In today’s edition of “mansplaining,” I’m going to talk about two topics I’ve been told never to discuss as a male angel investor: Ellen Pao & the lack of female venture capitalists.
In fact, I’m fairly certain that no angels or VCs are blogging about the Ellen Pao case — or tweeting about it. That’s the state of our industry and it’s sad.
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How strange is it that an issue as important as equality is not being talked about?
I think we need to talk about it, so in this piece I’ll address three things in the hope we can start a dialogue as the Pao case comes to a conclusion.
- The private conversations around the Ellen Pao case
- Why venture capital is a boys club
- The quickest way to solve diversity in venture capital
Ellen Pao v. KPCB
For those of you who don’t read the news, Ellen Pao is currently suing one of the most storied venture capital firms in the world, Kleiner Perkins. The trial is heading into closing arguments, and almost everyone in Silicon Valley isn’t talking about it publicly.
Behind closed doors, the majority opinion from people in the know (male and female) goes something like this (note: this is not my take, this is what the majority of people are saying):
- KPCB hired a sexual predator who harassed women
- KPCB fired the bastard (and he’s on the lam, so he doesn’t have to testify!)
- KPCB has the largest percentage of female partners of any firm, and has actually worked hard on that issue (and to this day has a bunch of talented women at the firm)
- Ellen Pao is very hardworking, smart, and a little political
Folks are not really debating A through D above. It’s kind of a given, from the people I talk to.
Now, these folks in the know I’ve talked to are debating the following issues (again, note, this is not my take, necessarily):
- Was Ellen Pao actually harassed or denied advancement because of her gender — or was she just not a great partner/VC?
- Should Ellen’s experience be a referendum on the male-dominated VC industry? (Pao has said she is doing this to change the culture at KPCB.)
- What impact, if any, does Pao’s consensual affair with this man, before the (assumed) harassment started, have?
- Pao’s husband has a history of suing for discrimination, and some believe he’s putting her up to this in some Svengali kind of way. Does this matter? (Courts have said no.)
- Is this case going to cause VCs to hire fewer women because KPCB worked hard to include more women and it has blown up in their face?
Now, if you’re wondering what my position on all this is, here it is: I don’t know enough to make a judgement!
It’s super complicated, and that’s why there is a jury putting 100s of hours of their lives into sorting this mess out.
What is undeniable, however, is that venture capital is absurdly male-dominated and changing very, very slowly.
That sucks and needs to change.
VC firms are like Private Clubs — not companies
For background, I’ve never been a VC. I’ve been recruited by the top funds, and although I would make much more money joining their ranks, I have elected to be an angel.
There is a HUGE difference between an angel and a venture capitalist. Angel investors are individuals who give small amounts of their own money to startups they fall in love with.
VCs are typically packs of guys who want to make large amounts of money by backing companies that are run by extremely difficult individuals who want to change the world.
It’s a certain type of person who is drawn to this bizarre position in the world. They’re basically saying, “I don’t want to build stuff directly. I want to fund dozens of unmanageable, sometimes crazy, entrepreneurs to change the world.”
Ask yourself, “Who’s attracted to that position and why?”
It’s Professor X complex, where you go find the mutants, train them if you can, and try to keep them on the rails.
Venture capital used to draw the best of the business-school crowd, but today it’s being taken over by 30- and 40-year-old founders who have the credibility of having run a business.
In the Pao case this keeps coming up under the topic of “thought leadership.” A thought leader is someone who, as you might suspect, is listened to because they have thoughts that are worthy of consideration. They’re credible.
Why is it important to be a founder, operator, and thought leader? Because new founders think MBAs are dorks and that people who have built stuff are cool.
Entrepreneurs pick their investors these days, so you have to be desirable.
To understand why these VC firms are all male in many cases is to understand that they are not really businesses — they are partnerships. In my experience they operate more like social clubs, sports teams or, wait for it, fraternities.
Because their business is not actually building something, but rather sitting around talking about which founders they should back to build something, the required skill is “getting along” and “shooting the shit” and “debating.”
In a way, they’re more like debate clubs than corporations. That’s why they constantly go on retreats to try and bond and build trust with each other.
Now, I’m not saying this is right or the way things should be — this is what I’ve seen.
These firms are at their core designed to build trust between the partners so they can debate placing — or not placing — huge bets. They want to build enough trust so that if they say no to Google or Facebook, they are able to keep functioning in the face of such a huge miss!
You’ll frequently have a partnership where one partner hits two or three home runs, while another invests in ten dogs. Imagine you’re in a partnership with five people and a $200m fund, in which you each place 10 bets of $4m each (total $40m).
In this scenario, let’s say “Partner John” makes the firm a $600m return on one investment, while Steve, Fred, and Joe make the firm $100m each. Partner Bob loses the firm $40m on his 10 investments.
In this case the firm makes $900m, pays back the $200m, and the five of you chop up 20-30% of the $700m gain ($140-210m).
You each make $28-42m because you have “equal economics.” However, everyone knows that John “made the fund” and “Bob was a complete donut.”
Now, imagine Bob was against John’s big bet that made the fund — awkward!
It’s insane dynamics that don’t exist anywhere in the world. So, these VCs treat their partnerships like a brotherhood.
It’s a bizarre culture driven by bizarre financial dynamics.
That’s why I didn’t join any VC firms! I’m a solo act, not a frat boy. I don’t want to sit around and debate my investments. I want to write my blog, host my podcast, meet with founders, host my events, and place 50 bets a year. Done. No drama, no long walks on the beach, no going to “partner counseling.”
The reason there isn’t diversity in these groups is the same reason there isn’t a lot of gender diversity in book clubs, golf clubs, sororities/fraternities, and “dinners out” with the girls/boys.
Importantly: I’m not endorsing this, this is just my observation.
People are added and removed from these groups at a glacial pace — if at all.
They change as often as I’ve seen seats open at my poker groups in New York City and Los Angeles. Seats at those tables might open every five or 10 years, and typically, it’s when someone dies, moves to another city, or double-crosses another member (it happens).
I’m doubtful these firms will change all that much, and if they do, it’s important to know that they are formed with decade-long horizons. A $400m fund will be deployed and managed over a decade — or more! Most of these folks are raising overlapping funds, so they might have five funds with 10-year horizons raised over 10 years.
It’s going to be a slow, slow change — at best.
Forget Leaning In, Just Kick Ass
I’m a huge fan of Sandberg’s LeanIn philosophy, but sadly, I think in the case of venture capital, leaning in is going to take too long.
What has to happen is we all have to support, encourage, and fund female founders to start their own venture capital firms.
This can come in the form of mentorship, investment, and including these firms in hot deals. (Our team is super focused on diversity, as you probably noticed if you watch This Week in Startups, followed the LAUNCH Incubator (5 of 7 had female founders) or attended the LAUNCH Festival, and we’re doubling down on having more women VCs involved in every way.)
Only a handful of female-founded venture funds exist in the world today, but they are growing in number:
- Ann Winblad of Hummer Winblad (couldn’t find fund sizes)
- Aileen Lee’s Cowboy Ventures ($95m across two funds)
- Kirsten Green’s Forerunner Ventures ($99.5m in funds)
- Cindy Padnos, Illuminate Ventures ($20m)
- Jennifer Scott Fonstad & Theresia Gouw, Aspect Ventures ($150m fund)
- Halle Tecco’s Rock Health ($10m?)
- Jodi Sherman Jahic, Susan Mason, Aligned Partners ($80m)
- Maria Cirino, co-founder of 406 Ventures ($175m)
- Katie Rae of Project 11 ($30m)
Eight of those nine firms were only recently formed.
Total amount combined?
Around $750m — also known as a “drop in the bucket.”
What we really need are some female executives on the level of Sheryl Sandberg, Marissa Mayer, and Meg Whitman forming $1B funds. I think this could happen.
And there is an increasing number of affluent women in the world who can be LPs (limited partners, aka investors) in these female-lead funds. Think not only billionaires like Oprah, Laurene Powell Jobs, Sara Blakely & Lynda Resnick, but thousands and thousands of millionaires from the technology industry who could put $100,000 into a venture fund as opposed to the stock market or bonds.
Leaning in is fine, but kicking ass is better.
Changing this system will be very hard. Competing with it will be easier.