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Can you be a good investor if you don't invest in women?

By Shanet Hinds

The current discussion surrounding the carried interest loop is based on the fundamental income inequality that is present in our society. The fact that Warren Buffet pays a lower tax rate than his lesser earning secretary is something that does not sit well with President Obama or the working class American people.  Still, the mainstream discussion surrounding the controversial tax break excludes other systems of inequality that the venture capitalists uphold. Regardless of whether the loophole is fair or not, it’s commonly accepted that the funds received are a reward for making good investments. The question we must ask ourselves, in order to address other forms of inequality in the financial sector, is whether the VC is still a good investor when their portfolio largely omits women?

According to a recent Stanford study, women are only getting 4.2% of venture capital[1]. Considering that women own 28.7% of firms in this country, this statistic is shockingly low. Research suggests women invest in other women, but it looks like men might invest in other men too - the 96% of male investors investing their funds in 95.8% men?[2]Unfortunately, yes. Continuing to allow all venture capitalist firms to benefit from the carried interest loopholes is also supporting a system that does not support half of our population.

Skeptics might question whether the gender inequality in the funding recipients is due to women not seeking external funding at the same rate as men or due to women not being involved with as much high potential businesses that are good candidates for venture capital funding, but the statistics do not support this conclusion. Another funding source for business owners and entrepreneurs, Indiegogo, reported that women secure 47% of crowd funding capital[3]. The center for Venture research also disproves this belief -- they found that women also secure 25% of angel investments[4]. What’s the difference between venture capital firms and these other sources of funding? The main variation is that there are more than 4% women in those financial sectors. Provided that the funders are diverse, then the entrepreneurs and the business that get funded are too.

So if there is a mutual understanding that the carried interest loophole is a reward to venture capital firms for making “risky” investments, then what kind of behaviors are we rewarding? In many ways we are rewarding them for upholding the status quo and always going with the safest choice. The true risk takers are the VCs that are investing their capital in women-owned and led operations - which are actually turning out to be the safest bets. Firms that invest more than 4% in women should not receive benefits of the loophole. If we end the carried interest loophole for firms that don’t invest as much money in business that are women-owned as they do men-owned it will go back to serving its intended purpose - as a reward for diversity in their portfolios.