The Unintended Consequences of Women VCs Leaving Their Firms

Two senior women in Silicon Valley's venture capital industry are leaving their companies to start a new firm together. Theresia Gouw, a former partner at Accel, and Jennifer Fonstad, a former partner at Draper Fisher Jurvetson, are opening Aspect Ventures to focus on early-stage investments in mobile startups and -- just as importantly -- to highlight the value of diversity in companies.

After all, supporting greater equality within business is not just the right thing to do, it's the smart thing to do.

A 2012 Dow Jones report, "Women at the Wheel," found that at venture-backed firms "the overall median proportion of female executives is 7.1 percent at successful companies and 3.1 percent at unsuccessful companies, demonstrating the value that having more women can potentially bring to a management team." The report also concluded that a company's chances for success "increase with more female executives at the VP and director levels."

Also, with regard to hi-tech start-ups, a white paper in 2010 by Illuminate Ventures, entitled "High Performance Entrepreneurs: Women in High-Tech" concluded that "Women-led high-tech start-ups generate higher revenues per dollar of invested capital and have lower failure rates than those led by men." Also, "Organizations that are the most inclusive of women in top management achieve 35 percent higher ROE and 34 percent better total return to shareholders versus their peers." They achieve even higher returns "where innovation is key."

Yet today only 4.2 percent of all VC investment deals go to women-owned businesses. This has had a negative impact on the ability of women-owned businesses to grow and be successful.

Meanwhile studies have shown that women investors do better with the companies they invest in, says Tom Sightings at, summarizing studies from banks and investment firms. He offers several explanations for this, including the fact that women do more homework and take fewer risks.

Psychiatrist Richard L. Peterson, co-author of MarketPsych: How to Manage Fear and Build Your Investor Identity (Wiley Finance, 2010) has discovered from studying thousands of investors that because women have better self-understanding of the emotional factors in their decision-making they can more easily avoid costly investment mistakes. Peterson told ABC, "Mistakes happen when there is too much emotion, causing investors to overreact to new information by buying or selling when they shouldn't." Also, he points out that men's overconfidence leads them to take too much risk and over-trade and to not confront their mistakes and cut their losses.

At the same time, more women are striking out on their own to launch venture capital companies, increasing the number of women-owned VCs.

According to the Rothstein Kass study, "Women in Alternative Investments: A Marathon Not a Sprint," investors are increasing their allocations to women-run funds, because of "diversity mandates, as well as demonstrated outperformance by women managers." It predicts even more women will be launching their own funds in the years ahead. "As more women-run funds become available, more investors are able to consider women-owned or -managed funds for investment."

That's good news for high-growth technology businesses owned by women: there are friendlier women-owned VC's to court -- VC's that offer promising opportunities for women-owned start-ups.

But there's one problem. The overall number of women investors at VCs has decreased--according to the latest (2011) census by the National Venture Capital Association -- from 14 percent to 11 percent in three years. It's especially affecting the big VCs, where women depart either to leave the field entirely or to launch their own VC firms.

The net result is less diversity of thinking in the big VCs, which still dominate the investment landscape. The increasing scarcity of women investment partners in those traditional firms is likely to reinforce the "old boys" ethos, resulting in a culture that attracts and retains even fewer women investors, which can impact investment returns. In the case of Gouw's and Fonstad's departure, their former companies are left with no female investment partners in their Silicon Valley offices!

The old boys VC club will go the way of the 8-track tape deck, if they do not realize: (1) the power and impact that women investment partners make; and (2) the fact that businesses with women in executive positions yield a higher ROI.

It's time to increase the number of women investment partners in VC firms and for those firms to start balancing their portfolios to include more women-owned and women-managed businesses.