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How Investors Like Melinda Gates Are Helping These VCs Tackle Tech’s Bro Problem

Aspect Ventures cofounders Theresia Gouw (left) and Jennifer Fonstad run the rare gender-balanced VC firm. Photograph by Winni Wintermeyer

It could be just another monthly partner meeting at just another “Fill in the Blank” Capital, typical Silicon Valley–based venture firm. The fund’s top players sit around a white conference table, armed with Apple laptops and pastel-colored cans of La Croix. A couple of startup entrepreneurs stop by to present to the partners, enthusing over upward-trending charts and touting the merits of recent hires. Outside the expansive windows lies the not-quite-bustling heart of downtown Palo Alto—a town that, along with nearby Menlo Park and the city of San Francisco, is a mecca for Arc’teryx vest–wearing VCs.

But anyone who knows this hub of venture capital would immediately spot something unusual about this particular gathering: Four of the eight investors seated around the table are female. And one of the two presenting portfolio company heads is also a woman. In Silicon Valley, where unicorns are a dime a dozen, this kind of gender ratio is the real rare and magical discovery.

“If you have more diversity you have better financial performance,” says Theresia Gouw, one-half of the founding team of Aspect Ventures, the norm-breaking VC firm at hand (the other founder is Jennifer Fonstad). “Our company is nearly 50/50 in an industry in which just 7% of investors are female. And our portfolio is a reflection of our pipeline.”

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Aspect Ventures cofounders Theresia Gouw (left) and Jennifer Fonstad run the rare gender-balanced VC firm. - Photograph by Winni Wintermeyer
Aspect Ventures cofounders Theresia Gouw (left) and Jennifer Fonstad run the rare gender-balanced VC firm. Photograph by Winni Wintermeyer

Gouw and Fonstad, both longtime VCs who worked at firms like Accel and DFJ, didn’t set out to create a “female-focused” fund when they launched Aspect in 2014. But they believed that diversity, both internally and throughout their portfolio companies, would lead to better outcomes—and they had the right Rolodex to test out their thesis. “We have different networks than the traditional firms on Sand Hill Road,” says Fonstad, referring to the nearby street where the bulk of the most established VCs are headquartered.

The results: Over the course of their careers, Gouw and Fonstad’s investments have resulted in a collective seven public offerings, 26 acquisitions, and more than 500 financing rounds in follow-on capital. Aspect, which is now announcing a second, larger fund with some big-name limited partners (more on that later), began with $150 million in financing and has already made 29 Series A investments. One of its portfolio companies, security startup ForeScout, went public last fall at a valuation of about $800 million. Other standout investments under Aspect’s first fund include Cato Networks and Exabeam, both promising cybersecurity startups; health-tech player Vida Health; and online career source The Muse.

VCs by the numbers.
VCs by the numbers.

Overall, women founders receive less than 3% of total VC dollars (women of color, meanwhile, get a meager 0.2%), but Aspect’s portfolio looks strikingly different from the norm: About 40% of the firm’s companies were founded by women, and 30% were started by minorities. Once, those numbers might have been a mere curiosity—today they are becoming a competitive advantage. While investing for diversity is something certain industry players have been pushing for a long time, the message is finally beginning to be received by the deep-pocketed individuals and institutions that fund the Silicon Valley ecosystem. Why? Ignoring it can be expensive.

Last summer, after six female founders accused venture capitalist Justin Caldbeck of making unwanted sexual advances, his firm, Binary Capital, spiraled downward fast. Caldbeck quickly resigned from the all-male firm. A new fund, then in the process of being raised by Binary, was abruptly halted.

It’s not just venture capital firms that can be impacted. Perhaps the most high-profile example of how such misconduct can destroy value is Uber, the ride-sharing company rocked by allegations of harassment and sexism early last year. A number of other embarrassing debacles followed—including reports that Uber had used a software tool to try to deceive authorities by “hiding” rides—and ultimately resulted in a more than 20% decrease to the once high-flying company’s valuation, from around $70 billion to an estimated $54 billion.”

There’s no foolproof method to guarantee that a VC shop or startup will be immune to these kinds of problems, but betting on diverse leaders can give investors some peace of mind. Numerous studies have suggested that gender-balanced teams drive better business results—and, perhaps unsurprisingly, research shows that male-dominated organizations have higher levels of sexual harassment than those with more equitable gender dynamics.

None of this is lost on anyone who has a stake in Silicon Valley’s success, let alone the limited partners who fund the entire ecosystem, a.k.a. the investors in the investors.

Philanthropist Melinda Gates, who invested in Aspect’s second fund, says it’s time for LPs to step up and demand change. - Luisa Dorr
Philanthropist Melinda Gates, who invested in Aspect’s second fund, says it’s time for LPs to step up and demand change. Luisa Dorr

“In many ways, the venture and startup ecosystem is still a boys’ club—one that all too often excludes, disadvantages, and mistreats talented women who want to contribute to it,” says Melinda Gates, cochair of the Bill & Melinda Gates Foundation and an investor. “The data tells us that’s harmful to society and bad for business.”

Inside Aspect's portfolio.
Inside Aspect's portfolio.

Gates is one of a handful of limited partners who have put a collective $181 million into Aspect’s just-announced fund, the firm’s second. Another LP is Cisco Systems csco , the Bay Area–based networking giant, whose financing arm invests directly in startups and in other funds. “This fiscal year was the first time that we have specifically put diversity into our [investment] planning,” says Janey Hoe, a vice president with Cisco Investments. “Just like I have a plan for security and collaboration and data center, we have now put forward a plan for [investing in] diversity.”

While there have long been small players in the venture capital community who defied the stats and were able to attract some LP money, they tended to be relegated to the fringes of the industry, with less access to sizable funds and the buzziest companies. Now, as Silicon Valley is finally coming to terms with the fact that bad behavior can do more than cause a temporary headache, concerned LPs are taking notice. That opens the door for funds like Aspect, which have made diversity part of their investment strategy from the get-go. The question now: Is this newish breed of VCs truly in a position to challenge the established firms that have long ruled Sand Hill Road? Or is this trend just another one of tech’s passing fads?

Even with the brawn of Gates and Cisco behind it, Aspect’s $181 million fund isn’t all that menacing to the status quo when compared with the Valley’s biggest names, many of whom raise single funds worth more than $1 billion. But if the powers behind the money start to reprioritize, we could see the balance begin to tip in the underdog’s direction. If there’s one thing VCs know all too well, it’s that little guys sometimes put the big guys out of business.

Until recently, LPs have largely stayed in the background, invisible to most who operate day to day in the tech world. But despite their often secretive nature, these wealthy individuals, offices of private family funds, or institutions hold immense power. And venture capitalists say they are starting to ask questions.

“They likely believe [claims of sexual harassment] are material information,” says Mike Maples Jr., cofounder of Floodgate, a Palo Alto–based VC firm with an investing team that’s 40% female. “In today’s world, if partners engage in unacceptable behavior the entire firm can blow up.”

Limited partners have done significant back-channel reference checking for years. But according to insiders, not only are LPs doing even more intensive vetting these days, but also the people they are talking to are now much more likely to feel a responsibility to out bad behavior. “Now there is more of a culture of people thinking, ‘Hey, you should talk about these things even if they are rumors,’ ” says Floodgate’s other cofounder, Ann Miura-Ko.

Ann Miura-Ko, cofounder of Floodgate. - Christopher Michel
Ann Miura-Ko, cofounder of Floodgate. Christopher Michel

“This year and in 2017 it has definitely been a lot more top of mind for [LPs],” says Lan Xuezhao, the founding partner at Basis Set Ventures, a new, artificial intelligence–focused VC firm. The former Dropbox executive raised $140 million for her first fund and says that while bigger funds have a clear advantage when it comes to leading the largest deals, her dual focus—A.I. and diversity—gives her a leg up.

Even some of those larger funds appear to be feeling the pressure to diversify. Benchmark added its first-ever female partner last May, while Sequoia Capital hired its first female investing partner in the U.S. in fall of 2016. The moves brought the VC heavyweights to 17% and 11% women investors, respectively.

NEA, one of the largest firms with $20 billion in assets under management, has yet to hire or promote a female general partner, though it does have six female investing partners on staff. But Dayna Grayson, one of those investing partners, says her firm does have some advantages—besides just sheer dollars—over smaller players.

Lan Xuezhao’s Basis Set Ventures focuses on A.I. startups. - Jerry Yoon
Lan Xuezhao’s Basis Set Ventures focuses on A.I. startups. Jerry Yoon

“When you get to a certain scale you can have an HR body, a chief legal officer, policies and training, and a number of other levers to ensure that everybody is informed” on what is and is not acceptable in the workplace, says Grayson. So while a firm like NEA may not have a woman at the table when the big decisions are being made, there is an argument that it can afford the infrastructure needed to stem bad behavior, both at its portfolio companies and within its own ranks.

Kate Barrett, NEA’s marketing partner, adds that comparing the gender ratios of large firms like hers with smaller players can be misleading: It’s one thing for a four-person firm to be 50% female, but quite another for a 36-person operation like NEA.

NEA maintains that questions about diversity have not impacted its fundraising. But that may well change. The firm closed its latest fund, a massive $3.3 billion, last May, just as the Valley’s harassment scandals were starting to mount—but before they gained real attention from the bulk of the tech world. “We hear from our LPs [more regularly] during fundraising times,” says Barrett.

Last September, about 200 representatives from some of the largest family funds in the country gathered at the Ritz-Carlton in San Francisco. The group comprised, as portfolio manager Kristen Koh Goldstein put it, the kind of people who are “wealthy enough they don’t need to be in a listicle.” But while the attendees might opt to keep their fortunes out of the press, they are putting those funds to work; everyone at the gathering was a limited partner, tasked with allocating large amounts of private, family-owned capital into various investments, including many of Silicon Valley’s venture capital firms.

Goldstein, who comanages the investments of her family office, AthenaPartners, had been asked by the gathering’s organizers to put together content on a topic of increasing concern to the LPs in attendance: the mounting discrimination and harassment problems in the tech world. “They realized this was an issue, but they didn’t know the extent of it or what you could do about it as a limited partner,” says Goldstein.

The Bay Area–based investor brought in founder Niniane Wang, who sold her startup last year and is now an engineering leader at Pokémon Go creator Niantic. Earlier in 2017 she was among the women who publicly accused Caldbeck, the former partner at Binary Capital, of sexual harassment.

“I gave them [the LPs] some actionable advice, like, don’t sign a nondisclosure agreement as part of your investment, and ask questions about how they [the VCs] treat diversity or whether or not they have a female partner,” says Wang.

Mike Maples Jr, Cofounder of Floodgate. - Christopher Michel
Mike Maples Jr, Cofounder of Floodgate. Christopher Michel

According to Goldstein, Wang received a standing ovation, and both women were mobbed with questions and comments from the audience. The session was the highest rated at the event, and the organization has already asked Goldstein to come up with similar programming for future summits.

“There is an enormous risk here that some of these families weren’t even aware of,” says Goldstein. “Our goal was to reach these wealthy people, who sometimes have no idea they are funding misogynists, and give them practical things they can do to protect themselves.”

Following the event, Goldstein has fielded several calls from high-profile family offices, asking for her take on whether there might be a misconduct or other risk with some of their potential investments; she calls these “what’s the real deal here” calls.

Some LPs—ones who obviously haven’t signed NDAs with the venture capital firms they’ve funded—aren’t just using back channels to ask questions. Instead they are throwing off their usual role as silent partner and for the first time taking their concerns public.

Last summer, amidst the wave of harassment scandals, 500 Startups cofounder Dave McClure was accused of sexual misconduct. The eccentric general partner of the incubator and venture capital firm apologized and resigned from his role. In response to the revelations, some of his most high-profile LPs, including Mitch Kapor and Freada Kapor Klein, publicly expressed their outrage at his behavior—and the larger tech community’s role in enabling it.

“This is a culture that has been allowed to fester and to rot by enablers who refused to intervene when they witnessed inexcusable behavior or went to great lengths to avoid seeing it,” they said in a statement.

Many limited partners have signed NDAs and will probably continue to do so. And many more won’t speak out even if given the opportunity. But as awareness and concern reaches critical mass, it’s likely that a growing number of LPs will make their voices heard—if not with words, then with dollars. Down the road, that could have tangible impact on venture capital firms that are not evolving to meet current demands.

“I want to back the people best positioned to successfully invest in tomorrow’s groundbreaking ideas,” says Melinda Gates. “And they’re not always the people who successfully invested in yesterday’s.”

This is an updated version of an article that appears in the Feb. 1, 2018 issue of Fortune with the headline “Can These VCs Fix Tech’s Bro Problem?”

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