As another person steps forward in the trial involving Reddit CEO Ellen Pao and her former employer, prominent VC firm Kleiner Perkins Caufield & Byers, new questions have been raised about the diversity of the venture capital world. Freada Kapor Klein, a partner at venture capital firm Kapor Capital, says that for years she's been mistreated and seen inappropriate things happen to women in the industry. "That’s what being a woman in business has meant in the last few decades," she says.
Kapor and other diversity-minded investors say that at the investment level, diversity does, in fact, affect the rest of the technology industry. VCs—94% of whom are male and mostly white, according to a Diana Project report—hold a lot of power that isn't being used well enough, says Kapor. After doing her PhD on the hidden bias within technology-based work environments, she came to realize that VCs still don’t understand the use and need for diversity, even though they have one of the strongest reasons for promoting it: increasing the competitiveness of the companies they nurture.
Kapor says a frequent refrain on Sand Hill Road has been ‘We don’t care who you are, what your background is—we fund the best ideas." "We hear silly statements like, ‘You could be purple for all we care if you have a good idea, we’ll fund it,' which turns out to be an aspiration and really far from the truth."
Last year, a Harvard Business School study showed that female managers improve overall firm performance by bringing informational and social diversity benefits to the management team, enriching the behaviors exhibited by managers throughout the firm, and motivating lower-status women in the firm. That same study showed that when presented with the same pitch, investors chose the male entrepreneur’s—even when the content of the pitch is the same.
The numbers reflect this bias. A study last year by Babson College found that just 2.7 percent of the 6,517 companies that received venture funding from 2011 to 2013 had women CEOs. Some estimates have put the numbers higher, around 10%. Meanwhile, while 11 percent of Americans are African-American, only 1 percent of venture-backed companies in the U.S. were founded by an African-American. Other groups, including Hispanics, receive so little funding that numbers are hard to come by.
One of the best pitches Kapor says her firm has ever seen was by a formerly incarcerated black man who had created a company called Pigeonly, which aims to dramatically lower the cost of phone calls to and from prison, potentially upending a multi-billion-dollar-a-year business. "He’s disrupting something that’s been charging $3 or $4 a minute—that kind of exorbitant price has already been disruptive in the rest of society," she says. "He is radically lowering that cost and building trusting relationships with the incarcerated and their families and he can build businesses with the formerly incarcerated. I don’t think anyone else who doesn’t have family members incarcerated or his background would have come up with that."
She says before taking any sum of money, entrepreneurs need to be active in making sure any diverse-minded values align with that of the firms they are getting into a relationship with.
"Don’t just take money from some Sand Hill name you’ve heard of if they don’t share the same values or vision," says Kapor. "Very often, you’re no longer the owner of your company, and if you’re not aligned from a values or vision perspective, you’re gonna lose your company."
In 2013, 500 Startups invested in its first African startup, Dropifi, a Salesforce-like "customer engagement" platform for small businesses. It quickly rode to the top of its class. Even 500 Startups founder David McClure admitted he didn’t take Dropifi founder Kamil Nabong seriously at first. He told CNN, "Initially I was cautious like, ‘Okay, what is this guy from Africa doing trying to pitch me?’"
"Even the most successful companies usually have stories of countless VCs saying ‘no’ before one finally said ‘yes,’" Parker Thompson, a 500 Startups venture partner, said in 2013. "It is probably harder for companies like Dropifi, with founders that don’t fit the patterns venture capitalists are used to seeing."
"Patterns" suggests a discriminatory attitude; after a rocky year for Silicon Valley's reputation on diversity, the safer term seems to be "unintentional bias." Either way, bias is the charge by Vassallo and Pao, who say that in 2011, they were not promoted from junior to senior partner even as all three of their male junior partners were, as Re/code reported. "Sometimes in a room, it’s harder for a women’s message to be heard. I’m not really sure why, but I’ll hear some other woman make a comment and it’s not really endorsed until a guy in the room says it," says Cindy Padnos, a founding partner at Illuminate Ventures, an early-stage cloud and mobile VC firm. "Then all of the sudden everyone’s nodding their heads."
Kapor agrees that each person has unintentional bias, though it's unclear whether that is the case in the Kleiner trial. But she worries that will be used as an excuse. "I think VCs have a responsibility to mitigate their own biases because they have so much control over what companies even get a chance."
Padnos says VCs have a bigger role than just writing checks and retaining returns: They help manage their firm's diverse portfolio, in what she calls "an apprentice business." "I don’t think it’s the VCs job to tell them who to hire and do a head count, but it is much more about showing the opportunities and making the most introductions to help them find the people they wouldn’t otherwise have access to," she says.
To Padnos, there’s almost nothing more important to startups than innovation, which she says they can only achieve when they're advised by a diverse set of perspectives. By giving the firm members access to the whole portfolio they are able to combine perspectives, contacts, and ultimately ideas, and both the team and portfolio are able to outperform firms that are less diverse. "I can’t even tell you how many times what we hear from an entrepreneur is, 'Wow, conversation with you guys is refreshing and different than Sand Hill Road," Padnos says. Even Padnos says she had a hard time finding funding to start Illuminate because of the lack of investors who had the same diversity mind-set.
Another challenge Padnos sees in bringing diversity to more firms is that there’s often an average 10-year lifetime of any given fund, which means sticking with the same—usually white male—firm partner or VC. That's another reason Padnos says it's important to align values in the beginning. Both Padnos and Kapor insist the efforts of giants like Intel and Microsoft, which pour money into diversity at later stages in their corporate life, should not be a model for companies going forward. "It is much easier to build a diverse company from the ground up than to take a company of 80,000 employees and try to retrofit," says Kapor.
If VCs are writing the check—especially in series B rounds and beyond—they have the ability to ask for some kind of a diversity-related plan. "Every single VC firm can ask those questions or that plan but it has far less credibility when all of your partners are white men," says Kapor.
But how can you fix something if you don’t know there’s a problem or the magnitude of it in the first place? "In the same way most VCs believe they’re making objective decisions on the quality of the idea—the same dynamic holds that there’s not an understanding of diversity as a business issue," says Kapor.
The problems are less obvious when VC firms are doing great. Pinterest engineer Tracy Chou says the lack of diversity gets hard to course-correct, which is what we're seeing in bigger companies. "Disadvantages of lacking perspective, or the culture getting out of whack—those things have a lot of implications for the products that are built and how the business functions, but it's not direct."
Given that so many successful companies have been marked by low diversity, it can be hard to paint the straightforward business case, says Kapor. "It’s very difficult to see the need when you’ve got outsized returns as a VC firm, when you’re oversubscribed, when you’ve got more people wanting to give you money to invest than you can possibly place in a responsible way," she says. "I think it gets very distorted."
She says VCs should be asking two questions: "What companies didn’t get created that could have been as successful as the ones that did get created?" And, "what if some of social media companies actually reflected their users more? Wouldn’t they have that much more success, that much more traction and that much greater profits?"
A lack of knowledge shows up when VCs are asked about it directly. Even Tim Draper of Draper Fischer Jurvetson, who confidently and articulately planned California's division into six different states, still couldn't make a case for women during an awkward interview at Fast Company's Techmanity event in San Jose last fall.
Draper—a third generation VC and one of Silicon Valley’s most prominent VCs—tried to awkwardly explain that women should start their own businesses to be taken seriously. To defend why he’s pro-women, he spewed off ill-timed generalizations like "They’re very tight with money" and "They have great ways of encouraging great behavior." He explained that—with the exception of his daughter’s friend Elizabeth Holmes, who was dropping out of Stanford to start the company Theranos—"women’s returns were average." But he assured the crowd he loves women. "Come on, baby," he said to no one in particular. "I’m looking for more of you." He's also done a partial striptease on YouTube to show his "appreciation for women."
At VC firms, there is another dangerous trend: The sense that progress is actually being made. Vivek Wahdwa, a cheerleader for diversity, has dropped out of the discussion that he has been engaging in a conversation he didn't understand, even as he sung the praises of the diversity efforts of VCs. One bit of evidence Wahdwa cites: The National Venture Capital Association asked him (instead of an actual woman in tech, I might add) to be a speaker at their annual ritzy conference.
KPCB has sought to improve its gender image in advance of the lawsuit. Recently, its blog featured two posts about women and diversity in tech within days of each other, for example; Meanwhile, the firm has sought to tamp down on the transparency that comes with a public court case. According to Bloomberg, KPCB asked a judge to close the public portions of the trial dealing with its financial performance and its partners, citing trade secrets.
When VCs recognize their roles in creating more diversity in the field and giving more chances to people outside of their friend group, we could actually start to experience true innovation, says Cindy Padnos. "I think it’s important for people to not just say they want [diversity], but to encourage it and support it and reward it."
Yes, it's complicated but it’s not rocket science, Kapor says. "If you have very few diverse entrepreneurs in the firm, you’re less likely to get a great pitch—from a woman, African-American, or Latina entrepreneur—that could be the next big thing." And it takes more than just one white woman on your board to call yourself diverse, she says.
Disrupting diversity within firms would help firms mirror the companies whom they invest in, benefiting everyone. "I think the mistreatment that women and entrepreneurs of color experience at the hands of VCs will go away when the entrepreneurs have somebody who respects them, understands them, and looks like them to invest in their companies," she said.
This this story was originally titled "To Truly Change Diversity In Silicon Valley, Follow The Money."