And the Children Shall Lead: Gender Diversity and Performance in Venture Capital
When senior partners have more daughters, their venture capital firms hire more women, improving deal and fund performance.
For the past 25 years, the percentage of women in venture capital firms has remained at around 10%, lagging behind other highly compensated fields like medicine or law. These firms focus investment on early stage companies with high growth potential and are typically led by a handful of partners, who determine their firms’ infrequent senior hires. Small teams tend to be more susceptible to bias – and 75% of venture capital firms have never hired a female senior investment professional. This gender gap reflects venture capitalists’ preference for hiring people similar to themselves, with male partners favoring male applicants.
Previous research, such as evidence on the effect of having a daughter on the votes of judges in the United States Courts of Appeals, suggests that parents of daughters are more likely to support gender equity. This paper explores the effect of having daughters on venture capital firm partners’ decisions to hire female partners.
This paper also contributes new causal evidence to suggest that increases in gender diversity lead to better business performance. Previous, generally correlational, studies have mostly not been able to establish a causal link between gender diversity and financial outcomes. In this study, due to the fact that the gender of partners’ children is exogenous (not influenced by the partners’ gender biases), the authors were able to establish a causal positive effect of the increase in female hires on venture capital firms’ deal and fund performance.
Venture capital firms where partners had a higher relative fraction of daughters were more likely to hire female partners, and this gender diversity improved the performance of deals and funds. These effects were primarily driven by the gender of senior partners’ children in a sample of 1,310 venture capital partners at 301 firms.
- The relative effect of having one more daughter for all senior partners increased the probability of hiring a woman by 5.1%. This represents a significant increase of 50%, given the average female hiring ratio among venture capital firms of 9.9% (i.e., on average, of every ten hires, nine were men and one was a woman).
- Existing partners having one more daughter increased the probability of deal success – determined by whether a deal resulted in an initial public offering (IPO) or a successful acquisition where the acquisition value was greater than the amount of capital invested – by 3.2 percentage points, compared to the overall success rate of 27.3%, which is an economically meaningful magnitude and provides strong evidence of a relationship between the gender of venture capitalists’ children and investment performance.
- The relative effect of existing partners having a daughter over a son increased excess return for the fund by 4.56%. For the funds in this sample, the average net internal rate of return (IRR) was 14.0%, and the average excess return was 3.9%.
- These effects were overwhelmingly concentrated on senior partners (defined as those that have an investment tenure of more than three years) with daughters, rather than junior partners. The authors expect that partners with a longer tenure are more likely to have a greater role in hiring new partners.
These findings from a real-world business setting show that greater gender diversity enhances firms’ financial performance. To estimate economic impact, the authors show that if the ratio of women hired at a venture capital firm increased by 5% due to partners with more daughters, its deal success rate would increase by 4.7 percentage points, representing a 17% increase in deal success rates. Taken together, these findings suggest that capital markets could function better with improved gender diversity, which in turn can be facilitated by debiasing existing partners (which may also make them better mentors for female venture capitalists). These results further suggest that achieving greater gender diversity through the genuine removal of bias or a change in beliefs could lead to better economic outcomes than mandated gender ratios, and that future research should focus on other means of achieving similar debiasing.
This paper investigates the effect of gender diversity at venture capital firms, focusing on 1,310 venture capital partners (9.9% female) at 301 firms. The authors used data covering the time period from 1990 to mid-2016 from VentureSource, a database containing detailed information on venture capital investments. They then compiled a unique dataset of venture capitalists’ children’s gender and age (available for 70.5% of the sample), taking advantage of a research design where the children’s gender was exogenous to the individual partner (not influenced by the partners’ gender biases).
Combined with the time series of the hiring of senior investment professionals and deal performance, this paper tested whether a higher relative fraction of daughters led to a higher female hiring ratio and higher deal and fund performance. Reduced form regressions were used to examine whether a higher relative fraction of daughters was related to improved deal and fund performance. Instrumental variable regressions tested whether this exogenously induced increase in firm gender diversity led to improvements in performance.