The benefits of raising daughters: Increasing gender diversity in venture capital

Summary

Does the presence of gender diversity in firms lead to better financial performance? To date, this question has mainly been explored through the use of experimental data that lack “real world” outcomes. Economists Paul Gompers and Sophie Wang take advantage of a unique dataset to assess whether gender diversity leads to better financial performance in the field of venture capital (VC). Their study reveals important findings: When VC partners have more daughters, the probability of hiring senior female investors increases significantly. Increasing gender diversity, in turn, improves firm performance, leading to a greater likelihood of achieving an IPO or successful acquisition. These findings suggest that the subtle elimination of bias in hiring decisions (in this case, via lifelong exposure to gender diversity through raising daughters) is both good for its own sake, and for firm performance.

Research

Hiring people who have historically faced discrimination, such as women and racial minorities, is important for reducing inequality and creating more inclusive work environments.  But there may be an additional benefit to firms that increase workplace diversity: better financial outcomes. Having a diverse array of individuals in positions of power (for example, along lines of gender, race, sexual orientation, or ability) can reduce social conformity, thereby improving decision-making and leading to better financial outcomes.

The present study focuses on VC firms to test whether firms that hire more women perform better financially. VC firms, in particular, have features that make hiring discrimination more difficult to overcome. For one, VC firms tend to be small with hiring decisions made by a select few individuals. Small groups are more prone to having biases (both conscious and subconscious) influence decision-making, including decisions about whom to hire. In addition, because of their small size, VC firms tend to hire infrequently, averaging every 3 to 5 years. This results in fewer opportunities to increase diversity through hiring. Because of these difficulties, the field of venture capital serves as an important case for creating more inclusive work environments.

Gompers and Wang used the database VentureSource to conduct their study, which contains information on venture capital investments. For each firm in the dataset, they tracked the identities of venture capitalists that sat on the board of directors between 1990 and 2016. They also gathered family information of VC partners, including the number of children as well as the gender and age of each child. The authors were interested in the effects of the children’s gender on the hiring choices of VC firms net of other potential influences, such as firm size and age. The study revealed three main findings.

First, when VC partners have daughters, there is an increased likelihood that their firm will hire female investment partners. In effect, if the son of a partner were to be hypothetically replaced with a daughter, the probability of hiring a senior female investor increased by 24%. Notably, this effect was only found when senior partners were parents to daughters, not junior partners. Because senior partners are more likely to make hiring decisions than junior partners, this difference is understandable.

After pinpointing this important source for overcoming bias in hiring decisions, Gompers and Wang analyzed whether firms that hire more women perform better. In particular, they assessed the likelihood of whether deals in which VC firms have a stake result in an IPO or a successful acquisition (where the value is greater than the amount of capital invested) when the number of partners’ daughters is greater relative to their number of sons.

They found that a relative increase of one daughter, on average, lead to an increased probability of successful performance by 2.88%.

In other words, greater gender diversity (introduced through the parenting of more daughters by VC partners) increases a VC firm’s chance of having deals that result in an IPO or a successful acquisition.

Third, the authors took historical data on firm performance to estimate the economic gains that could be made by VC firms if they were to hire more female investment partners. Between 1990 and 2010, the total amount of capital raised through IPOs was $91.6 billion by over 800 companies. Gompers and Wang make a calculation based on the increased probability of achieving an IPO within VC portfolios when more women are hired and estimate that the relative effect of VC partners having a daughter versus a son is that an additional $4.5 billion in capital could have been raised.

Implications

• Hiring Practices – That VC partners with daughters are more likely to hire women suggests an important, yet difficult to achieve, source of workplace diversity: exposure to diversity across one’s life. When promoting individuals to powerful positions that include control over hiring decisions, HR personnel, and other management committed to achieving diversity, should consider the individual’s social network, and whether they have been exposed to a diverse array of people. This is particularly important to consider when promoting white men, as more white men tend to be in positions of power, and research suggests that those responsible for hiring are prone to hiring individuals that are similar to them – a process referred to as homosocial reproduction.
• Social Network – Consideration of individuals’ social network could be ascertained, for example, through a survey questionnaire that asks about the breadth and diversity of one’s social ties.