Diversity in Venture Capital

Abstract

This review article first highlights some key statistics on diversity in venture capital. In particular, it establishes that the fraction of women in VC and entrepreneurship has remained quite low throughout the past three decades. Even as of 2019, fewer than 15% of new entrants into venture capital and entrepreneurship were women. In addition, it also documents that the racial/ethnic composition of this population is highly skewed toward Whites and Asian Americans, with only about 10% of them being under-represented minorities.

Supply-side explanations, such as the distribution of appropriate educational or industry backgrounds, likely can not effectively explain the lack of diversity observed in the data. On the other hand, demand-side frictions, especially network frictions, play an especially important role across all stages of venture capital investment (from deal sourcing to co-investment, follow-on investments, and post-investment operations) and entrepreneurial activity (from team formation to early employee hiring). As a result, because the status quo in venture capital is highly unbalanced, women and under-represented minorities suffer from a continued network disadvantage.

Lastly, this article highlights that the performance implications of diversity in venture capital are likely context-dependent. Diversity improvements due to reduced structural frictions are likely performance-enhancing (Calder-Wang and Gompers 2021). In contrast, diversity achieved at the expense of sacrificing team-specific match quality degrades entrepreneurial performance (Calder-Wang, Gompers, and Huang 2022). Such findings also suggest that policy interventions on the issue of diversity in venture capital, and in corporate settings at large, should be careful about how to design the methods through which diversity is achieved.

Keywords: Diversity, Venture Capital, Entrepreneurship

JEL Classification: G24, L26, M14