Venture capital takes a step in the right direction on diversity, but it’s still early days

The National Venture Capital Association (NVCA) announced Monday the formation of a task force to help its members increase opportunities for women and minorities. On the surface, this looks like just another news release by an industry under fire; but I think there is much more to it. The NVCA is providing true leadership and challenging its members to clean up their act.

I have long been critical of the venture-capital community for encouraging frat-boy behavior and tolerating the exclusionary hiring practices of companies that they have invested in. I have called out the CEOs of prominent venture-backed companies such as Twitter and Dropbox and said that a skill that VCs commonly tout, “pattern recognition”, is a code name for sexism and racism.

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So when I received an invitation, in May 2014, to speak on the main stage at NVCA’s marquee conference, Venturescape, and to be part of a discussion group on sexism in venture capital, I was dubious. I asked Venky Ganesan, who was the chair of this event and who had invited me, whether I was walking into some kind of an ambush. I joked on Twitter that I felt like a hen going into the foxhouse.

I was surprised when, after I criticized their system for being male dominated and demanded that it be changed, the audience of 700 VCs cheered. They didn’t deny the problem or attack me for speaking up, as a few prominent VCs have done in the past. NVCA chief executive Bobby Franklin said improving diversity in gender and race was a personal mission for him because it would improve the innovation, productivity, and performance of the companies that the venture community invested in — and better the overall economy. He agreed that VC firms should be proactive in correcting their gender imbalance and disclosing diversity data, and he promised to work towards making this happen.

So the intentions seem to be good. But the challenges are greater than the NVCA imagines they are. The 2011 survey that they cite, which was conducted by Dow Jones VentureSource, reported that 89 percent of venture capital investors were male and 11 percent were female, and that, of these, 2 percent were African American or Latino. These self-reported data are inaccurate.

A study by Babson College found that in U.S. venture-capital firms the proportion of women partners was only six percent in 2014, having fallen from 10 percent in 1999. An analysis by Dan Primack, of Fortune magazine, of the top 92 venture-capital firms revealed that, of the 542 partner-level VCs in these firms, only 23, or a paltry 4.2 percent, are female. VCs tend to fund people who are like them — typically, nerdy males. This entrenches discrimination against women and minorities. The Babson research revealed that only 2.7 percent of the 6,517 companies that had received venture funding from 2011 to 2013 had women CEOs. The proportions of black and Hispanic CEOs were surely much lower.

VC firms simply won’t release data on the diversity of the leaders of companies they invest in. For many years, technology companies too refused to release their data because they knew it would cause them public embarrassment. But, one after another, led by Google, they started releasing the data. Though not nearly as bad as the VCs’ numbers, the numbers were low. But the revelations have led the tech companies’ CEOs to recognize the problems and commit their companies to addressing the issues that have led to excluding women and minorities. They have acknowledged that it was harming their companies’ competitiveness and performance. The venture-capital system needs to do the same now.

The majority of venture funds have produced lower returns than the public markets have and thus have shortchanged the individuals, the state pension funds, endowments, and foundations investing in them. In doing the right thing and addressing diversity, the NVCA is ensuring its own survival. And, as Menlo Ventures partner Venky Ganesan said to me, it is about making a difference. He wants to make sure that his three daughters see a venture-capital system different from the one he has been a part of.

Vivek Wadhwa is a fellow at Rock Center for Corporate Governance at Stanford University, director of research at Center for Entrepreneurship and Research Commercialization at Duke, and distinguished fellow at Singularity University. His past appointments include Harvard Law School, University of California Berkeley, and Emory University.