Can Tech Make the World Better?

The world of startups—on both the funding and founding sides—has long had the reputation of being a boys’ club. Its mythology, whether set in the HP garage or among the VC gods of Sand Hill Road, is almost exclusively male. In this case, the myth reflects reality. A survey of diversity reports published by 11 of the world’s largest tech companies found that just 30% of employees were women. Focus only on women in technical positions and the numbers get even worse. The future isn’t looking too bright, either. A report on school-age girls and technology, called Cracking the Gender Code, predicts that unless something drastic is done, women in the industry will decrease over the next decade.

Another frequent criticism of tech is its focus on seemingly trivial products and services, many of them designed to appeal to men with disposable incomes. “Why are so many people devoting so much energy to solving problems that don’t really exist?” asked Allison Arieff in the New York Times. “How can we get more people to look beyond their own lived experience?”

Katie Rae ’97, managing director of the investment firm Project 11, and cofounder and chairman of the Startup Institute, argues that potentially world-changing ideas are emerging in tech, but that investors and entrepreneurs need to avoid the temptation to spend their time making tiny tweaks to the latest app craze. They also need to make systematic efforts to diversify—not least in order to understand the buying habits of women and other groups underrepresented in tech. Rae spoke with Yale Insights about the state of tech entrepreneurism and what she’s doing to try to foster diversity in startups.

Q: Let’s talk about the investing ecosystem that has built up around the tech industry over the years. Is it unique among industries? Is it effective in identifying and developing promising companies?

It is different than a lot of other kinds of investing. Especially in the last 30 years with software-based ideas, you can have really explosive changes very quickly with very little capital. That’s just so different than anything else. Building an airplane is highly, highly technical. It takes lots of capital, lots of time needed, and lots of very qualified engineers with a high degree of precision. Now, you have this whole other ecosystem with what we call hackers, people who can just put stuff together, really working on very interesting big ideas with small capital. So, that is really different.

Q: Is there anything negative about startup costs being so much lower in software?

There is some negativity for the entrepreneur that costs are so low. The barriers to entry for the next person starting the same exact company are pretty close to zero at this point for many kinds of ideas. So you’ll see this race to the bottom in certain areas. If you don’t truly have a technical insight or some new way of creating barriers to entry for the next startup or your idea just isn’t big enough for anybody else to care, it’s going to be difficult for you. If somebody starts to gain traction, you’ll get a whole bunch of copycats. If they’re doing well enough, people will start to fund them. Therefore, your competition is even steeper.

From the investor side, when we look at an idea, it’s not just the idea we care about. It’s almost always, is it the right team to execute on it? The competition is really human competition for gathering the best team around an idea.

Q: How do you judge what a good team is?

I’m a technology investor, so the first thing I look at is, do they have a technology team that can build a world class product? I’ve been involved in tech for a long time and have two partners who are CTOs, so we look really closely at what are they coding and why or what are they building and why.

The next piece we look at really carefully is, what’s their way to break out? It’s really important that you have actually thought through this and understand the experiments that have been tried before you. Again, no matter what, it always comes back to team. It comes back to, do you have that management team that can create enthusiasm so that you get enough people to follow you into this adventure?

Q: Is it possible to get a sense of whether a teams functions effectively before investing?

When we evaluate a team, we actually evaluate it while working with them on a project. We’ll take whatever we think is their hardest problem. We’ll sit around a table or a whiteboard and try to figure it out together. That is the only way to mimic a true working relationship with startup founders.

There’s no perfect team. There’s no perfect way to interact. But we want to see what their way is and if we think that it’s additive. If we don’t, we’ll be pretty honest about pointing out, “It seems like you guys have lots of great ideas but you have a hard time coming to conclusions.” Or “You have only one strong person with ideas and, therefore, everybody else must be a follower.”

Those are two of the ways a lot of startups get killed. It’s not that you can’t have a very strong leader but if that strong lead won’t work with anybody and won’t have a sparring partner, it’s tough for them to create a great company because they get a lot of people who just follow instead of make their ideas better. We look at that really carefully.

Q: There is a criticism that technology companies are focused on building apps and getting faster takeout food rather than changing the world. Do you think that tech is working on the right problems?

There are many extraordinary entrepreneurs working on the right problems. Do I wish that people were always working on bigger, harder, society-changing problems faster? Sure, I do. Those take a lot of capital in general and mostly will need government funding or university funding to get off the ground. In the next 10 years you will see more emphasis on that. Are there a lot of dumb ideas people are chasing? Yes, there are. Often they’re just a tiny improvement on the last thing, some app or some very trivial project.

I don’t know how to fix that problem, especially when it’s so cheap. It’s just that if you’re investing or if you’re looking for a venture to work on or at, you should be careful of those. I always just think of it as, do I care about the problem? That’s how I think as an investor. Do I actually care that that problem gets solved in the world?

Q: The perception is that the industry is just completely male dominated. How accurate is this?

Tech—and tech investing—is male dominated. If you look on the investor side, probably at most 3% are women. If you look on the entrepreneurial side, it’s probably less than 5% of CEOs. If you include the whole management team, it might float up above 10% that are females.

The good news on the founding side is that there are a lot of women who are starting ventures. There’s certainly somewhat of a spotlight being pointed at the fact that it’s harder for women to get funded. It’s harder for them to get funded a second time. I don’t know anybody who accepts that as the way it should be in the world. A bunch of us, men and women alike, look at that problem and are trying to fix it in all of our small ways. So I’m hopeful it will get fixed.

The more entrenched side is the investor side. There’s a bunch of research that says if you don’t have female investors, it is much harder for female entrepreneurs to get funded and stay funded. If you look at it as an underlying problem to fix that would be certainly one way how: to attract more women to venture capital and keep them there.

Q: If a vast majority of investors and entrepreneurs fit one profile, do they have blind spots when they are considering products and ventures?

Certainly you have a lot of anecdotal evidence that they do. I don't have hard data on this. A lot of female entrepreneurs say to me, “I go and pitch my ideas to a room full of men. They go home and ask their wives if this is something they would buy.” If you have to take two steps to get an answer then you might get bad data. So, just theoretically, there are going to be ideas that do have a gender lens to them that a guy won't understand in the same way that a woman would.

There is a dearth of capital for women and for women-focused ventures. But I see lots of signs that over the years that will get fixed because people know it's crazy. Women control 80% of buying decisions.

Q: You often talk about trying get minorities involved as well.

The numbers I quoted about women, if you look at them for Hispanics or African Americans, they’re not even at 1%. Not even a percentage point of investors are underrepresented minorities. Is the problem systematic? Yes. Does it need to be fixed at a systematic level? Yes. Is it that people in current partnerships are bad people? No. I don’t believe that. But venture partnerships are very tight relationships, very long-lasting in general, and hard to change. So, what we should be looking at is new partnerships and ways to systematically help people who don’t have investment capital find it.

Q: Is this something that you’re working on?

I work on it all the time. I try to help people raise their funds. I try to help a lot of different kinds of entrepreneurs get funded. We look at it closely for ourselves. What biases do we have? Especially because we do a lot of deep tech—there are just fewer women doing those ideas. That’s a difficult reality for me. If you look at computer science departments, you’re graduating 20% women there, maybe 25%. At the very best of the best, it’s 50-50. But there are very few programs like that. Carnegie Mellon stands out as one. MIT certainly is pretty close to 50-50 at this point. But there aren’t many programs in deep tech engineering that truly have gender balance.

Q: Before your latest roles, you worked at Microsoft. How is it different trying to be entrepreneurial within a big company like that versus on your own?

It’s really different. The easiest way to explain it is you either have a budget or you don’t. If you have a budget, that’s intrapreneurship. If you don’t, that’s entrepreneurship. It’s really a dividing line.

There’s nothing wrong with intrapreneurship. It’s hugely important. What keeps large companies large and successful is that they are willing to create something better than they already have so that they stay ahead of the market. But it’s definitely a different mindset than starting from scratch and having to raise your money or bootstrap for it than to be a large company and decide we’re going to go after this market. Here’s the budget to go do it. It takes different kinds of people as well. In a large company, you’ve got to be able to navigate the current administration, whoever is running the company, whereas, it’s very different to navigate just a new market. It builds different skills but both are important.

Q: Why do we often see big companies miss markets or trends that should’ve been perfect for them?

There just aren’t that many ideas that are big enough to matter. It’s also very hard to know in the beginning. On paper the idea may look very big but when you get into it, it may not materialize.

That’s the beautiful part of entrepreneurship. You can discover as you go. But when you’re in a large company and have to optimize the dollars you’re investing for a shorter time horizon, you often cut things that don’t look promising in the beginning. Then some startup creates a mega billion dollar company.

Google is a perfect example of that. It’s not that Microsoft didn’t know search was important. But they didn’t invest enough in the beginning. Therefore, Google got away from them. You see that over and over again. Lots of large companies take the strategy that it’s better to miss it in the beginning and then just buy it later because you’ve taken a lot of risk out of it.