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Updated February 11, 2023Laura Huang (Harvard Business School)
Laura Huang is a professor at Harvard Business School and has been researching topics right at the heart of DEI in venture capital and technology companies her entire academic career. She has published widely on how female and male founders are treated differently when pitching to VCs and the role that gut feeling plays in the investment process, among other things. We talked about implicit bias among VCs, what needs to change to overcome it, and the disparity of education in the tech ecosystem, which is reproducing another kind of elite.
Interviewed via email March 2021
Johannes Lenhard (JL): You have been involved in pathbreaking work on the relationship between VC investors and (female) founders, and are published widely in top journals. Translating this back into concrete insights for VCs and founders and their everyday work: what are the biggest findings when it comes to identifying problems in the investment process with a specific focus on DEI?
Laura Huang (LH): One of the largest problems in the investment process is the impact of implicit bias—the perceptions people hold of others based on internalized biases and stereotypes. Effectively communicating with and winning over investors is one of the most imperative skills to the development of a founder’s career, and getting funding from VCs is heavily reliant on how the investors perceive the founder. However, as a result of implicit bias, many investors have an unconscious idea of what a successful entrepreneur looks like. Based on common stereotypes, this image typically reflects a young, white male entrepreneur. This is the root of the problem, as this puts female founders at a disadvantage from the get-go: they simply don’t look that part of a successful entrepreneur.
From this initial disadvantage, internalized implicit bias continues to have a negative impact on female founders by manifesting itself through investor-founder communication. In my research, I have found that while investors are more likely to pose positive, promotion questions to white male founders, they are more likely to pose negative, prevention questions to female founders. This disparity in communication, based upon the investor’s initial perception of who “fits the bill” of a successful businessperson, allows white male founders to discuss their business in a more positive, attractive way while female founders are left to grapple with defending their pitches from negatively tinged questions.
For example, take a founder who is seeking investment from a VC in order to scale a company that has struggled with generating revenue in the past. If the founder is a white male, he is more likely to be asked questions that allow him to highlight the positive aspects of the company, such as discussing the total addressable market or emphasizing the potential for high-market return on investment for the VC. However, if the founder is female, she is more likely to be asked questions that require her to defend the company’s issues, such as explaining the current lack of investment or discussing the barriers to past revenue generation.
As you can see, these positive and negative spins on communication can have a huge impact on the investment process—founders who are able to engage in positive communication are significantly more likely to land a successful pitch with a VC than founders who engage in negative communication. Therefore, implicit bias and perceptions are incredibly influential in investing and can shape the entirety of interpersonal relationships from the start of a conversation. In relation to DEI, this has negative implications for how female founders operate within the world of business. If female founders are put at a disadvantage just based on their gender and appearance, how can they effectively position themselves to compete with their male counterparts?
JL: Turning from the problems to possible solutions, have you come across any best practices which VCs could embrace and use in order to overcome the issues you identified in the investment process? What do VCs need to do better to increase DEI in the space?
LH: First and foremost, we must remember that even though VCs are large financial institutions with significant influence, at the end of the day, they are organizations comprised of a group of people. As I’ve discussed in my research, people have the natural tendency to internalize stereotypes, make snap judgments, formulate their own perceptions, and make judgments. However, this can become problematic if people with a lot of power, such as partners at VC firms, foster and unconsciously act upon implicit biases that negatively impact minority and female founders. At its core, this is a deeply human problem based on perceptions and negative attributions. Although my research and book focus on addressing those at a disadvantage—learning how to flip negative perceptions and turn adversity into advantage—I also believe progress can be made if those with the advantage are willing to make a change.
I believe there are a number of actions VCs can take if they want to solve the major problems that currently stand in the way of a more diverse and equitable investing landscape. First, VCs can make an impact by hiring partners from diverse backgrounds. VC partners typically fit the archetype of the wealthy, white, male investor, which means that most of the decision-making power is given disproportionately to members of that group. If the partners of a VC firm were more diverse, meaning if there were a greater balance of women and people of color given a seat at the table, then the biases of the entire decision-making organization would not skew so significantly in the direction of favoring one particular population. Additionally, VCs can counter implicit bias and stereotypes within their organizations right now through the implementation of diversity, equity, and inclusion training courses as a requirement for every single investor meeting face-to-face with founders. These courses can help train their current executives to unlearn implicit biases and approach investing in a more effective, open-minded fashion that benefits both the founder and the VC.
JL: In your book Edge: Turning Adversity into Advantage, you draw learnings from both your own and other people’s experience as an overlooked and underprivileged person. What are the top three learnings that specifically an entrepreneur can take from Edge? What are concrete best practice for entrepreneurs to take on to do better?
LH: In my book, I describe what I like to call the “EDGE Principles”—the four steps to honing your own unique edge. The acronym stands for Enrich, Delight, Guide, and Effort. I believe they are the top learnings that any entrepreneur should take from Edge.
Enrich calls upon the individual to identify your own basic goods—the greatest value you have to offer. What is your greatest strength that sets you apart from others? At the same time, you must be able to recognize your weaknesses as well. From this holistic understanding of both your strengths and weaknesses, you understand the cards you bring to the table and can operate within that parameter.
Delight is the idea that you must pleasantly surprise key stakeholders in order to make others more intrigued by you and/or your services. Delight can come in many forms, such as micro interactions or company-wide policies. For example, a founder of a small clothing business can delight customers by offering them a free gift with their purchase. This gift both pleasantly surprises the customer and gives them incentive to return to the store in hopes of more delightful interactions.
Guide calls upon the individual to reframe others’ potentially negative perceptions into a positive view. For entrepreneurs, this is an incredibly effective tool that can help them grow and manage a startup. First, you must recognize the reason why others have a negative view of you, your product, and/or your business. Then, you must understand the positive perceptions you want people to have in place of the current negative perceptions. From here, you must formulate an action plan that can reframe people’s perception of your business to highlight the positive and downplay the negative. Guide is not about denying or changing yourself, it is about embracing yourself and your brand completely and purposefully highlighting the positive aspects. Essentially, you must figure out a way to tell people about who you are rather than letting them rely on their own personal assumptions and snap judgments.
Finally, Effort is the classic “hard work” that is touted to everyone as the key to success. I include it last in this acronym because I believe hard work alone won’t carry success. However, hard work is a very necessary component to success and will carry you to the finish line if you can master the first three skills. After enriching, delighting, and guiding others’ perceptions of you, effort is where you have to show up and perform the hard work you promised to from the start.
JL: In some of your work, you talk about the role of “gut feeling” in VC investment decisions (also in contrast to the relative lack of impact of “hard data”). Isn’t the impact of such “soft factors” a convenient excuse for VCs to keep investing in and hiring an un-diverse set of founders and next-gen investors? Could a “professionalization of the industry” (e.g., with data) help get over this kind of self-reproducing behavior?
LH: That is an interesting idea, and my first instinct would be to question what kind of data we would use to “professionalize the industry.” We have to remember that, as in interpersonal relationships and current investing processes, hard data and statistics can also be manipulated by the personal biases of the people programming, coding, and analyzing the data. With that said, even if it were possible to completely randomize, redact, and present founders/startups as anonymized datasets, I am not sure if the industry would be accepting of this kind of change. At the root, entrepreneurship and investing are deeply human, people-facing industries. However, the only way you can remove the impact of the aforementioned soft factors is by removing all interaction between VCs and the founders, as these soft factors are the result of gut feel, internalized biases, and quick perceptions. Would any VC be willing to make a major investment into a company without having substantial face-to-face interactions with the founder and startup team? I would imagine it would be hard for a firm to part with a large sum of money to invest in a company without having any interaction whatsoever with the leadership team.
With all of this said, would I like more attention paid to the hard data founders present in their VC pitches? Yes, as this is often the “meat and potatoes” of the investment pitch. However, the problem won’t be solved by doing a complete 180 and focusing solely on data. Instead, the duty should be placed upon VCs to see the value in DEI and put measures in place to prevent implicit biases on part of their partners from negatively impacting investment decisions. There are a number of actions VCs can take to promote DEI, as I discussed above already. In summation, I believe we can tackle the lack of diversity in entrepreneurship by calling upon VCs to change their business practices that currently have the most negative impact on diversity in investing.
JL: Most recently, you have been working on female founders and their networks, and how that affects their chances of success. What are you learning from that (ongoing) research? What concrete “best practices” would you advise female founders to proactively engage in based on these findings?
LH: As I continue to work with female founders and their networks, the greatest defining feature that always pops out to me is the disparity between how male and female founders are treated in business. It seems that women in business tend to get the short end of the stick, especially when communicating with VCs. With that said, I’ve also found that these same female founders are also incredibly intelligent and talented businesspeople, which makes this disparity all the more concerning.
Regarding best practices, the first thing female founders need to understand is that they have power over how others perceive them. As I discuss in my book Edge: Turning Adversity into Advantage, we are able to guide others’ perceptions of us to view us as how we want to be recognized. Relating back to the investment process, female founders can guide communication with VCs to parry unproductive discussion topics. It is difficult to change the communication style of the investor, simply because investors hold the power. However, female founders can work proactively to identify red flag statements from investors that indicate negative implicit bias, and then reframe the discussion within their retort. Essentially, female founders must master the art of noticing prevention questions, and then phrasing their response in a way that reframes the initial statement as a promotion question and then answering in a positive fashion.
For example, imagine a situation in which an investor asks a female founder how her company can be attractive if it currently is underperforming in revenue generation. If the female founder is able to recognize this communication pattern, then she can answer this prevention question in a promotion-based nature that reframes the conversation and makes the business appear much more positive and attractive than before. She can respond by acknowledging the investor’s concerns, but then asking him to look at the issue from another perspective: “Though we don’t have significant revenue stats as of right now, we are a scrappy startup that is prepared to take on the market as we grow and scale even further. In fact, our total addressable market is [amount of money] and we expect our revenue margins to exponentially increase as we continue to build out our product and push our new and invigorating advertising campaign. In fact, let me tell you more about our new and innovative marketing approach …” From here, the female founder has not only gained control of the conversation, but can now direct it to highlight the positive attributes of her business. And this tactic doesn’t have to focus on an advertising campaign, but can redirect the conversation to anything such as product development, partnerships, and the management team.
Essentially, I advise female founders to gain a comprehensive understanding of communication styles and implicit bias. From here, they can go on to utilize what they’ve learned in the workplace.
JL: Lastly, what is a big area of interest for you that is not understood well enough yet when it comes to increasing DEI in the tech/startup/VC ecosystem? Where are the crucial blind spots you will be working on next?
LH: I think another crucial blind spot that currently plagues the industry is understanding how inequality in education impacts the tech/startup/VC ecosystem. In this country, there is a significant disparity in the quality of education students receive based upon the socioeconomic status of their family. If you are only enrolled in the public education system, then the quality of education you receive is solely based on the family in which you were born as well as the geographic location of your home. This tends to create a racial divide in which students of color, who are more likely to be born into low-income neighborhoods, receive a lower quality education in comparison to their white peers. This goes on to follow low-income students throughout their professional careers, as they lack access to the resources and capital necessary to thrive in school, gain acceptance to a higher education institution, and ultimately land a job in tech or entrepreneurship.
This has always been an issue I’ve been passionate about—in fact, my first job out of college was as a math teacher in a low-income neighborhood in Maryland. If we want to increase DEI in the tech/startup/VC industries, then we need to start empowering underrepresented populations at an early age. As such, I am in the process of founding Project EMplify, a non-profit dedicated to helping underprivileged students develop integral soft skills, bridging the gap between what is taught in school and what is needed in the workplace. Project EMplify’s mission is to combat socioeconomic inequality by giving disadvantaged students access to the resources necessary to become competitive in the professional workplace, including a book donation program, mentorship program, and workshop series. I look forward to working with our first cohort of students and working towards making the future professional working environment more accessible and diverse.