What if I told you that venture capitalists aren’t soothsaying wise men who are uniquely qualified to predict the future of male and female CEOs alike?
Don’t take my word for it: The folks at Village Capital over the last decade have been running a social science experiment that raises some interesting questions about whether the powers that be in Silicon Valley investing are really that all-knowing.
Village Capital has for a decade run an accelerator program that had a reality show-esque twist at the end: The dozen or so startups end the program by ranking which of the other startups were the most promising — and the two highest-rated companies would get a check from Village Capital’s venture arm. They spend about 12 days over the course of a three-month period getting to know one another as they all tackle a similar problem.
They call it “peer-selected investment” — but that’s just fancy language for the timeworn idea that study group partners probably know who is going to do well on an exam better than the absentminded professor. And what Village Capital has now done is explored how well the 12 or so startups in each cohort did at predicting each other’s future success — and comparing that prediction ability against the panel of experts.
The experts here are the people who served as the admission committee, so to speak, for the program — meaning that they similarly stack-ranked the dozen startups that were admitted to the accelerator. They’re largely professional investors. And it turns out that the startups were slightly better than the venture capitalists at seeing the future success stories.
Here’s why this should really matter: The entrepreneurs were significantly more likely to highly rank female entrepreneurs than were the experts. So Village Capital is holding this up, in a report shared with Recode, as a revealing alternative to the current startup fundraising model.
“No, we’re not calling into question the wisdom of venture capitalists,” said Allie Burns, the head of Village Capital, delicately.
But she sorta is — at least at the seed stage, where her study unfolds.
There are a ton of caveats:
- The dependent variable for “success” here is the amount of money a startup raises in the future. Raising money shouldn’t be seen as an end in itself, but it’s the stand-in here for their absolute success given that the companies are still private.
- The money that the top two startups won in the accelerator program could merely serve as a signaling effect of sorts. Because they won a startup competition, that may make them more likely to raise big mounds of cash in the future (which might explain why the startups are “smart” in predicting future success).
- The entrepreneurs are evaluating one another based purely on future success, but the admission committee is also including qualitative things like whether the startup would benefit from participating in the program in the first place.
But even in a world where the entrepreneurs were merely on par with the experts, the real big idea here is that Village Capital claims their entrepreneurs are more likely to back women than is the industry as a whole. And that’s not nothing in a day when such a small percentage of money in Silicon Valley goes to female entrepreneurs.
The startup leaders collectively elevated female founders to the top two roles at the same rate that they appeared in the program. So for instance, if six of the 12 companies in a cohort had a female founder, one of the two “winning” slots went to a female-founded company, on average.
Here’s the equivlent: Venture capitalists only award about 10 percent of their money to female-founded companies. But they obviously are pitched by a much higher rate of women.
So Village Capital’s startups are doing a better job on diversity while not sacrificing on predictive financial ability. At a time when Silicon Valley is reckoning with biases in the fundraising process, this is a good study that offers some possible solutions.
“I don’t think every single investor is going to take the leap and say we should adopt a peer-review-based decision-making model, but can investors think about putting entrepreneurs on their investment committees?” asked Burns. “Are there more studio-like models where entrepreneurs make more funding decisions?”
Good questions. But I don’t think either is likely to happen.
Reason one: Lots of venture capital firms already try to hire former founders, and so they would be quick to claim that they’re already accounting for the viewpoint of the entrepreneur. (There’s already a debate in the business about whether financial types or founder types make the better investor.)
Reason two: Part of the mystique and brand of venture capital is that they have so-called “pattern recognition” — because they review hundreds of investment opportunities a year — and can see success in a way that an entrepreneur who basically only knows his own experience cannot. Some elite venture capital firms use “scout” programs, where a CEO might refer opportunities to full-time investors, but the ethic of pattern recognition is engrained (maybe wrongly!) into the venture capital gospel.
Perhaps a takeaway here is that venture capitalists should simply spend more time with startups before making decisions. If an investor spent 12 days in a three-month period with a prospective CEO, I’m sure they’d have a very fine read on their success — and they’d probably be more inclusive toward women, too.
But spending 12 days with every CEO they meet is, of course, impossible. So we remain mired in a male-dominated status quo.