Written by: Karl Simpson
To be blunt, biotechnology ventures require lots of capital, and although alternative funding sources are now more accessible, money has traditionally come from the venture capital firms. These venture firms exercise differing strategies in allocating risk capital; either choosing to invest in early stage ventures where the technology still needs validating and a management team put around it, or ventures which have begun de-risking further along the development pathway.
The capital intensive nature of this business means venture capital and other streams of risk capital feature prominently. This capital is strongly influential in the formation of companies and the maturation of new technologies. Later stage ventures see a richer blend of capital sources and more frequent infusion of capital from pharma, as licensing and alliances are formed against promising assets with strengthening data packages.
The reliance on capital and the shortage of truly promising drug assets often means the venture capital community exert power over the sector in many ways. One of which is the configuration of management teams and boards. The strength of management is often a significant driver behind the decision to invest in an emerging venture, and the board of directors begins to be shaped by the changing ownership structure that investment brings about.
The Funding Landscape in 2015 and Women Executives
To assess just what these teams look like, we undertook research into current investments in the biotech category, evaluating 110 different investment deals in private biotech companies across Europe and the US during a 6 month period in Q4-2014 – Q2 2015 (here). The research covered a total of $4.52bn in investment, with a substantial $2253.8bn invested by way of Series A and B rounds, averaging $31.6m and $37.7m per round respectively.
Our purpose was to find out exactly where this money was invested, both in terms of the CEOs and the Board of Directors. Who were the constituent members of the board of directors and who were the CEOs entrusted with the investments. Specifically, we looked at the gender of the CEO and the gender mix of the board of directors.
Here we found that 5.4% of the total capital raised was invested in companies run by women CEOs, equivalent to $242.5m. There were just 10 female CEOs represented in the study’s 110 companies, representing 9% of the CEO study population. With the board of directors, we saw a total $2576m, or 57%, invested in companies with all-male board of directors, a stark contrast to the paltry $60m invested in companies with 50% or more female board directors. This signals a disproportionate capital allocation to companies with all-male boards and further analysis showed that companies with less than 20% of women on their boards received the vast majority of venture funds.
(Source: Liftstream – Investing in Biotech Management 2015 – Fig. 6.)
In 2014, a study we conducted which took in a much larger sample of biotech companies, 1491 companies and over 7000 board directors in total, showed that 1 in 10 board directors in biotech are women. It also showed that 52% of biotech board directors in the US are male, a figure which rises to 60% in Europe, with just 7% women CEOs.
The Venture Investor and Gender Diversity
So the figures in this new study are relatively consistent, despite in comparison a cohort of more nascent companies, indicated by the strong presence of Series A and B financing among the 110 companies studied. But what does this tell us about the venture finance community and their investment strategy?
Well, it does not tell us that investors are explicitly rejecting the investment opportunities presented to them by women CEOs and entrepreneurs, nor that prejudicial selection of management is commonplace. They are certainly guilty of investing in companies, sometimes repeatedly, that have absolutely no gender diversity among the board or management team. Investors argue in defence that they will invest in good opportunities and that the presence of gender diversity is neither a case for or against investing. A position in contradiction with a growing body of evidence that shows companies with gender diverse management and boards do offer greater returns. A prominent investor told us: “We are looking for a team which is proven and we are confident can execute, diversity scores very low on our consciousness. We don’t have time to train them and overhauling a team has many challenges which can jeopardise your success.”
In a recent study conducted by BIO, they identified some £38bn in venture financing over a decade (2004-2013) of drug R&D venture investing. If you extrapolate out against the figures seen our study, this would indicate over $21bn of venture investment managed by all-male boards and just over $2bn invested in women CEOs, a figure which in reality we’d expect to be considerably lower because of historic demographics.
At the board level within these small private companies, the population of the board is largely drawn from the company’s investors. With only 9% of partners in prominent life science VCs being women, the chances of raising the proportion of women on boards up to the 25%+ figure needed to increase sustainability among the pool of women board directors, is severely hampered. Therefore, VCs themselves need to diversify for it to be reflected in the companies they invest in. Evidence this can shape the landscape is seen in the higher number of women now present in Corporate Venture Capital. Here the population of women is around 18% and growing, which is beginning to diversify the boards of their portfolio companies.
It is not all about changing the investor community demographic though, which would naturally take a long time. Investors tend to shape their portfolio management teams through a strong reliance on personal networks, entrusting operational management to people they have worked with previously, have come recommended, or who have clearly created value for investors elsewhere. This unstructured approach and heavy reliance on people known to them, plus a certain amount of pattern-matching, continues to perpetuate the ‘close network’ appointing that is clearly visible around many VCs.
The blame cannot be fully laid at the door of the investors or indeed the board / management. While many executives will claim to have a strong interest in joining early stage ventures, the reality is that it takes considerable persuasion for them to do so. Often people are most persuaded by the credentials of the people linked to a venture, an attraction further amplified by professional familiarity, loyalty or trust.
Sharing the Responsibility for Change
For there to be real change in the representation of women in venture funded companies, either among the leadership or the board directors, many things need to change. There needs to be a deeper pool of highly capable women proactively looking to step up and lead early stage ventures with the inherent risks associated. Networks and sponsors are vital, and women executives need to cultivate these fully, but be equally prepared to join unfamiliar teams. Investors need to be more receptive to women CEOs and entrepreneurs and more conscious of their bias towards investing in people that reflect their own personal characteristics and values. Small companies and investors need to embed better processes and recruiting structures to capture more diversified talent and move away from ‘word-of-mouth’ hiring as the default approach. Board of Directors need to challenge their own preconceptions about what the ‘right’ profile is for new appointments, thinking laterally and creatively to broaden the field of prospects and must face greater accountability for doing so.
Instilling these recruiting disciplines across the entire process will improve diversity, gender or otherwise. Management teams and boards will be strengthened and governance improved, the results of which are clear for all to understand.
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