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Why a New Memo on Diversity Should Make Venture Capitalists Look in the Mirror

Lightspeed is asking its portfolio companies to implement a version of the NFL’s Rooney Rule when hiring executives. But should the same standard apply to VC firms themselves?

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BY Kimberly Weisul - 08 Feb 2018

Why a New Memo on Diversity Should Make Venture Capitalists Look in the Mirror

PHOTO CREDIT: Getty Images

Lightspeed Venture Partners, a prominent Silicon Valley venture capital firm, is asking CEOs of its portfolio companies to sign a letter affirming their commitment to diversity in hiring. The letter urges the executives to interview women and other underrepresented groups for senior leadership positions and for openings on their boards of directors.

The firm, whose portfolio includes The Honest Company, Affirm, and Nutanix, should be applauded for this. It's asking its companies to do one of the few things they can do to get more women and people of color in the door. The practice is a version of the Rooney Rule, named after former Pittsburgh Steelers owner Dan Rooney, who advocated that at least one person of color must be interviewed for NFL head coaching and general manager positions.

Lightspeed says it will hold itself to the same standards it is asking of its portfolio companies, but other VC firms need to apply the Rooney Rule to themselves, too. Data on the representation of most minority groups in the industry is scarce. And there are few numbers on venture funding of minority-led businesses either, save for a 2016 digitalundivided report that revealed black women founders account for just 0.2 percent of all deals.

Statistics on women are more readily available, but they paint a bleak picture of the state of gender diversity in the VC world. The most recent numbers from Crunchbase show that among the top 100 venture firms, 8 percent of investing partners are women. Companies with a female co-founder win about 18 percent of venture funding. Sole female CEOs get a miniscule 2.7 percent.

The two phenomena--a lack of female investing partners, and a dearth of money going to female entrepreneurs, are linked. Venture capitalists prefer to invest in entrepreneurs "like them," (or like a younger version of them). Venture capitalists freely admit they use "pattern matching"--identifying the characteristics in companies and founders that have made them money before, and then investing in those same types of companies and founders again.

That puts female founders in a terrible bind. They don't look like the vast majority of venture capitalists. And since so few of them get venture capital money, they don't "look like" the people who've made money for VCs before.

Change comes slowly to venture capital

Lightspeed's most high-profile failure to create a woman-friendly culture was the case of former managing director Justin Caldbeck, whom six female entrepreneurs accused of inappropriate behavior. At least one of the instances took place while Caldbeck was at Lightspeed, which says it "should have done more" when it heard a complaint.

The firm also has been slow to hire women. Lightspeed's first female investing partner, Nicole Quinn, came on board just three years ago. That means that of the 21 people at Lightspeed whose title is simply "partner," only one is female.

Lightspeed says that 33 percent of its investments in the consumer space have a female founder. Quinn, who invests in that area, says most of her investments have been in women-led businesses, lending strength to the argument that having more female investing partners really does lead to more investments in women entrepreneurs. Firmwide, Lightspeed says 14 percent of its investments are in companies with a female founder or co-founder.

Quinn says the firm is committed to increasing the number of women with the power to make investments. "It's something we are very focused on and have very specific and aggressive goals internally," she says, although she declines to say precisely what those goals are. When asked how the firm will measure success in its diversity efforts, Quinn says, "We always think about industry-wide numbers. We want to be exceeding industry averages across metrics. We want to be best in class."

The problem, however, is that the venture capital ecosystem is so ridiculously homogenous that beating the industry averages--or becoming best in class--still may not get you anywhere near an equitable outcome. Lightspeed could add just one more female investing partner, and, at 9 percent representation, it would be above the industry average.

Quinn stresses that progress takes time. "I very much feel like you have to have one to have two to have three," she says. "As long as we are moving forward, which is very much how my mind works, I'll feel like we're making progress."

It's hard to argue with Quinn's point. But that shouldn't prevent anyone from pushing for speed. After all, entrepreneurs tend to have very short runways.

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