Understanding the Venture Capital Gender Gap
Jenny Lefcourt, partner at Freestyle VC and cofounder of All Raise, says that even as a serial entrepreneur herself, she long underestimated how little venture capital funding goes to female startup founders compared to the money men get. She believes unconscious biases, an industry built on intuition, and historical dynamics all contribute to this inequity. They also affect the low numbers of women in decision-making roles at VC firms. Lefcourt explains the ways the industry can actively reduce this gap.
CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
Women have been disproportionately affected by the COVID-19 pandemic. In the U.S. for instance, women left the workforce at alarming rates, largely due to childcare needs in a year of schooling, and working from home. Also affected the limited numbers of female entrepreneurs. On the one hand venture capital firms in the U.S. set a record high investing nearly $130 billion in companies last year, much of that money went into fast growing categories like healthcare, remote work, and e-commerce. But just 2.3% of that money, literally a couple of pennies per dollar went to startups led by women. That’s down from about three pennies the year before, which although extremely low had been trending up.
Now, Harvard Business Review has been featuring a lot of research and analysis of this trend. Go to hbr.org and type in venture capital gender gap, and you’ll find all sorts of articles about how male and female founders get asked different questions when they pitch to VC firms and how it affects how much they get about how the gender gap disappears when women fund women.
But also about how just 12% of venture capital firms have women deciding where funding goes. These inequities are widespread, slow changing, and honestly, they just don’t make economic sense. Here to help us understand this ecosystem and what’s happening is Jenny Lefcourt. She’s a General Partner at Freestyle Capital in Silicon Valley. She also helped launch a nonprofit called All Raise that is trying to change the inequality in venture equity. Jenny, thanks so much for coming on the show.
JENNY LEFCOURT: Thanks for having me.
CURT NICKISCH: How did you get into VC funding?
JENNY LEFCOURT: Well, I started on the other side, which is being the receiver of venture capital. I was a founder of two companies, a co-founder, which both raised a lot of venture capital. The first one was weddingchannel.com, which I co-founded over 20 years ago. For both of those companies combined, I raised over a hundred million dollars.
CURT NICKISCH: Was that remarkable at the time as a female founder?
JENNY LEFCOURT: It turns out it was remarkable. The funny thing is, I didn’t know it at the time. So just, I would go in there and I’d pitch my heart out. I didn’t know at the time that very little venture capital went to women, which I think helped me. I often have said that ignorance can be bliss. But there are some things that I think worked to my favor that are worth understanding. The first one was very much a woman business, meaning it was based on wedding gifts. So I think the men in the room really understood that we knew this market better than they did. The second time around I raised venture funding, but I also had a man by my side, who I’d brought in to be the CEO. I don’t mean to say anyone… It was just a matter of mindset. I think my mindset was helpful and that I didn’t know it was supposed to be a problem, but I also had a couple other factors working to my favor.
CURT NICKISCH: Tell me a little bit about your growing awareness. What were some of the horror stories or things that you saw that made you realize that this is a serious problem?
JENNY LEFCOURT: I’m almost embarrassed to admit the time it took me to kind of pull my head out of the sand as it relates to the lack of gender parody in venture capital. So as someone who had successfully raised so much venture capital, and then I was an angel investor and an advisor to many companies, and a lot of them, I was helping women raise money and they would tell me how hard it was for them as a woman. I really told them it’s mind over matter, and that they were wrong.
CURT NICKISCH: They must be imagining things. Is that basically what you were thinking?
JENNY LEFCOURT: Well, it was a combination of my experience and also this belief that Silicon Valley was meritocracy, and that venture capitalists, capitalists won’t care who you are, what color of your skin, if you can make them money. At one point, I’m embarrassed to tell you that I said, “You could be a purple person and if you can make someone lots of money, they would back you.” I thought it just didn’t matter. And it wasn’t until I became a venture capitalist and looked around and said, “Where are the women? There are so few of us.”
CURT NICKISCH: Because you just saw a parade of male founders coming in to pitch you, or you just saw male names on your calendar. When did you realize that?
JENNY LEFCOURT: Well, my first realization was in, where are my… I work very well with men, but I love having female friends and coworkers. Until I became a venture capitalist and I went to build my network of venture capitalists, and I knew a lot of them from my days when I was a founder fundraising. But as I was making those connections and sort of reconnecting with people, I was aware at how few women there were. So as I got curious about that, I started to dig into the data. The more I dug into the data, the more abysmal I realized the data was not just on how many venture capitalists there were, who were truly deploying the capital and being decision makers, but also how little a venture capital was going to women. I did not know until I became a VC myself.
CURT NICKISCH: I have to admit this as something that just baffles me too. Right? Because you would think that in a business where you’re really trying to attract money to invest in companies to make money, you have very, very, very clear incentives. It just doesn’t make sense that you would pass on value that comes into your boardroom to make a pitch to you just because of gender. It just like, it should be so easy for people to see value that other people aren’t seeing and just invest in it and snap it up.
JENNY LEFCOURT: Yeah. I think a little education or breakdown of how the systems have worked may actually shine some light onto this. So venture capitalists use their network. We, and I’ll say, we use our networks to deliver founders who then present to us and show us a vision and ideas that we can have conviction in. So one, you’re relying on your network to show you that. A lot of times it’s not so much that you pass because someone was a woman or someone was a person of color. You may never have seen it depending on what your network looks like. And then the second thing is that the earliest stages, there is no data. So you’re looking to have this gut feeling, this conviction to believe. So the reality is there’s pattern recognition.
So you’re looking someone across the table, do they look like someone who is going to build a big, powerful, valuable company? Most of those valuable companies had been built by white men, that’s brings us to unconscious biases. So one, I think it’s how many times are venture capitalists seeing the right companies, right? The right founders with the right visions. So you have to make sure that you had the right things in your pipeline. And then the second part is making sure, especially at the early days when there isn’t enough data that you have really parked your unconscious biases aside. Because if you don’t, you’re basically… Especially if you think about Mark Zuckerberg with his, the young dropout from Harvard with the gray hoodie, you saw a lot of the guys that looked like that getting funded after Facebook was successful. And that is pattern recognition at its finest, otherwise known as unconscious biases.
CURT NICKISCH: So you’re in this kind of catch-22 situation where to have more funding in female founders, you need more of them to be successful, but if people aren’t putting money into them, they won’t be successful.
JENNY LEFCOURT: That is correct. So I think there’s a few things at play. One is because the first round of financing is a little bit more leap of faith, right? Lacks the data you believe in the team, and you believe in the vision, you need more of those. So those rounds of capital are smaller. And then when those groups, those teams are successful as their success grows, and as their company grows, they raise more venture capital. And the sizes of those rounds just keep getting bigger and bigger and bigger. So if you want to change the gender diversity in who is getting the venture capital, you actually have to get it at the earliest stages. Because whoever’s doing their massive, hundred million dollar round today, they got started five years ago. So when I look at the data, there’s a few things that I like to look at to really say like, “Can I have hope that this is changing? That this can go in the right direction even if the numbers today don’t show it.”
So two big things. One is what percentage of the decision makers, the people who are writing the checks, deploying the capital, sitting on boards are women, right? Is there gender diversity in venture capitalists? And then the second is what percent of early stage financing are going to diverse teams? Because if you just look at the number, the big number of what percentage of venture capital went to diverse teams in 2020, it is so small because it is super skewed by these large rounds. And of course the large rounds are going to go to who was funded five years ago, which wasn’t very diverse.
CURT NICKISCH: So this is one reason that you founded All Raise, this nonprofit to boost funding in female entrepreneurs, and also pressure, really, venture capital firms to put more women into check writing roles. What kind of resistance have you encountered?
JENNY LEFCOURT: So when we started All Raise three years ago, we felt like there was an opportunity to make a very positive difference in tech, as it related to gender diversity. We felt like there were two sort of big levers to improve. One was the percentage of venture capitalists who were women and the other was the percentage of venture capital going to diverse teams. So the interesting thing is those two are not siloed, right? They go together. And at the time we were seeing signs of the power dynamic being with founders. Now I don’t mean to claim that all founders have the power in this dynamic, but the “hot companies”, those founding teams do. They have many firms vying to write them checks and be their investors.
What we were seeing was that those founders knew that diversity mattered, and they knew that to make their company wildly successful, not have a toxic culture, be sort of appreciated by people of all kinds using the product, they wanted to get diversity right out of the gate. So they went looking for firms who are modern and diverse because they knew if their funders were diverse, they would have a greater chance of having a diverse board and then a diverse organization. So as founders began wanting firms who were diverse, it enabled us to let the firms know that which turned out to be pressure for them to diversify.
CURT NICKISCH: Jenny, do you think there should be a mandate for venture capital firms to have women in check writing, decision making roles or a certain amount of money go into companies that are led by women or have women in the founding team? I asked that because there’s interesting comps, right? With boards in Nordic countries, where they have mandated a certain number of women on those boards. And it has substantially affected those boards and how they operate. A lot of people who didn’t even like the mandate when it first went in, feel like it’s had a positive effect. What do you think about that in the U.S. venture capital industry? Would that kickstart things?
JENNY LEFCOURT: I think that mandates often do kickstart things. So it may be a direction that we one day have to go in. Right now, I am hopeful that we’ll get there ourselves. We, being the venture capitalists before a mandate will even have to get put in place because the impact is so great if people are truly educated on understanding why diversity matters and the positive impact it can have on society and the profitability and success of the business. So, because I am seeing so many people really get educated on the importance and monitoring it themselves, I guess I’m still hopeful that we, as an industry, will get there before we even needed to put a mandate in place.
CURT NICKISCH: I want to ask a little bit about the pandemic, right? Because funding in women led startups went down from 2.9% down to 2.3%. What do you think is happening currently? And does this trend worry you?
JENNY LEFCOURT: So we experienced a startup boom in 2020, and more capital was deployed than any other time. Meaning more people were writing checks and to startups than any other time. And it was because the pandemic accelerated so much change the way that people were working, getting educated, shopping, exercise, everything completely changed. So two things happened with that. One is you have a lot of new opportunities showing themselves and young entrepreneurs, I don’t mean young in age, but founders starting companies to chase those opportunities. And then the second thing was that you had seen acceleration for many companies that were helped by these pandemic tailwinds.
So there are companies that maybe had funding in the past that now the pandemic cause explosive growth for them. And you had a lot of venture capitalists trying to write really big checks and put them into their companies. With that, you had this, the numbers that you shared of the amount of venture capital going to diverse teams down in 2020 versus 2019. But what you need to understand is the lion’s share of that are in the growth rounds of financing, those larger rounds of financing. So that’s going to dwarf what’s happening at the early stages.
CURT NICKISCH: So it may not have been as much of a backward slide as the 2.3% seems?
JENNY LEFCOURT: Right. So I don’t believe the back… The numbers show a greater backward slide than I think actually exists because I think that the growth rounds are a lagging indicator of gender diversity. And the early stage rounds are more a leading indicator on how are we doing on gender diversity. Now I feel the need to point out we were pretty flat. We had been going up into the right on early stage financing or early stage venture capital going to diverse teams. So it was still very disappointing and definitely the pandemic hit that, but I don’t think it is as bad as it appears because of these differences between what is the leading indicator versus the lagging indicator.
I would love to say though that I believe that even with the early stage venture capital, that it got impacted by the fact that things were happening so quickly, that venture capitalists and founders were relying on the old ways of doing things, which is relying on your network and going really quickly to going with sort of your gut or your quick conviction, or I can trust them. There are serial founders who I believe in them. And those are the things that often trap us into investing in the same people we’ve invested in the past or just investing in our network. So I do believe that the pandemic still had an impact on the percentage of early stage capital going to diverse teams. I think it would have been more positive or more up into the right, like it had been if things were a little bit slower and we weren’t relying on sort of some old bad habits.
Now you’re in Silicon Valley, the giant bay area venture capital scene is your home. I’m curious what you have been seeing in these trends internationally. And do you think, investing in women led companies, female founders, whether that’s an opportunity for other tech clusters or other venture capital firms in other places?
JENNY LEFCOURT: I do believe that the pandemic changed a lot of behaviors. One of them is that it’s not in the Valley or just in the Valley anymore. We had already been seeing trends, but once again, pandemic accelerated these trends. I think that where someone is located, their gender, what college they went to, the people that they know, a lot of that carries less weight than it used to. And people are being more evaluated by who they are, how they think, the opportunity they’re pursuing than a lot of other factors, I think, that were deeply at play with unconscious biases with the old sort of Silicon Valley way.
CURT NICKISCH: It sounds like even though it’s been a little bit of a rough road for progress in the pandemic, you’ve got some hope for the future.
JENNY LEFCOURT: I absolutely have hope for the future. I’m not going to lie, seeing the numbers were very disappointing. However, looking at the most competitive, important firms in the Valley diversifying, consciously diversifying, making sure that they had the right people at the table making decisions, knowing they need to stay competitive. And then looking at the founding teams and seeing that at the early stages, we are still seeing things either in the pandemic stay flat, or the good news is it looks like in Q1 2021, going up into the right. So diverse teams getting more venture capital out of the gate, which is sort of what matters, right? Those are the companies that will get the massive rounds, the large rounds in the future. So seeing those numbers look good right this moment. Those are the things that give me hope. I would say the most powerful thing that gives me hope is how educated founders are on the importance of diversity within their organizations, and understanding that having a diverse cap table, meaning a diverse group of investors will help them achieve that almost better than anything else.
CURT NICKISCH: Jenny, what kind of progress are you seeing? Who’s pioneering this and taking advantage of the trend that other people are slow to recognize and adapt to?
JENNY LEFCOURT: I am seeing some of the biggest, most powerful firms diversifying. So you have benchmark Sequoia, A16Z, USV, those types of firms who went out of their way, knowing it was a smart move for their firms to stay competitive, putting women in positions of power. Then on top of that, you’ve seen a lot of women start their own firms and be very successful in raising their capital to then deploy. So you have Aileen Lee at Cowboy, you have Kirsten Green at Forerunner. You have Mary Meeker at Bond. You have a lot of funds that recently raised. So it’s BBG, Construct Capitals, Bold Ventures, Reach Capital. I mean, I could keep on naming them, Theresia Gow at Aspect. I think that we’re seeing the biggest and best firms who want to stay competitive, diversifying at the top. And then I think you’re seeing a lot of limited partners. The people who put checks into VC firms like mine, having women either start their own or being strong, equal partners.
CURT NICKISCH: Jenny, thanks so much for coming on the show.
JENNY LEFCOURT: Thank you for having me and helping us shine a light on this issue.
CURT NICKISCH: That’s Jenny Lefcourt. She’s a General Partner at Freestyle Capital and she’s a co-founder of the nonprofit, All Raise.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt, Adam Buckholtz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.