A world without venture capital firms

“Es el mismo perro con diferente collar”

In recent years, we’ve seen considerable pressure on venture capital firms to diversify their partnerships. Since only 7% of partners at the top 100 venture funds are women, the reflexive argument is that venture partnerships should hire more women. However, we believe this represents a backward-looking step, not a forward-looking step. While increasing the ratio of women in venture capital is a positive, it fails to address the real problem.

In our view, the real problem isn’t a lack of women in venture capital, but a lack of funded entrepreneurs who are marginalized as a result of age, gender, race and other distinguishing characteristics. As one example, less than 1% of funded entrepreneurs are African-American, despite comprising 11% of the US population.

Additionally, it’s not clear that diversification would reduce venture firms’ errors of commission and omission:

Every human has conscious or unconscious biases and tendencies. As explained by Edith Dorsen, managing director at the Women’s Venture Capital Fund, “There’s an inherent and usually unconscious tendency or bias in all of us to support and invest in individuals that we most closely relate to and identify with.”

In the 1970s, the New York Philharmonic and other symphony orchestras initiated blind auditions to address these biases. Notably, this improved the chances that a woman would advance to the finals by 50% and was subsequently adopted by other orchestras. As a result, the ratio of female musicians increased from less than 5% in 1970 to more than 30% in 2013.

Today’s venture fundraising process — essentially unchanged since Arthur Rock’s 1957 investment in Fairchild Semiconductor – involves multiple calls and meetings over 6-9 months. With this process, it seems impossible to create a truly non-discriminatory practice. Accordingly, we believe the answer is to remove humans from the equation. In the same manner that algorithmic trading has displaced Wall Street traders, algorithmic investing should eventually outperform venture capitalists.

“It’s well-documented that we humans make mistakes. For me, it’s scarier to be relying on those human-based intuitions and justifications than relying on purely what the data and statistics are telling you.”

— Babak Hodjat, CEO at Sentient Technologies, one of the first hedge funds run by artificial intelligence

With the advent of software which automates the evaluation of startups (Mattermark) and the construction of portfolios (AngelList) across sectors, stages and geographies, we expect increased algorithmic investing in startups. We believe this is the most impactful way for marginalized entrepreneurs to attract funding, support and the opportunity for positive outcomes.

The problem isn’t that venture capitalists are men, the problem is that they’re human.

 

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