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ENTREPRENEURSHIP 2, 4.04 (V) 4.2 Bias and Meritocracy

4.04 (V) 4.2 Bias and Meritocracy

This session I want to talk about bias and meritocracy among startups. I think we'd all like to believe that entrepreneurship is all about the best idea winning. It's a pure meritocracy. But entrepreneurship is a social process, and like any social processes is subject to all kinds of biases and other sorts of barriers that affects some people more than others. This is especially true in entrepreneurship because it's very hard to know in advance, what startup's going to win and which ones aren't. So, decision makers like funders or other people who are deciding which startups to support, have to use what Laura Huang calls gut feel. The idea that you're taking in a lot of information that is hard to quantify, and using that to make a decision about what start up to fund. As a result of that, there are lots of potential biases that creep into this decision making process. Many of those biases are unconscious, and that makes them even harder to detect. Now, we're going to talk about two of these biases in this lecture. Will give some suggestions to solving these problems. I think there is progress being made, but some of the numbers are fairly stack. Now, some of the biases results from fairly objective decision-making. So one clear bias in startup funding is about geography. The mean distance between a venture capitalist and a company that it funds is only 80 miles. That means that as you can see in this chart here, which maps seed funding in the United States. There's very few places where there's a lot of venture capital funding. You could see those areas lit up in blue. So, that is Silicon Valley, and Boston, and New York. Boston and New York are far behind Silicon Valley in terms of funding. If you're outside of those areas, the chance you're getting funding through venture capital is much lower. Now, this is not just a bias based on the fact that people like Silicon Valley people better, but because there's a whole bunch of network effects of being in these locations. So you get to meet more venture capitalists. Also venture capitalist seem to monitor many different companies. So if they have to travel long distances to be able to monitor that company, then they can't monitor other companies in their local area, so they'd rather be local. In fact, we have evidence that when a direct flight is added between Silicon Valley and another city, venture capital investment actually goes up in that city. So that geography really matters, but there's a rational reason for it. Now, many of the other biases among startups are not as rational. So for example, around 40 percent of all business owners in the United States are women. The people highlighted in red in this chart. Can you guess what percentage of VC backed companies of at least one female co-founder? So the answer is really depressing. It's somewhere between four and eight percent to put it under a calculator. That number is not been improving tremendously over time. Now, how does it happen? How do we end up having 40 percent of business owners being female but only a few percent of VC backed companies receiving money being female lead? So there's a bunch of reasons for this. One reason is pure discrimination. So misogyny is a potential issue. There have been Me Too Movement concerns that have happened within venture capitals. A variety of venture capitalists and accelerator owners have been accused of and have had to quit because of harassment or other sorts of issues. There is straight misogyny that ends up happening in these kind of environments. But even when you don't have that sort of over discrimination, you have a bunch of social processes that make it harder for you to receive funding if you're a woman. One of those is about homophily. So homophily is the basic social principal that's been known since Aristotle. That birds of a feather flock together. We like people who are like ourselves. So there's a natural attraction between you and people who shares similarities with you. For various historical reasons, the majority of VCs in the past have been white males. White males tend to associate with other males. They also tend to be from top schools. They associate with other people from top schools. So a network starts to be formed of these sets of people. So, individually, they may find less in common with a woman, because of the homophily issue. But also, the network starts to consist only of people who look like each other. That makes it harder for a woman to enter this network because the Venture Capital Network is all about informal connections and warm introductions. If you don't know people who are part of that network it's hard to get access. Even if entrepreneurs are looking to get access to network, and even venture capitalists are looking to fund more female entrepreneurs. They look around and say, I don't know any female entrepreneurs. Well, that's because their network is formed by this homophily principle. They tend to know other people who are like themselves, and they never get to meet the female entrepreneurs who are being successful because they're not part of their network. Then there's a whole bunch of unconscious bias issues. So, there's a really interesting set of studies about the questions that venture capitalists ask women versus men. They tend to ask men more ambitious questions about how they're going to win, and they tend to ask women more questions about, how they're minimizing risks. So these unconscious biases creep in as well. So, there's a whole bunch of reasons why entrepreneurship is not a pure meritocracy. So, pure discrimination, homophily at the individual level, network access larger issue, and unconscious bias, all shape the decisions people are making. I wish I could say there was a single easy answer to these problems of bias. Unfortunately, there isn't. I think if you're a member of a minority group, or you are a female founder, or any other group is not as well represented in the founding community. You have to realize that there might be these kind of concerns coming up. So, many of my students never encountered any of these issues, some of them do. I think that you have to be aware that they're there. The good news is you're not the only person who is working on this problem. There's a widespread recognition in the entrepreneurship community, that entrepreneurship needs to be more accessible to women and minority group members. There's a lot of efforts to try and make that happen. Increasingly the evidence seems to be, that provided that a woman or a minority group members get access to the same sorts of funding and opportunities that are provided to other entrepreneurs, that they seem to have very similar success rates and in some cases higher success rates than the majority groups who are receiving funding. So, it's about getting that initial access. That's the problem. There's a lot of groups that are trying to make this happen. I give you the advice that if you are one of these minority group members or female entrepreneur, that you should think about reaching out to these groups that support founders in your community. You can also apply for accelerators and launch programs. We have lectures on those issues. Think about your own networks. You might have to be more aggressive at scouring your own networks in order to be able to get access to these kind of communities. So, the world is changing for the better, but not as quickly as we'd like. There is a possibility of bias out there that may affect you. You should realize though that the world is changing on the better on this side and that though the work might be harder they still have every chance of succeeding. Once you have accessed that funding and initial resources, that the success rate for these discriminated against groups seems to be just as good as for any other organization. In fact, if you're a funder looking to fund entrepreneurs, there's a real opportunity there to fund more female lead and more minority lead entrepreneurs. Because it gives you a chance to expand your portfolio, and make investments in groups of people who have just as good ideas and even better potential outcomes that other people are making investments in.


4.04 (V) 4.2 Bias and Meritocracy

This session I want to talk about bias and meritocracy among startups. I think we'd all like to believe that entrepreneurship is all about the best idea winning. It's a pure meritocracy. But entrepreneurship is a social process, and like any social processes is subject to all kinds of biases and other sorts of barriers that affects some people more than others. This is especially true in entrepreneurship because it's very hard to know in advance, what startup's going to win and which ones aren't. So, decision makers like funders or other people who are deciding which startups to support, have to use what Laura Huang calls gut feel. The idea that you're taking in a lot of information that is hard to quantify, and using that to make a decision about what start up to fund. As a result of that, there are lots of potential biases that creep into this decision making process. Many of those biases are unconscious, and that makes them even harder to detect. Now, we're going to talk about two of these biases in this lecture. Will give some suggestions to solving these problems. I think there is progress being made, but some of the numbers are fairly stack. Now, some of the biases results from fairly objective decision-making. So one clear bias in startup funding is about geography. The mean distance between a venture capitalist and a company that it funds is only 80 miles. That means that as you can see in this chart here, which maps seed funding in the United States. There's very few places where there's a lot of venture capital funding. You could see those areas lit up in blue. So, that is Silicon Valley, and Boston, and New York. Boston and New York are far behind Silicon Valley in terms of funding. If you're outside of those areas, the chance you're getting funding through venture capital is much lower. Now, this is not just a bias based on the fact that people like Silicon Valley people better, but because there's a whole bunch of network effects of being in these locations. So you get to meet more venture capitalists. Also venture capitalist seem to monitor many different companies. So if they have to travel long distances to be able to monitor that company, then they can't monitor other companies in their local area, so they'd rather be local. In fact, we have evidence that when a direct flight is added between Silicon Valley and another city, venture capital investment actually goes up in that city. So that geography really matters, but there's a rational reason for it. Now, many of the other biases among startups are not as rational. So for example, around 40 percent of all business owners in the United States are women. The people highlighted in red in this chart. Can you guess what percentage of VC backed companies of at least one female co-founder? So the answer is really depressing. It's somewhere between four and eight percent to put it under a calculator. That number is not been improving tremendously over time. Now, how does it happen? How do we end up having 40 percent of business owners being female but only a few percent of VC backed companies receiving money being female lead? So there's a bunch of reasons for this. One reason is pure discrimination. So misogyny is a potential issue. There have been Me Too Movement concerns that have happened within venture capitals. A variety of venture capitalists and accelerator owners have been accused of and have had to quit because of harassment or other sorts of issues. There is straight misogyny that ends up happening in these kind of environments. But even when you don't have that sort of over discrimination, you have a bunch of social processes that make it harder for you to receive funding if you're a woman. One of those is about homophily. So homophily is the basic social principal that's been known since Aristotle. That birds of a feather flock together. We like people who are like ourselves. So there's a natural attraction between you and people who shares similarities with you. For various historical reasons, the majority of VCs in the past have been white males. White males tend to associate with other males. They also tend to be from top schools. They associate with other people from top schools. So a network starts to be formed of these sets of people. So, individually, they may find less in common with a woman, because of the homophily issue. But also, the network starts to consist only of people who look like each other. That makes it harder for a woman to enter this network because the Venture Capital Network is all about informal connections and warm introductions. If you don't know people who are part of that network it's hard to get access. Even if entrepreneurs are looking to get access to network, and even venture capitalists are looking to fund more female entrepreneurs. They look around and say, I don't know any female entrepreneurs. Well, that's because their network is formed by this homophily principle. They tend to know other people who are like themselves, and they never get to meet the female entrepreneurs who are being successful because they're not part of their network. Then there's a whole bunch of unconscious bias issues. So, there's a really interesting set of studies about the questions that venture capitalists ask women versus men. They tend to ask men more ambitious questions about how they're going to win, and they tend to ask women more questions about, how they're minimizing risks. So these unconscious biases creep in as well. So, there's a whole bunch of reasons why entrepreneurship is not a pure meritocracy. So, pure discrimination, homophily at the individual level, network access larger issue, and unconscious bias, all shape the decisions people are making. I wish I could say there was a single easy answer to these problems of bias. Unfortunately, there isn't. I think if you're a member of a minority group, or you are a female founder, or any other group is not as well represented in the founding community. You have to realize that there might be these kind of concerns coming up. So, many of my students never encountered any of these issues, some of them do. I think that you have to be aware that they're there. The good news is you're not the only person who is working on this problem. There's a widespread recognition in the entrepreneurship community, that entrepreneurship needs to be more accessible to women and minority group members. There's a lot of efforts to try and make that happen. Increasingly the evidence seems to be, that provided that a woman or a minority group members get access to the same sorts of funding and opportunities that are provided to other entrepreneurs, that they seem to have very similar success rates and in some cases higher success rates than the majority groups who are receiving funding. So, it's about getting that initial access. That's the problem. There's a lot of groups that are trying to make this happen. I give you the advice that if you are one of these minority group members or female entrepreneur, that you should think about reaching out to these groups that support founders in your community. You can also apply for accelerators and launch programs. We have lectures on those issues. Think about your own networks. You might have to be more aggressive at scouring your own networks in order to be able to get access to these kind of communities. So, the world is changing for the better, but not as quickly as we'd like. There is a possibility of bias out there that may affect you. You should realize though that the world is changing on the better on this side and that though the work might be harder they still have every chance of succeeding. Once you have accessed that funding and initial resources, that the success rate for these discriminated against groups seems to be just as good as for any other organization. In fact, if you're a funder looking to fund entrepreneurs, there's a real opportunity there to fund more female lead and more minority lead entrepreneurs. Because it gives you a chance to expand your portfolio, and make investments in groups of people who have just as good ideas and even better potential outcomes that other people are making investments in.