Tuesday, November 26, 2013

Investing in Women Entrepreneurs ... with help from Isaiah Berlin, Hedgehogs and Foxes

While catching up with Laura Sachar, one of the cofounders of Starvest, last week I was asked: "So, why do you invest in women entrepreneurs?" and I answered:

1. I want to exploit the power of diversity 
Early stage investing is partly a numbers game. So anything that can tilt the odds in your favor seems to me worth pursuing and diversity is one such factor. The a priori chances of success in any individual angel investment are very low ... the vast majority of returns come from no more than 10% of your investments. Of course the most fundamental numbers game point that angels need to grasp is that volume/diversification are essential as pointed out in "Angel Investing by the Numbers" for example. But for me the compelling evidence that gender diverse teams make better decisions is an additional and important one of those tilt factors. (See for example the 2011 HBR Article: "What Makes Teams Smarter?") 

2. I want to invest in an under appreciated opportunity
Women entrepreneurs, and specifically women CEOs, are under appreciated when it comes to the investment process, specifically when pitching in my view. ie there is what economists could call a "market failure". So a situation where capital is not appropriately allocated to set of investment opportunities based on non rational criteria, in the sense that the level of interest in those opportunities is not appropriately correlated with the chances and degree of success. There are (sadly) plenty of examples of women CEOs describing the differentially tougher challenges they faced when raising early stage capital. See for example the stories of Erika Trautman, Kathryn Minshew, Jules Pieri and Elizabeth Yin. The male dominated nature (80% of angels, 89% of VCs, c95% of the most senior VCs) of early stage capital providers is the obvious issue here and, as I recently noted, likely means the VC community is not as innovative as it likes to think it is.

Reflecting on Laura's question some more afterwards it stuck me I could have elaborated on the reasons for this under appreciation in the following two ways:

1. Pattern recognition
StartUp land loves to talk about "pattern recognition". Summarizing how this impacts diverse (aka not young straight white male techies) founders Dave McClure succinctly put the issue as follows: 
“There’s a soft bias toward doing things that are familiar. That's white male nerds.”

At a deeper level, and in the context of women entrepreneurs, the gendered nature of behaviors (which can encompass all of verbal and non verbal communication as well as appearance) come in to play in my view. Characteristics gendered masculine  ("assertive", "decisive" etc) are more commonly associated by both men and women ... with leadership. In their HBR article and book: "Women and the Labyrinth of Leadership" Alice Eagely and Linda Carli summarize this finding, and the so called "double bind", as follows:

Study after study has affirmed that people associate women and men with different traits and link men with more of the traits that connote leadership. Kim Campbell, who briefly served as the prime minister of Canada in 1993, described the tension that results:
I don’t have a traditionally female way of speaking….I’m quite assertive. If I didn’t speak the way I do, I wouldn’t have been seen as a leader. But my way of speaking may have grated on people who were not used to hearing it from a woman. It was the right way for a leader to speak, but it wasn’t the right way for a woman to speak. It goes against type.
2. Another framing: Hedgehogs vs Foxes
When it comes to the specifics of women start up CEOs pitching their companies evidence is more anecdotal but I have repeatedly heard "the way we pitch" cited as an issue. While individual comments aren't a good basis for generalization common observations I have personally come across can be bucketed as follows: 

a) The scale of vision 
So ... just not as bold as the guys. Many women CEOs I have spoken say that they feel were disadvantaged by the way they made the case for their company. ie not emphatically calling out the inevitability of their soon to be $1bn business. Exhibit A: On the guy side of the ledger one of the founders of Rap Genius summarized the secrets to their success in the great post "How RapGenius Raised $1.8mn In Seed Funding Without Knowing What We Were Doing" stating:

"So fundraising is a psychologically trying experience that depends very little on any sober analysis of the quality of your product and much more on how you can project confidence and manage your own psychology."

One women CEO I know reported being dumb struck by some of the unsubstantiated over the top (or so she felt) claims her (male) co-founder made in their first pitch meetings together. After some discussion and reflection she said she learnt to mimic at least some of his bravado!

b) Leading with more problems and giving detailed answers
Women entrepreneurs (again some not all) report that they feel they tend to balance positives with more negatives and, perhaps as a result, feel they can give too detailed answers in a pitch context. Result: they deemed less compelling (and hence less likely to get the second meeting) compared to the other six guys the investor saw that day who were all oozing conviction and who hit any question succinctly out of the park! As one CEO put it to me:

"The detail, no matter how thought-out or on point, can often hurt you because in the vagueness it's easier to sell a dream."

Hence ... maybe another case of Hedgehogs and Foxes?
While I might be connecting too many dots here, these issues reminded me of the decision making paradigms laid out by Philip Tetlock in his brilliant book: "Expert Political Judgement". He classifies thinking styles using Isaiah Berlin's prototypes of the fox and the hedgehog with his years of study indicating that the fox (the thinker who knows many things) is more successful at predicting the future than the hedgehog (who knows one big thing). In what seems to me to be a parallel with the world of what "works" when pitching vs what works for pundits and the media he noted the perverse inverse relationship between the best indicators of good judgment and the qualities that the media most prize in pundits. ie the media loves hedgehogs for their conviction ... but they are actually the worst people to have making a prediction! So maybe women CEOs are the foxes of the pitching world and men disproportionately the hedgehogs!? Hence, just as you are more likely to get an accurate prediction in most any domain from a fox as opposed to a hedgehog, seems to me that CEO foxes are worth extra consideration too!

PS #1: Just over a year ago RapGenius raised $15mn from Andreessen Horowitz. See: "Are Rap Genius's Founders Insane, or is it just a gimmick?"

PS #2: Note that in answer to Laura I did not say either: a) because with women making 80% of purchasing decisions in the economy having a woman on the founding team ups the chances of bringing relevant expertise/experiences to bear that will enhance product development and sales/market decisions (which it will!) or b) because it's an issue of "fairness" (which it is). The point being, this investment thesis makes sense enough just framed in clinical investment process and organizational decision making terms. Add these further two considerations and the case is even more powerful.

Thursday, November 21, 2013

VC has a gender gap problem, perhaps an innovation problem too!?

I recently wrote about the NVCA/DeSantis Breindel survey that looked at the claimed and desired attributes of VCs vs entrepreneurs. (The Brand Influence Guide For The Venture Capital Industry). This intriguing study showed that there was a brand "gap" and graphically represented it through a forced ranking of entrepreneur favored characteristics vs a VC derived ranking for the same characteristics. (e.g. hands-on, supportive, trustworthy etc).

An additional important "gap" was gender based. Specifically in answer to the question: "Does the gender make-up of a VC's partner base matter to CEOs?" 1 in 4 of CEOs surveys said "Yes" ... but only 1 in 10 of the VCs gave the same answer. And2 of 3 women CEOs said the gender make of a VC's partner base mattered!

What I didn't state at the time, was that this particular result (I think it's safe to say) is a reflection of the underlying gender diversity "gap" of the Venture Capital Industry. Namely that women make up just 1 in 10 (11% to be exact) of investment professionals at Venture Capital firms as reported by the NVCA. And in terms of senior decision makers its much worse ... for example the number of women VCs listed in the most recent Forbes Midas List fell to just 3 of 100 ranked.

Perhaps this lack of diversity (and it's not just gender) is one reason VCs in aggregate do a poor job for their LPs? As I noted end last month, VCs collectively haven't beaten the S&P 500 for a decade. To be exact the data shows 1, 3 and 5 year net to LP returns lag the public markets while the 10 year record is roughly a wash.

I sit on the Board of the Center for Talent Innovation which has just done some impressive work showing the way that workforce diversity unlocks innovation - and sets out in some detail what "diversity" actually is, well beyond gender. The analysis makes the case against homogenous organizations and in favor of those where leadership demonstrates "2D Diversity".

The CTI conclusion is as follows (my highlights):

But what drives serial innovation? CTI’s ground-breaking research reveals the engine to be a diverse workforce that’s managed by leaders who cherish difference, embrace disruption, and foster a speak-up culture. Inclusive leader behaviors effectively “unlock” the innovative potential of an inherently diverse workforce, enabling companies to increase their share of existing markets and lever open brand new ones. By encouraging a proliferation of perspectives, leaders who foster a speak-up culture also enable companies to realize greater efficiencies and trim costs—another way that innovation drives bottom-line value.

You can see more about the research findings here:
Executive Summary

You can follow CTI's work at:
and its founding President Sylvia Ann Hewlett at:

Saturday, November 9, 2013

VCs pitching to entrepreneurs - how well do they connect?

What do entrepreneurs want from a VC vs what VCs think they want!?

There is just so much noise in the start up world. So many people giving so many other people advice, solicited or otherwise. So many blogs to read. So many forums, panels etc where investors explain how entrepreneurs should most effectively do this, that or the other. Some of this is well informed, some not. Being a small part of this noise generating equation myself I do my best to add value where I can, or shut up! But when it comes to what entrepreneurs value and what VC investors think they want are "they" and "we" aligned?

In answer to this question a recent National Venture Capital Association (NVCA) commissioned survey provides some hard data, which I discuss below. And I supplement this with some more anecdotal observations from the recent Capital on Stage event in New York.


In a piece this past summer Russ Garland at the Wall Street Journal dissected a NVCA/DeSantis Breindel survey that looked at the claimed and desired attributes of VCs vs entrepreneurs with a view to identifying and quantifying any "brand gap" - hence the title: The Brand Influence Guide For The Venture Capital Industry

Russ noted:

"Venture capitalists like to describe themselves as “hands-on” when it comes to portfolio companies, but that’s not what entrepreneurs want to hear. While 22% of venture firm representatives said “hands-on” is a phrase that best described their firm, only 1% of entrepreneurs thought that was an important quality when evaluating a VC firm ..."


“Entrepreneur-friendly” was the top quality for entrepreneurs, selected by 58% of those surveyed, followed closely by “trustworthy.”

Here is the detail from this intriguing study framed in terms of a forced ranking of entrepreneur favored characteristics with the VC derived ranking view overlaid on that:

Gender: A big disconnect

In terms of other brand gap issues the survey revealed, an important one was gender based. Specifically in answer to the question: 

"Does the gender make-up of a VC's partner base matter to CEOs?" 

1 in 4 of CEOs surveys said "Yes" ... but only 1 in 10 of the VCs gave the same answer. And, urgent memo to non diverse VC teams (i.e. most of them, see some of the data in my post on VC Backed Boards), 2 of 3 women CEOs said the gender make of a VC's partner base mattered.

The survey also found that by far the most important channel cited by CEOs in terms of influencing their perception of VCs was ... word of mouth from other entrepreneurs. So if you don't get the reality of the adverse perception of your partnership gender mix with women CEOs then look out, because it's on their agenda.


On Thursday 11/7 Capital on Stage (CoS) held their 2nd NYC conference, hosted by Goodwin Proctor ... where VCs are literally put "on stage" presenting to a room of entrepreneurs. Credit and thanks to Arjen Strijker for bringing this great event to NYC for the second year. 

At CoS, rather than just filling in a survey, here were some 20 VCs face to face with potential investees and having to present their wares one in rapid fire format. How did this face to face experience compare to the DeSantis Breindel survey? What did the VCs say they had to offer? 

Five observations

My totally personal assessment was as follows: 

1. Just because you see and opine on a lot of pitches doesn’t make you any good at pitching yourself. Many of the pitches would not have got beyond the first round of most investor pitch competitions I have been to or judged based on delivery style and content. But I guess that is another version of the "golden rule." (ie he/she who has the gold makes the rules.)

2. For those who provided some substantive rationale around their value added (beyond money), which was not much more than half, the most often mentioned items were:

  • Network/support: "we help with intros, recruiting etc.; we connect you with other investees to share experiences around challenges, successes" etc.
  • Expertise/focus: relevant domain expertise, geography, stage, diverse founders, mobile consumer vs. B2B etc.
  • Level of engagement: some talked about being “very hands on” … others stressed being hands off esp. those which, as a matter of policy, do not seek Board seats.
  • Financing advice/strategic: getting you to the next round and working the exit.

3. About a third cited some version of the “We understand your pain” talking point. ie highlighting the extent to which senior team VC members are former entrepreneurs/operators and can thus relate to the experience of their investees based on personal experience.

4. In my view only one of VCs fully spoke to the "examination question". So really focused on WHY entrepreneurs might want to work with his fund. As such he (my personal plaudit goes to Rob Go of NextView Ventures) explicitly framed his pitch in the context of “know your customer”. So laying out how his fund processes are all about his team's assessment of what entrepreneurs actually need, then ensuring relevant expertise is thus brought to bear and that there is both strong alignment and empathy along the way. 

5. One other VC, although less heavy on the empathy, also had (or more to the point actually communicated) a thoughtful analytical approach to how they invest in resources that de-risk parts of their investees’ execution challenges, thus allowing the portfolio companies to focus on business specific risk. 

Some Conclusions

Yes, having sat through CoS and discussed this issue with eight CEOs afterwards, the DeSantis Breindel data does seem to make directional sense to me. So ...

Empathy, trust, collaboration and support needed from VCs. Definitely some vision and influence too. (Neither of those last two items got a clear mention in any of the Capital on Stage reverse pitches.) 

"Hands-on" thank you very much! (Well, a balance anyway.) 
As one CEO at the event put it to me afterwards: "I don’t want to hear “hands-on,” because it implies that a lot more work is in store for the CEO just to keep the meddling investor tightly in the loop." And explaining why the issue of trust ranked so high in their own thinking another CEO noted: "You want to trust somebody before you want him/her to get involved hands-on, which could potentially mean that they really mess things up. So trust and trustworthiness are for sure more important than activism." A third CEO set out the tension nicely with this assessment: "The "hands-on" vs "hands-off" is hard. On one hand you do not want a VC micromanaging you, especially if they are not experienced in the space you are in. On the other hand as a first time entrepreneur you want feedback and guidance. So like most anything, its all about balance." Yep: younger first time founder? Most likely hands-on!; older serial founder? Most likely hands-off!