Women own about 40 percent of the private businesses in the United States, according to the Center for Women's Business Research. But according to Astia, a group that supports women-led small companies, women make up less than 10 percent of venture-backed start-ups. As of last year, only 14 women had been funded by Y Combinator out of a total of 208.
That's a disparity that some, including Cindy Padnos, have found troubling. It's not because of any bias it might imply. Padnos finds the numbers so disturbing because she believes start-ups are missing out on a very valuable resource that are actually quite important for their health. That resource is the presence of women.
Padnos started her career as a tech entrepreneur and later served as president and CEO of a software company. These days, she has segued into life as a venture capitalist and has launched Illuminate Ventures, an early-stage venture fund that invests in cloud computing start-ups, based in Oakland. The advisory board of Illuminate Ventures, notably, is two-thirds women.
"I thought I saw a growing disparity between the growth in the number of venture-backable women, and the actual dollars that were going into companies that had women on the founding team," Padnos says. "And I was confused by that."
To address her hypothesis, Padnos, along with two MBA researchers from Carnegie Mellon, released one of the most comprehensive research reports to date on the state of women in venture-backed start-ups, titled High Performance Entrepreneurs: Women in High-Tech.
Among its many findings, the report, released in February 2010, concluded, "Women-led high-tech start-ups generate higher revenues per dollar of invested capital and have lower failure rates than those led by men. Data clearly shows that high-tech venture-backed companies founded by women do as well as those led by men despite often being capital-constrained. Portfolios that lack this diversity are likely to suffer over time."
In other words, gender diversity yields positive results for start-ups, especially when women hold management positions. But why? And if the research is indeed true, how should start-ups go about finding more women?
Three Ways Start-ups Benefit From Gender Diversity
Padnos's research points to three statistics that suggest that a mixed-gender company is better-positioned for success. They are:
Women are better at bootstrapping: Research from the Kauffman Institute shows that women-led tech start-ups launch with about half as much capital. Why? "I think part of it is that it's perceived by women that it's harder to raise large amounts of capital, so they frequently start with less capital, because it's an easier thing to do," says Padnos. In other words, women seem to be capable of doing more with less.
Women fail less often: According to the 2005 Report on Women and Entrepreneurship, the percentages of entrepreneurs who expect growth for their businesses "is somewhat higher for female entrepreneurs than male entrepreneurs." According to a separate study by Babson College and the London School of Economics, women-led start-ups experienced "fewer failures in moving from early to growth-stage companies than men."
Gender diversity improves long-term returns: Research from the University of Michigan and Cornell University found that companies with more gender diversity delivered better results from IPOs, by as much as 30 percent on average.
What About the Critics?
Still, some entrepreneurs argue that diversity can hinder the growth of a start-up. Penelope Trunk, for instance, a three-time entrepreneur whose latest venture is Brazen Careerist, a job-networking site for young professionals, says that start-ups actually suffer from diversity. Her argument is that founders need to make decisions quickly; having too much diversity can stunt their ability to move fast.
"You can't go into work every day and have arguments," she says. "When the best answer is the fastest answer, you don't want a diverse team."
Most, however, disagree. Jean Hsu, a software engineer at Pulse, a 14-person start-up based in Palo Alto that has built a popular news reader app, says that having women at a start-up helps the innovation process in an early stage start-up.
"I understand where Penelope is coming from, because obviously when you have people that are the same, it's easier to make decisions, and get something out there," she says. "But it's not necessarily the best thing, because you don't have a 360 degree perspective on the problem, and potential solutions to that problem. So it is good to have a very diverse team."
In fact, some research takes it a step further: One study shows that teams don't just benefit from the existence of diversity; there actually is a direct correlation between the scale of success and the percentage women that comprise an organization.
In Defend Your Research: What Makes a Team Smarter? More Women, Thomas Malone, a management professor at MIT, created teams of people aged 18 to 60, had them take IQ tests, and then issued them a series of problem sets. Surprisingly, those with the highest IQs did not perform the best—but the teams with the most women, did.
"The standard argument is that diversity is good and you should have both men and women in a group," he told the Harvard Business Review in June 2011. "But so far, the data show, the more women, the better."
Now, Can You Actually Attract Women?
So, what's a start-up to do to bring more women on board?
Cindy Padnos believes in the "build it and they will come" philosophy. That is, assigning women to senior roles from the very beginning of a start-up's life will attract more women down the road.
"I think that the way that entrepreneurs need to attract women is the same way that [our firm] attracts them," she says. "Demonstrate that by bringing women into senior roles, they have an opportunity to succeed there."
Of course, hiring women at start-ups, is, in part, a systemic issue. Tech start-ups are hungry for trained developers who are, more often than not, young men. In 2009, for instance, only 18 percent of undergraduate Computing and Information Sciences degrees were awarded to women, according to the National Center for Women and Information Technology.
Still, part of what hinders a start-up's ability to attract more women, according to Jean Hsu, is merely an image issue.
"I think women have this conception of what a culture at a start-up would be like," says Hsu. "There are a lot of start-ups out there that are like 20 dudes, and if you have that many guys, they sort of develop a macho, fratty environment. There can be a lot of testosterone in one room. It's hard to change that culture once it's there."
But, there is a remedy. And it has to not only start with a diversity-minded hiring strategy. It also involves the way you publically talk about and brand your business from the start.
"It’s how you portray your company culture to prospective candidates," Hsu says.