Why the Startup Ecosystem Needs a Shift Towards Gender Diversity

By Ehsan Khademi

For us at 1000 Angels, the private investor network that connects startups with investors, this is a very important topic. The sex-bias trial against Venture Capital pioneer Kleiner, Perkins, Caufield and Byers is just opening up a controversial discussion on whether the startup ecosystem encourages gender diversity.

While the VC and startup scenes have been subjects to wide criticism regarding the gender inequality, this case will be the first gathering such public attention due to the fact that it’s held in court.

In this particular case, a former female employee of KPCB alleges that she was discriminated and harassed while working for the company. According to her, the company failed to promote her, paid her less than to her male colleagues and excluded her from certain client events.

Stanford University’s professor on gender equality, Deborah Rhode, labelled the case to be a wake-up call and commented, “The case has sparked a much-needed debate about gender inequality regardless of its merit.”

Even though the trial has still to show if the allegations have merit or is purely a revenge of a disgruntled employee, the more important question, as pointed out by Rhode, is why addressing gender equality is still a big issue on an industry-wide level.
 

Gender (In-)Equality at the Big Players

Looking back, several other companies had to deal with similar issues in the past. Silicon Valley especially tends to show a huge gender imbalance. Facebook Inc. earned much criticism and managed only to appoint a woman to its Board of Directors after its IPO. This took place only after some negative buzz shattered through social media.

When Twitter went public in 2013, the same problem attracted wider attention. The absence of women in c-suite positions was one of the first things CEO Dick Costolo was asked about during the IPO day while standing on the trading floor of the NYSE. He responded that Twitter is aware of that and just promoted a woman as a general counsel.

Well, he failed to mention that the promotion took place 5 weeks before the IPO, which seems more like a publicity stunt than active promotions of women to management positions. It seems that Silicon Valley took a page from Wall Street with regard to its male-dominated culture.

Another revelation came when major tech companies released their payroll details for the first time last year. Only 30% of all employees were females, while the majority of technical jobs were occupied by male employees.
 

Gender Bias - A Disturbing Trend

It can be assumed that Big Players don’t exactly serve as role models. If, on one hand, established former startups like Google, Facebook or Twitter and, on the other hand, elite VCs fail to address this problem in an adequate manner, it’s no wonder that there is a lack of awareness of this particular issue on a large scale. In today’s competitive marketplace, it’s not a question of gender preferences but rather a strong case for corporate mismanagement. It wouldn’t be in the best interest of a company to employ women just to fulfill a certain quota, instead of looking for the most deserving person to fulfill the position.

Nevertheless, there seems to be a certain trend emphasizing a bias against women when it comes to startup entrepreneurship. A quick look at startups seeking funds reveals a devastating image of the industry. As a matter of fact, most female-led startups are less likely to get funding by a VC in comparison to their male counterparts, indicating a strong case for gender bias.

A research study by Professor Candida Brush from the Babson College gives further evidence to these disturbing developments. According to the study, 97% of venture-backed companies in the U.S. have male CEOs. In addition to that, less than 10% of all VC firms analyzed in the study had at least one female partner.

This leads to the question of whether there’s a reasonable economic explanation for this kind of imbalance or if it’s based purely on personal preferences. Sadly, it appears that, most likely, the later is true.
 

Is Gender Diversity Beneficial? Yes, It Is.

In matters of business, it is better to put emotions aside and judge based on facts and figures. In 2010, female entrepreneur Cindy Padnos published a research paper called “High-Performance Entrepreneurs: Women in High Tech”. Among the findings are several interesting clues that suggest a strong case for the positive influence of female employees and entrepreneurs on startup companies. High-tech companies founded by women are more capital-efficient, and venture-backed firms with women on the board have had more successful exits.

Furthermore, women-owned firms are the fastest growing sector of new venture creation in the U.S. Finally, companies that are the most inclusive of women in top management achieve 35% higher ROE and 34% better total return to shareholders versus their peers. (Source: http://www.illuminate.com/whitepaper/)

In a 2011 interview with Inc Magazine, Padnos stated that there are actually three ways startups benefit from gender diversity:

 

Padnos's research points to three statistics that suggest that a mixed-gender company is better-positioned for success. They are: 

Women are better at bootstrapping: Research from the Kauffman Institute shows that women-led tech start-ups launch with about half as much capital. Why? "I think part of it is that it's perceived by women that it's harder to raise large amounts of capital, so they frequently start with less capital, because it's an easier thing to do," says Padnos. In other words, women seem to be capable of doing more with less.

Women fail less often: According to the 2005 Report on Women and Entrepreneurship, the percentages of entrepreneurs who expect growth for their businesses "is somewhat higher for female entrepreneurs than male entrepreneurs." According to a separate study by Babson College and the London School of Economics, women-led start-ups experienced "fewer failures in moving from early to growth-stage companies than men."

Gender diversity improves long-term returns: Research from the University of Michigan and Cornell University found that companies with more gender diversity delivered better results from IPOs, by as much as 30 percent on average.

(Source: http://www.inc.com/articles/201109/how-to-combat-the-all-male-startup.html)

These findings not only suggest that it’s highly beneficial to have women on board of a startup company, they also imply that it is an economic disadvantage to neglect to either employ female employees or invest in companies led or founded by female entrepreneurs.
 

Why It Is Necessary To Change The Status Quo

At the moment, it looks like most of the established startup companies, as well as the major VCs, are comfortable with the current situation and hesitate to put change in motion. Going forward, this will turn out to be a mistake, considering the ever-increasing battle for talent and innovation. The main goal should be getting the best minds (to add to the value, innovation, progress and success) regardless of the gender.  

Whats more important is that upcoming startups feel the need to initiate a change of paradigm. Innovation and progress are certainly the characteristics of the startup culture and this attitude shouldn’t stop at the corporate level when speaking of gender diversity.

On a final thought, everybody can imagine what would happen if your female customer base chooses to pass on the services or products you offer because of certain hiring practices. And why shouldn’t they? Let’s hope that this kind of customer behavior isn’t necessary in order to raise awareness of a much needed shift in the corporate startup culture.


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