The Midas Touch: Surprising Facts in the World of Venture Capital

All Hail King Midas

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Venture Capitalists turn geeks into billionaires. They are the catalysts of innovation, technological advancement and job creation (originally venture-backed companies accounted for 11.87 million jobs and over $3.1 trillion in revenue in the United States, NVCA 2010). The energy shot behind every sleep deprived genius. The strategic beholders of over $176.7 billion in committed capital (NVCA, 2011). King Midas to over 3500 lucky startups in 2011 (NVCA), venture capitalists are indeed mighty, magical forces to be reckoned with.

After much research, I stumbled upon a few surprising facts:

You don?t have be an engineer

The most common undergraduate degree was in economics (21 percent), followed by business administration (16 percent) and mechanical or electrical engineering (13 percent).?Forty-nine percent of those surveyed had MBAs, making it the most prevalent degree. (NVCA 2011)

Venture Capital is Risky Business (*which you probably know, but it?s nice to see stats)

Success stats: ?It is estimated that 40 percent of venture backed companies fail; 40 percent return moderate amounts of capital; and only 20 percent or less produce high returns. (NVCA)

This is a Man?s World

Women represent less than 10 percent of high-level venture capitalists, and they have been leaving the industry at twice the rate of men, according to Gatekeepers of Venture Growth: The Role and Participation of Women in the Venture Capital Industry.??The study is the latest report of the Diana Project, a multi-year, multi-university study of women business owners and business growth opportunities (Kauffman)

Diversity is a Struggle

According to NVCA research in 2011, 87 percent of venture capitalists were Caucasian, nine percent were Asian, two percent were African American or Latino, and two percent were of mixed race. It?s getting better though! Venture professionals who have been in the industry fewer than five years showed greater diversity: 77 percent were Caucasian, 17 percent were Asian, three percent were African American or Latino and three percent were of mixed race.

(NVCA and Dow Jones VentureSource 2011 Venture Census Data)

Stanford and Harvard Sweep the Board

In 2011, Stanford and Harvard led the pack with 10 percent of the VC industry (each), ?University of Pennsylvania was a close second with 8 percent, University of California ? Berkeley (five percent), MIT (four percent) and Duke, Northwestern, University of Michigan, Yale, and Columbia (each at three percent).

Why Does This Matter?

It?s in a venture capital firm?s best interest to make the greater returns from their investment, but without enough diversity (according to the stats), costly perspectives, high potential entrepreneurs and most importantly, many monster returns, are left unmet. Women receive just 4.2% of venture capital funding (Stanford University The Clayman Institute) even though women are starting new companies at a rate?1.5 times higher?than the national average (whitehouse.gov ?Women in America?), own 40 percent of private businesses in the United States ?(Center for Women?s Business Research) and it?s been shown that having a board of at least 33% of women leads to higher returns. (HBR)

Why Does This Happen?

While women now comprise a growing share of the college-educated workforce, only 14 percent of engineers are women. (U.S. Joint Economic Committee 2012). ?It?s not like people are making an effort to exclude people, but I see very little diversity in the candidate pool,? says Aileen Lee, a partner at Kleiner Perkins Caufield & Byers(NYT). She says this could reflect the different educational paths men and women follow in high school and college: men, for a variety of reasons, are more likely to pursue computer science and engineering degrees and subsequently rise through start-up or management ranks.

Given the stats, Mrs. Lee?s (who has an undergraduate degree in engineering and MBA) comment seems misguided, (The most common undergraduate degree was in economics (21 percent), followed by business administration (16 percent) and mechanical or electrical engineering (13 percent).( Women now earn more than 50 percent of all bachelor?s and master?s degrees and nearly half of all doctorate-level degrees) ?However she brings up a valid starting point to this lack of diversity.

The Funnel

While and engineering degree may not be an excuse, 49% of VC?s have an MBA, but women make up only 33%. This discrepancy slices away at a hefty fraction when we consider that a strong majority of startup investments are made in technology, a field lacking female founders (this is where Lee?s argument hits home). Only 3 percent of technology companies are founded by women and outside of legal and marketing positions, women are nearly absent (Kauffman).

The Chicken or the Egg?

Given the bio?s of the Midas list, the common ways to become a VC firm are 1.To become an entrepreneur in residence or 2.Investment Banking/Consulting 3. Start your own fund or become and Angel. ?Venture funds are created when a group of wealthy investors come together to take huge risks with a long term potential to multiply their pot. If women are still only earning 77 cents for every dollar a man earns, then it makes sense that 1. Men are more likely to have more money 2. Men appear to be ?better? with their money 3. Men are more likely to look to other men to join the firm.

Note: I try to speak with data, but please do argue against me if you disagree!

Thoughts?

What do you think about this lack of diversity? (note:? I focused primarily on women). Do you think we need more women in Venture Capital? How should we go about solving this problem?

Sources:

1. http://www.kauffman.org/research-and-policy/gatekeepers-of-venture-growth.aspx
2. http://www.dowjones.com/privatemarkets/.
3. http://www.nvca.org.
4. http://www.forbes.com/sites/connieguglielmo/2012/06/07/silicon-valley-venture-capital-firms-say-they-welcome-more-women/4/
5. http://www.nytimes.com/2010/04/18/technology/18women.html?_r=2&pagewanted=all&
6. http://www.forbes.com/sites/lesliebradshaw/2012/01/10/how-women-are-getting-left-out-of-the-venture-capital-game/
7. http://www.jec.senate.gov/public/index.cfm?a=Files.Serve&File_id=6aaa7e1f-9586-47be-82e7-326f47658320

Source: http://www.trueventurestec.com/2013/06/27/the-midas-touch-surprising-facts-in-the-world-of-venture-capital/?utm_source=rss&utm_medium=rss&utm_campaign=the-midas-touch-surprising-facts-in-the-world-of-venture-capital

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