A recent study by University of Alberta’s Sahil Raina makes the case for diversity in venture capital.
According to Raina’s research, female-led businesses have a greater chance of exiting well if the venture capital firm that backed them have female partners. After examining Crunchbase data on 600 firms, Raina found more evidence supporting the widely understood theory that male-led firms consistently exited at higher rates than female-led firms. 17 per cent of female founders had successful exits, compared to 27 per cent of male founders.
In the past, this trend has previously been explained in one of two ways: differences in risk aversion, and the differences in competitiveness. Both explanations suggest women in investment and entrepreneurship just don’t cut the mustard.
Under the first ‘explanation’ the assumption is that female founders are just not taking enough risk, and that why they don’t succeed. The second ‘explanation’ is that women aren’t competitive enough to thrive in competitive sectors like venture capital. Neither of these theories take hiring biases, sector-wide sexism or the glass ceiling into account.
According to Raina’s research, which also looked at the demographics of the VC partners backing each of the 600 start-ups on Crunchbase, there’s more to the story.
If a VC firm with only male partners invested in a start-up’s first round, the chance of a successful exit is around 15 per cent if it’s a female-led business, or 40 per cent if it’s a male-founded business. But when a first-round VC firm had at least one female partner backing the start-up, founders of both genders had equal chances of success: around 40 per cent.
Raina theorises that there are two possible explanations for this trend. Either female VCs, who currently make up about 9 per cent of all partners, are better at picking successful female-led start-ups, or they’re better at advising female founders to be successful.
Raina remains partial to the first scenario, that female VCs are better at selecting successful female-led start-ups to back. This is because the differences in exit rates were only correlated to the genders of VC partners in first round. In later funding rounds or exits, there was no correlation between investors’ gender and success.
This research ultimately suggests that female investors are actually more likely to make decisions that make their firms money; a key marker for success in venture capital. Yet another proof point in the case for diversity in financial services.