King's College London

This piece was originally written for the Global Institute for Women's Leadership's new Essays on Equality publication, which features contributions on a range of different issues by leading researchers and figures working on gender equality.

Read the full collection of essays

Blind auditions,^* where musicians perform behind a curtain, helped increase the fraction of female musicians in the major US symphony orchestras from about 5 per cent in the 1970s to almost 40 per cent today. When orchestra directors couldn’t see who was playing, they based their selection decisions on the quality of the performance, rather than the personal qualities of the performer. An ingenious design intervention, the curtain and the accompanying research remind us that good people interested in maximising the quality of their product – such as orchestra directors seeking the best-sounding music – fall prey to bias.

In the world of early-stage investing, what venture capitalists (VCs) arguably care most about is the return on their investment. But they fall short of creating a level playing field for the most brilliant investing minds. Much like orchestras 50 years ago, US venture capital today is dominated by men – approximately 90 per cent of VC investors are men and roughly 88 per cent of venture dollars go to all-male founding teams. These venture capitalists have never had the benefit of the curtain to come face-to-face with how their biases affect their decision-making. They still believe in the power of meritocracy.

Unfortunately, the evidence tells an overwhelmingly different story. Research by Paul Gompers, Laura Huang, Malin Malmström, Lakshmi Balachandra, Alison Wood Brooks and colleagues suggests that female entrepreneurs are not given a fair shake, and neither are female investors. These challenges within the investor community also have a direct impact on the ecosystem of female founders seeking and securing funding. According to Pitchbook, all-female founders received only 2.3 per cent of the $130 billion in total VC funding in 2018.

So, why can’t venture capitalists be more like orchestra directors? We set out to explore this question, partnering with the New England Venture Capital Association and Culturintel, a female co-founded AI-powered research firm. In 2018, we conducted various in-depth one-on-one interviews with male and female VCs, and took a look at what venture capitalists and entrepreneurs were saying about the process of raising capital in more than 500,000 open-source conversations online across diverse gender and ethnic segments.

The curtain intervention is increasingly popular among organisations like the UK government, KPMG and HSBC, which are experimenting with blind recruitment – and tech start-ups like London-based Applied are providing the software to implement the practice. But it’s not had much impact on venture capital pitches thus far. One challenge is that in contrast to orchestra directors, who are looking for the best performers today, venture capitalists are looking for the people who will generate the best financial returns tomorrow.

Investors take a bet on the future. While they care about someone’s historical track record, they invariably evaluate founders based on potential rather than performance. It is all about trust – and people are more likely to trust others who look like them.

Much of the research on “potential bias” so far has taken place in corporations and shows that when performance appraisals are based on both past performance and future potential, the gender gap is much more pronounced. Or, as articulated by one of the VCs we interviewed: “Women get promoted on performance, and men get promoted on potential.” A female founder explained how this applies to securing venture capital funding: “Guys secure tons of funding out of a paper-napkin idea versus … women and femme entrepreneurs, they have numbers, they have traction and still they hear, ‘It’s not enough. You need to come back with more proof.’”

Earning someone’s trust is hard enough, but so much harder when a person from an underrepresented group is perceived to be “guilty” or untrustworthy absent proof to the contrary. Or as one entrepreneur suggested: “Men are good investments until they prove otherwise. Women are unsound investments until they prove they are worth taking a risk on.” Our research shows that, much like in law, trust defaults matter. When the baseline was no trust, the participants in our experiments chose to invest 28 per cent of their available resources in their counterparts. When people started with a high level of trust and had to decide how much to distrust their counterparts, they ended up leaving 52 per cent of their assets with their counterparts.

While “fund unless proven otherwise” is likely a hard sell for investors, defaulting to yes is a practice a number of promotion committees have adopted in trying to overcome the widely documented gender gap in promotions. Besides, introducing the curtain might not be so elusive after all. London-based Fuel Ventures announced that it would anonymise incoming pitches for three months to remove bias after the firm learned that only 4 per cent were from female founders. While it is too early to judge the model’s returns, this type of experiment at VC firms suggests that some investors are taking inspiration from orchestra directors.

Even if most VC firms balk at the idea of moving to all-out blind evaluations, they should still aim for more diversity in their own ranks as well as among their investments – especially given that companies with a female founder outperform their male counterparts by 63 per cent, according to a 10-year study by FirstRound.

Diversity within companies also creates a fairer playing field for founders, as research suggests that VC firms with female partners are twice as likely to invest in companies with a woman on the management team, and three times more likely to invest in companies with female CEOs. Along the way, this would increase the diversity of ideas getting funded.

To get there, firms will have to rely on a number of tools offered by behavioural science. Overall, it comes down to more structure and more accountability at the firm level, including professionalising and centralising HR procedures. Almost everyone seems to agree that there is much room for improvement in this area: a mid-level female VC suggested: “It goes back to how we all hire people ... Do I like that person? Am I having fun talking to them in this interview? Do I have things in common with them? If you hire people that way, you do not end up with diversity.”

Basing HR procedures on evidence-based insights is not rocket science but does require deliberate effort. VC firms should consider using formal processes for their hiring, including going beyond one’s network in recruitment and deal sourcing; employing state-of-the-art evaluation processes; and formalising onboarding, performance reviews and promotions. Orchestra directors needed a process change in the form of the curtain to hear the quality of the music instead of seeing the people playing it. In the same way, venture capitalists can redesign their processes – institute a curtain of their own – to recognise the best talent and realise maximum returns. 

* For more information on the effects of blind evaluation procedures, see the  seven additional studies summarised here.

Iris Bohnet is the Albert Pratt Professor of Business and Government and Academic Dean, Harvard Kennedy School.

Siri Chilazi is a Research Fellow at the Women and Public Policy Program, Harvard Kennedy School.

Anisha Asundi is a Research Fellow and Gender Specialist at the Women and Public Policy Program, Harvard Kennedy School.

Lili Gil Valletta is Co-Founder and CEO of Culturintel and CIEN+.