Diversity is perhaps the hottest topics in venture capital (VC). Many may wonder why this is happening now, considering that we were very much aware of this structural defect in our sector.
Women and ethnically diverse backgrounds have been consistently excluded from VC/PE roles from the very beginning, if we want to be historically accurate. It is not a temporary trend we are observing, or a recent realisation. Various studies have been conducted over the last few decades and all highlighted the unchanging make-up of our ecosystem.
It is not a straightforward, one-report-and-a-data-exercise type of solution, nor will we see changes straight away. To help improve diversity we need to create capacity at the top end of the funnel, potentially with career and progression pathways within the sector, mentoring and support schemes.
To get an understanding of the depth of this problem we have to analyse the context and why this may be the right time to introduce new measures.
Understanding the context
One thing has been constant over periods of economic boom and bust, and that is the income gap between genders.
At European level, according to EUROSTAT, women are paid 16.2% less than men. Of course the situation varies, from Estonia with an income gap over 25%, to Romania with 5.3%, which is just unbelievable. The situation is not more encouraging across the globe, or across time. Today, what we are experiencing is part of the structure, not just a mere deviation from a more encouraging normal.
Any sub-level analysis will yield some interesting nuances. If we break the data into age groups, we can conclude that millennials enjoy more income fairness and in some cases inverse relationships, with women earning slightly more.
If we then wanted to explore the data by sector, we would find that in financial services and insurance sectors have enjoyed the highest differential across time. In effect, we are dealing with a whole sector where women not only have been a minority but also paid substantially substandard levels.
While opinions vary across academic studies and some could arguably say that we are not comparing like-for-like roles, or responsibilities. It is a structural problem that researchers and enthusiasts alike have been contemplated for decades without resolution.
Women executives and board members have also been a rarity, with an average of 23% across listed companies, but only 6% at CEO level and 10% at the C-suite level, as found by 30percent Club in their 2016 and 2018 report.
The situation has not improved in SMEs, where only 14.3% of all founders in Europe are women, according to the European Start-up Monitor.
Traditionally, VC/PE firms recruited from the banking sector and still does. It should be no shock that the data for this group of professionals is not particularly encouraging.
Why does the VC sector only have an estimated 3–8% women in senior positions?
Survey-based studies have been conducted more recently in our sector, see Diversity VC, and as expected at the bottom of the pyramid, we observe a great deal influx of women analysts and associates, with more cohesion in large teams and less so in smaller ones.
The work is excellent, understanding the differential across a sector is a promising starting point for implementing long-term measures to stimulate more inclusion of specific groups. Of course, measurement in any industry is not a solution in itself.
The pollination of reports and work in the space begs the question ‘Why now?’. The last few years have been essential in measuring performance related benefits for diverse teams and the financial benefit of having more women in top positions.
McKinsey, 30percentclub, EUROSTAT, ONS and many other organisations across the globe have rushed in to close the data gap we had in the past. It shows that women-led businesses are just as performant as ones led by men; this is equally the case for listed and non-listed companies, at early-stage and growth level.
The McKinsey report finds that the US dataset shows no statistically significant correlation between gender diversity and performance until women constitute at least 22% of a senior executive team.
Despite systematic underfunding over the last decade, there is a £400k differential between men and women entrepreneurs, according to Pitchbook, which is present in all data samples analysed; women-led businesses have improved utilisation of capital and an increased ratio of revenue generated per pound spent.
Since shareholders and investors seem to be particularly passionate about the bottom line and the valuation of their businesses, it is a crucial historical moment because we have empirical data showing the correlation between earnings and diversity (gender and ethnicity).
It is not unlikely that the VC world as we know it could change to take advantage of this new found source of success: women.
By Flavia Richardson, Funding London