In a year like 2020, it’s not unusual to come across venture firms that want to talk about diversity and inclusion.
Most firms and their LPs are looking at D&I issues and considering ways to address them, whether it’s related to staff hires or the makeup of the founding teams in their portfolios. In part, the spotlight on social justice issues across the US is driving the discussion. However, it’s also as a result of the #MeToo movement, which has directly impacted several high-profile VCs.
For Eric Ball, the issue of diversity and inclusion has weighed on his mind for a few years.
Ball is a longtime investor, advisor and tech finance professional, including having served for 10 years in the treasury department at Oracle. He’s also general partner of Impact Venture Capital, which he co-founded in 2016 to back early-stage AI start-ups. The firm has offices in Burlingame and Sacramento, California.
Whether as an operator or as an investor, Ball says he has witnessed over the years how male entrepreneurs are favored over their female counterparts when it comes to receiving funding. In addition, he says there’s an age bias, too.
“I’ve heard people say that older people do not have the energy to help drive a start-up forward,” he says. “VCs like to use the term ‘pattern recognition,’ but it amounts to selection bias whereby investors favor young men as entrepreneurs.”
Ball had collected data and wanted to delve more into the issue, but he had postponed such an undertaking while he was launching Impact. That was until 2019, when he met researchers at the University of California, Berkeley.
Together, Ball and UC Berkeley partnered to craft a study that looked at more than 170,000 US-based start-ups since 2000, based on PitchBook data. They found that through Q2 in 2020, about 14,400 exited. They had a large enough sample to then compare the age and gender of the founders to see if there was a correlation to performance. (Click here to download a white paper on the study.)
Bias vs performance
Ball and UC Berkeley shared the data exclusively with Venture Capital Journal and prior to publishing the academic research online. What they found confirms that young males are preferred by VCs. This is consistent with data reported by Forbes and others, which say women make up about 40 percent of entrepreneurs, but have received only 7 percent of venture funding.
The UC Berkeley study found that of the start-ups that exited since 2000, only 12 percent had a female founder or at least one woman on the founding team. The study also revealed a key metric when it came to performance. In looking at the return on investment delivered by female and male CEOs at the time of exit, the “difference was negligible,” according to Ball.
Essentially, having a diverse pool of CEOs based on age or gender results in a similar quality of exits. The authors say this refutes the notion that young male entrepreneurs perform better than their counterparts.
To put it another way, gender and age just do not make enough of a difference for investors to favor young male entrepreneurs.
“VCs are funding young males not because they deliver better outcomes, but because of bias,” Ball says.
“GPs need to be open to investing in different kinds of funds,” says Kelli Fontaine, a partner at the LP Cendana Capital, which invests in early-stage venture vehicles. “Everyone is chasing deals. But the more you hear data like this that there’s no correlation, the more willing you think investors should be to look at different kinds of entrepreneurs.”
Ball adds that at Impact, he and his partners believe that women and older entrepreneurs deserve a fair shake even if the broader VC community disagrees.
“You’re not going to get far telling people to hire differently or invest differently for diversity’s sake,” Ball says. “But if you can show investors that diversity leads to better financial outcomes, then that is maybe a faster way to enact change.”