Thought of the Week - Daughters make for better performance
Ok, that sounds weird, so I’d better explain. By now the evidence is pretty widespread that companies with more diverse leadership teams in terms of gender diversity outperform those with less diverse leadership teams.
I have written about this, for example, here and here.
At the same time, we know that while gender diversity in publicly listed companies is improving thanks to increased scrutiny by the press and investors alike, the situation in venture capital is relatively underdeveloped as I explain here. But shouldn’t the benefits of increased diversity not accrue to venture capital firms just as they do to publicly listed firms?
Sophie Calder-Wang from Wharton and Paul Gompers from Harvard looked at the success rate of 1,310 venture capital firms in the US between 1990 and 2016. Success rates represent the share of deals where the investment is either sold at a profit to another private equity firm or successfully listed on a stock exchange. On average, venture capital firms had a pretty high success rate of 27.3% (at least I think that’s high). But having 5% more women among its partners increases the success rate of venture capital firms by 4.7 percentage points to 32%. Not a small effect.
So, venture capital firms benefit from higher gender diversity. But the really interesting thing about the research from Calder-Wang and Gompers is their finding of what makes venture capital (VC) firms hire more women. Remember that the study covers the period from 1990 to 2016 when diversity wasn’t really a topic on most people’s radar and there were no external pressures on partners in VC firms to hire more women. It turns out the key driver for VC firms to hire more women were the daughters of the partners. If senior partners in VC firms had daughters, they were more likely to hire women as partners for their firms. That effect aggregates and VC firms with more daughters than sons among the partners were overall more likely to hire women as partners. The personal experience in their homes of what daughters are capable of doing made partners more amenable to the idea of hiring female partners to work with them … which in turn made their firms more successful in the long run.
Thought of the Week features investment-related and economics-related musings that don’t necessarily have anything to do with current markets. They are designed to take a step back and think about the world a little bit differently. Feel free to share these thoughts with your colleagues whenever you find them interesting. If you have colleagues who would like to receive this publication please ask them to send an email to [email protected]. This publication is free for everyone.
