Published October 12, 2009 at 5:59 AM
By: Mary Kathleen Flynn

Getting the best woman for the job may be the best solution to the venture capital industry's biggest problem: low returns on investment, or what Union Square Ventures' Fred Wilson called "The Venture Capital Math Problem" in a blog post earlier this year that spawned hundreds of comments, indicating just how worried the VC industry is about returns.

The lack of female VC partners -- let's call it the venture capital gender gap -- is as old as the industry itself, but it gained some new critics in the blogosphere last week, when Jeff Bussgang, a general partner of Flybridge Capital Partners, a former serial entrepreneur and the father of a "capable, ambitious daughter," asked in a blog post, "Are VCs sexist?"

Bussgang's post was circulated eagerly around the Twittersphere by high-profile entrepreneurs. I was led to it by a tweet from Chris Dixon, who co-founded Hunch, a decision-making startup in New York, with Caterina Fake. Roughly 40, Fake is one of the most successful female tech entrepreneurs of her generation, having co-founded with her husband Stewart Butterfield the Flickr photo-sharing service, which was bought by Yahoo! Inc. (NASDAQ:YHOO) for a reported $30 million in 2005.

Are VCs sexist?

"jeff - its endearing how you earnestly debate this," tweeted Dixon. "the answer is: yes."

But whether or not you believe sexism is the underlying problem, the fact that there are few women in the venture capital industry is not a matter of debate.

"The venture capital industry is among the last bastions of male dominance in the business world," said Carl Schramm, president and CEO of the Kauffman Foundation, when the foundation published the Diana Project's oft-sited 2008 study, "Gatekeepers of Venture Growth: The Role and Participation of Women in the Venture Capital Industry."

The numbers speak for themselves, as Bussgang writes, citing the Gatekeepers study:

I find it amazing that only 5-10% of the VC industry is made up of women. Only 25% of all VC partnerships have a single women partner and only 7-8% have more than one women partner. Anecdotally, even fewer women are "management company GPs" as opposed to "employee GPs" -- in other words, true owners of VC funds as opposed to deal partners.

Why are there so few female VCs?

It's a question I've been asking for 20 years of folks, including VC pioneer Ann Winblad, who in 1989 co-founded Silicon Valley's Hummer Winblad Venture Partners, the first venture capital fund to invest exclusively in software companies. The most common answer is that the VC industry is an old boys' network with the double barrier of technology and finance as its underpinings, fields which are themselves male-dominated.

More importantly, why does it matter that there are so few women partners in venture capital firms?

Because bringing aboard a female partner is likely to boost a VC firm's returns, says Sharon Vosmek in an interview with The Deal. Vosmek is the CEO of Astia, a nonprofit group that nurtures women-led high-growth businesses. Astia will mark its 10-year anniversary next month.

"It's not a gender issue, it's an innovation issue," says Vosmek. "When you include women in the equation, you end up with a more robust set of innovation."

"We know what it takes to get more diversity into the portfolio," Vosmek continues, citing research results soon to be published. "We don't know exactly how or why it does this, but we do know that VC firms with at least one woman in the partnership are 70% more likely to have a woman-led company in their portfolio."

"We know that a diverse group almost always outperforms even the best homogeneous groups by a wide margin," says Vosmek, pointing to several studies, including a 2007 Catalyst report that found that Fortune 500 companies with the highest representation of women board directors attained significantly higher financial performance, on average, than those with the lowest.

What's the most compelling reason a VC firm should bring aboard a female partner and with her an increased likelihood of women-led companies in the portfolio?

So you don't miss out on, say, the next VMware Inc. (NYSE:VMW), says Vosmek.

Co-founded by CEO Diane Greene and her husband Mendel Rosenblum, virtualization software developer VMware was passed over by many institutional investors who often shy away from husband and wife teams. (Incidentally, VCs also missed out on husband and wife-led Flickr, which was bootstrapped by Butterfield and Fake, who turned down VC money in favor of the Yahoo! offer.)

The VCs who said no to Greene are no doubt still kicking themselves. VMware sold to EMC Corp. (NYSE:EMC) for $635 million in 2003 and then raised $1.1 billion in a stunning IPO that valued EMC's 87% stake at $16.6 billion on the first day of public trading in 2007.

"VCs hate to think they're missing something big," said the Kauffman Foundation's  Schramm. "And as long as they pass over women as partners or investments, they are." - Mary Kathleen Flynn