Researchers Declare Questionable Winner in VC Battle of the Sexes

My wonderful friend Jane Sarasohn Kahn sent me an article the other day that really set me off. I know that was the point, actually—to get me thinking about how unbelievably weird and biased the conclusions of the article were. The article was entitled, Women venture capitalists underperform men, say Harvard academics. The article reported on a study entitled “Gender Effects in Venture Capital.” The researchers’ conclusion from their study was this, and I quote from the article that ran on Reuters, “We find that female venture capitalists significantly underperform their male colleagues,” wrote Paul Gompers, Vladimir Mukharlyamov and Yuhai Xuan of Harvard and Emily Weisburt of the University of Texas at Austin in their study,

On a side note, it is worth mentioning that this study was written by 3 men at Harvard and one woman at UT Austin yet the title of the first major article that reported about it entirely left out the woman. Shall I continue?

Ok, I thought to myself, if this assertion that men are better investors than women is true, let’s see the data, big or small.  Here’s what I found: first of all, the data from the article is so old, that most of us would not find it useful as predictive in today’s very different world. Data were culled from investments made 1975-2003.

But lamer yet, the article notes that, “the authors counted as successful the investments that led to an initial public offering of the company, or 4,622 IPOs.” In other words, they left out all companies that exited through merger and acquisition (M&A). If you know anything about venture capital, you know that the vast majority of companies don’t go public and exit through M&A. So including only those public companies, which are a fraction of the candidates for measure, skews the data ridiculously. And this is particularly true since there were and remain so few female venture capitalists. About 4-5% of partners at venture firms are women and it has been hovering in that pathetic range for a very long time. It was probably even lower back in the 1970s and 1980s., when much of this data was collected. On top of that, most venture capitalists have few IPOs in their portfolio since most of their companies exit through M&A (per above). As a result, the number of results being measured per firm partner hardly constitutes a trend, particularly if the women haven’t been partners for long enough to have many exits. In other words, the researchers are taking a fraction of a fraction to make their point, making for what one might call a problem with statistical significance. If “n” is less than one can see with the naked eye, what exactly is your point?

And furthermore, taking a company public is no proof it is creating any value for shareholders. IPOs should be considered financing events, not exits, for starters. VCs rarely get to exit at the IPO and must wait at least 6 months, and often much longer, to sell their positions. Sometimes the IPO value 6 months after the opening ain’t so hot.

For example, Out of 187 IPOs in 2014, 66 are underwater today (meaning their curren price is less than the price on the day they went public); of these 31 have lost more than 20% of their value. Of the IPOs that are up in value since opening day, 26 are up less than 10%, so nothing to write home about. Nearly a quarter of the 217 IPOs that went out in 2013 were underwater at the end of that year and of the balance, 26 had moved up less than 10% over their original offering price.

In contrast, as of June 2014 there had already been 16,775 mergers and acquisitions worldwide. The total value of M&A deals to date in 2014 is 44% greater than in 2013 even though number of announced worldwide transactions year to date 2014 is actually down 3.5% from 2013. Global M&A deal values reached $1.75 trillion year-to-date, dwarfing US IPO proceeds raised to date in 2014 of $40.6 billion and 2014 global IPO proceeds of $116.4 billion

FYI, if you want to look at a comparable time period as the ancient data in this study, there were 71 US IPOs in 2003 raising a total of $15.18 billion. During that same period there were about 28,000 M&A transactions with a total value of approximately $1.7 trillion. So you can see the trend and why it’s silly to judge value creation based on IPOs alone.

Yes, some of you will say, but VCs can make money even on failed IPOs since they invested at such low entry prices. And to you I will say, “yes, that is true, but do you really consider it a success if the fund makes money and the company is a failure for its broader shareholder base?” That is exactly the kind of stuff that gives VCs a bad rap. We should be in the business of building valuable companies, not taking the money and running. But maybe that’s one woman’s opinion.

But here’s my favorite part of the story: the researchers in this weird study blamed the performance difference between men and women, in part, on a lack of mentoring by male colleagues. In other words, if only the men had done a better job of taking those poor unskilled women under their wings, maybe things could have been better; without those men to share their wisdom of the ages, not so much. Are you kidding me?

First of all, how patronizing. I’m sure that the women who reported that their success was due to a male mentor meant that they were lucky to have a good mentor, who happened to be male. Second of all, the article notes that, “women out-performers often credit a male colleague who took them under his wing.” Well duh. There were almost no women to take other women under their wings, so anyone who served a mentoring role was going to be male. If every firm has, on average, one or fewer females, who else would be there to train them, Captain Obvious?

Another reason cited for males’ success over females in the field is that, “prior careers might affect success, with women VCs less likely to have experience as an entrepreneur, CEO, or product developer.” Yet I would like to see the breakdown of VCs who have these exact credentials. I know far more VCs who came from the world of finance and law than from the world of startups and product development. It is definitely true that there are fewer female than male CEOs historically, but I have not seen the data on the % of female VCs who have entrepreneurial/CEO/product development backgrounds vs. the number of men with those backgrounds. I bet you it is at least comparable. I could be wrong, but I doubt it since the bar for a woman to be hired at a firm is so high.

And not for nothing, there is a wealth of research out there demonstrating that women make better investors than men. You can look HERE for a good example of some of the contrary research out there, and it is not even mentioned in the report. I am not really sure what this new research adds to anyone’s collective knowledge, other than the one female author’s finding that she didn’t merit mention in a key headline about her report. Seriously Harvard, is this the legacy of research you want to leave?

But let’s get to the real point:  who gives a damn?  Some people are great investors and some people are bad investors.  Some venture firms make money for their investors and some firms don’t.  Controlling for any one variable, whether it is gender or age or whether one drives a red car or owns a dachshund hardly seems to matter.  I don’t know what the point is of this endless quest to “prove” that one gender is a better investor than the other.  Why can’t we all just get along?