Leadership

Meet Tomorrow's High-Performance Companies

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I’m not an equal rights activist. I’m a veteran start-up executive and venture capitalist in the technology industry. Our firm, Illuminate Ventures, invests in companies led by strong, entrepreneurial teams in a cross-section of high-tech sectors leveraging next generation technologies and services, with a particular focus on cloud computing and real-time analytics.

In the process of researching potential investments, I became aware of a significant innovation opportunity overlooked by many early-stage tech companies: The inclusion of female executives on management teams. As a result of this research, the overall impact of gender diversity in technology then became the subject of a report we developed, “High Performance Entrepreneurs: Women in High-Tech.”

This excerpt illuminates the opportunity represented by the current gap between the fast growing pool of skilled women entrepreneurs in high-tech and their fairly limited level of inclusion within start-ups today. It disabuses the mistaken beliefs that the sheer numbers of venture-backable women are small, that they are not entrepreneurial or that diversity should be considered because it is the “socially responsible” thing to do, by documenting the growth and impact of women in high-tech as well as the fundamental business value of creating environments where more diverse viewpoints are enabled and encouraged.

In an entrepreneurial community that exults innovation, the value of diverse and creative ideas is obvious.

Teams with Diverse Backgrounds Out-Perform

It is not about singling out women or other groups for special treatment.

It is about the enhanced performance that organizations see when their internal team members bring different skills, experiences and perspectives to the table.

The depth of research confirming that team diversity improves business results is large and continues to grow. It applies to large and small companies alike. Quantitative research conducted by the University of Michigan’s Scott Page with Lu Hong of Loyola University of Chicago modeled the impact of diversity on team performance. Their work showed that groups with greater gender diversity perform significantly better than homogeneous ones in solving complex problems in virtually all circumstances.

Many other studies including Pepperdine University’s 19-year study of business performance, Catalyst’s recent four-year study of Fortune 500 companies and IPO performance research conducted by the University of Michigan and Cornell University found that companies with greater gender diversity out-performed those with less – frequently by as much as 30 percent.

To investigate the connection between the inclusion of women senior managers and company performance, David Gaddis Ross of Columbia University and Christian Dezsö of the University of Maryland examined such performance metrics as return on assets, return on equity and annual sales growth from 1992 to 2006 across 1,500 U.S. firms. They analyzed the relationship between these measures and the percentage of women in senior management positions.

“We have documented a strong positive association between firm performance and female participation in senior management,” said Ross. “Firms with at least some female senior managers outperform firms without. We have also found that the more important innovation is to a firm’s strategy, the greater the positive impact of female participation on firm performance. The upshot is that any firm, but particularly those for which innovation and creativity are a priority, would benefit from female participation in senior management.”

Women as Tech Entrepreneurs

Over the past 30 years, more and more women have co-founded and successfully built capital-efficient high-tech companies that deliver venture-level returns. In just 10 years, for example, women’s involvement at officer–level in companies that IPO grew dramatically – from 10 percent in 1997 to over 55 percent in 2007. Of the 19 tech IPOs in 2009, all but two had at least one woman listed among the leadership ranks. These numbers demonstrate the continued expansion of the pool of high-tech female entrepreneurs with the ability to successfully launch and lead companies to profitable outcomes. Women are now earning the necessary degrees and have gained appropriate management experience to make substantial contributions to technology development.

Contributions to IP

Leveraging their educations, women are rapidly expanding their contributions to technology.

For example, the increase in the number of patents awarded to women illustrates the impact their contributions are having on the creation of intellectual capital. While overall U.S. patent activity increased five-fold from 2000 to 2005, U.S. female IT patenting experienced a 14-fold increase. U.S. female patenting grew most significantly in the computer software area. From 1980 to 1985, there were only 49 U.S. female-invented fractional software patents. From 2000 to 2005, the number of U.S. female-invented fractional software patents increased 45-fold, to over 2,200 patents. Today, women hold about 15 percent of all recent patents.

Source: National Center for Women & Information Technology

In recent decades, women have demonstrated their entrepreneurial determination by leaving large and mid-sized businesses to launch their own firms at an ever-quickening pace. Between 1997 and 2006 women-owned or led firms were the fastest growing sector of new venture creation in the United States, increasing at five times the rate of all new firms. By 2005, one in five U.S. firms with revenue of $1 million or more was woman-owned. Today, women-owned companies represent nearly half of all privately held U.S. businesses.

They build their businesses with lesser amounts of capital and fail less frequently than the norm.

Powerful Outcomes

In the high-tech world, investment success is most frequently measured by the strength of a company’s exit.

Here too women are proving to be a significant factor in value creation.

More than 200 women participated as co-founders or officers of over 125 high-tech companies at the time of a successful IPO or M&A exit of greater than $50 million during the period from 1998-2008. Like successful male founders, many of these women with venture-level outcomes are well on their way to success with their second or third start-up. More than 10 percent are already associated with two or more successful outcomes of venture-backed companies during this short ten-year period alone.

On the Cusp of Critical Mass

In any new category, there is a period of time needed build an appropriate pool of talent to feed into the funnel with the goal of creating a sustainable pipeline. The funnel must be filled with those having the right education, experience and skills. Yet only a small percentage of qualified professionals, no matter their gender, decide to become entrepreneurs.

Now, after decades of transition, many women with the credentials to become successful co-founders and leaders of high-tech firms are choosing to launch or join start-up companies in venture-backable sectors. Research shows that women are starting businesses in the same ratios as men in high-growth technology markets such as software, communications, consumer Internet and security that have traditionally been considered fitting for venture investment, but with fewer numbers still today overall. Data gathered in 2004 shows that the industry profile of women-owned $1 million-plus firms is very similar to that of firms owned by men. A little more than a quarter of both female and male firms are in the service sector. In other industry sectors, such as manufacturing and wholesale trade, they are represented fairly equally as well.

There are further indications that the percentage of the women-founded or women-led high-tech companies is poised to grow rapidly. The current generation of young women, prolific users of and contributors to technology will further expand the representation of women in high-tech. Among teens, 56 percent of Facebook users are female. On the Web, 75 percent more girls blog than boys and 45 percent more girls create web pages than boys.

Furthermore, following on the heels of the early organizations such as Astia and Springboard fostering venture-backable women’s entrepreneurship in the Tech sector, a second wave of women’s high-tech groups has arisen in recent years to focus at even earlier stages. Some, such as SD Forum Women are affiliates of existing larger mixed-gender organizations while others, like Women 2.0, Girls in Tech, and Girl Geeks, are new independent groups. Women 2.0, for example, was formed in 2006 as a small, local organization for the “next generation of woman founders” of high-tech businesses. In just three years it had grown to over 10,000 online members nationwide. The typical member is 21 to 45 years old. Eighty percent of members are currently in start-ups and 90 percent are already in management roles in high-tech.

While most of these groups are nationwide in scope, the majority of their membership is in California and particularly in the San Francisco Bay Area. This is consistent with research conducted in 2008 at Harvard University showing that nearly 30 percent of all women with experience as start-up executives worked for companies headquartered in California. Massachusetts, with just under 17 percent of start-up women execs, holds the next largest pool of this talent in the country.

Given the relatively recent time frame in which women have begun to gain any significant scale in terms of appropriate educations and work experience, we expect rapid growth in women’s participation in high-tech companies in coming years.

Gender should never be a criterion– for an investment or for team member selection – but nor should it be a barrier. If you believe in innovation as key to high-tech success, then you’ll agree that adding women to senior executive teams or advisory boards, or backing a female-founded venture will be likely to increase the company’s diversity of ideas and opinions – unleashing one of the most powerful drivers of innovation in business today.

Cindy Padnos is the founding managing director of Illuminate Ventures. Visit http://www.illuminate.com/whitepaper/ for a full copy of the whitepaper including citations and sources.

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