Many will snort contemptuously that they would never bother with such insignificant trifles, focused as they are, on the numbers - where it counts. But the data belie that easy sophistry. The opportunities of the future will belong to those who can really see value wherever it leads. JL

John Tozzi reports in Business Week:

Venture capital firms that invested in women-led companies outperformed those that didn’t, according to a new analysis of a decade’s worth of VC deals.

What’s more, the VCs that did invest the most in women entrepreneurs were less ingrained in the Sand Hill Road network. “Venture capital firms that don’t have the social ties—the social capital with other VC firms—those firms are more likely to invest in a women-led businesses than venture capital firms that are very well connected,” says Joy Godesiabois, a professor of entrepreneurship at the Colorado School of Mines, the paper’s lead author. The study, conducted for the Small Business Administration’s Office of Advocacy, also found that after VCs first invested in women entrepreneurs, they were more likely to do so again.
The VC world has long been criticized as an old boy’s club. Even when venture capitalists dismiss charges of gender bias, many are quite explicit that they want potential deals to come through trusted referrals. If women entrepreneurs are shut out of those networks, they may not get the consideration that male counterparts do.
The researchers measured social ties among VCs by looking at how they co-invested with other firms. Godesiabois and co-author Larry Plummer of the University of Oklahoma analyzed all venture capital investments in the U.S. from 2000 to 2010—90,000 deals involving 2,500 VC firms and almost 19,000 portfolio companies. The data were drawn from the Thompson Reuters (TRI) VentureXpert database.
Why did VC firms that invest in women-led businesses perform better? The study floats two possible reasons. First, VCs wary about investing in women-led businesses might do “more vigorous due diligence,” leading to better investments. The other explanation is that “a heterogeneous management team” might perform better, a finding that’s consistent with other research. It’s important to note here that the study doesn’t say that investing in women-led businesses caused the VCs to perform better—just that there’s a correlation.
A further explanation: If the venture capital market on the whole is biased against women, those VCs that do invest in women-led companies have their pick of good opportunities that others overlook. It’s a classic behavior of underfunded markets, Plummer says: “It generally means there’s very little money chasing a lot of good ideas.”