May 31, 2018 at 12:42PM
via Business Insider

Jamie McCarthy/Getty Images for Bill & Melinda Gates Foundation

• Melinda Gates has a plan to fix the endless not-enough-women-in-tech problem.
• She's become a power-player investor but not in the classic style. She's using her money to put pressure on the whole VC industry in two significant ways.
• And she has some harsh criticisms for status-quo VCs, kicking at their love for "white guys in hoodies"and treatment of women, from a lack of partnerships to sexual harassment. 

Melinda Gates has been putting her money where her mouth is when it comes to championing women in tech.

She's become a power-player investor through her somewhat secretive investment firm Pivotal Ventures. But she's not just investing directly into startups, like a classic venture investor. She's also become a limited partner (LP), investing in other VC funds with a strategy that has far bigger implications, she told Fortune's Polina Marinova.

First, she's doing what you would expect, contributing to funds that invest in a lot of women run startups, as well as startups run by minorities or others that fall into the "diverse" category. 

But more importantly, she's investing in funds that are run by female venture capitalists. And that's because women are grossly under-represented in the male-dominated venture finance industry, making up a mere 8% of partnerships among the top 100 funds as of 2017, according to Crunchbase. 

Gates is trying to pressure the real power players in the VC game to clean up their industry, rife with accusations of sexism and sexual harassment.

"I can put money where I think there are levers. And I think the LP community is one of the levers," Gates said. "When you see the LPs starting to move, that's when I think you'll start seeing pretty disruptive change, perhaps sometime in the next three to five years."

The LPs are typically the rich people, foundation fund managers, and pension fund managers that supply the money that VCs use to invest in startups. And by "move," Gates means having the LPs demand that their funds invest in more diverse startups and that their venture capital firms end the kind of sexism and sexual harassment practices that landed the industry in the press during much of 2017.

There's already grass roots movements to help female financiers get seats at the table like an uprising of networks of women VCs who are helping each other, as well as young funds run by women like Aspect Ventures, Female Founders Fund, Cowboy Ventures.

But there's no question that more needs to be done to change the industry because a female VC recently told Business Insider that the #metoo movement has in some ways backfired on the woman in the industry it was supposed to help.

"Guys in finance only hire who they can fire easily. Young men they can fire without a problem," one female VC told us. "The unfortunate thing that happened in the #metoo movement is that men don’t want to ride the elevator with women who could pitch them for fear they would accuse them, let alone mentor that person alone," this woman said.

Female VCs still feel a lot of pressure to keep their mouths shut about any sexism or sexual harassment they witness or experience. "It's a weird dynamic with a lot of these limited partners," this VC told us, because female VCs still fear any rocking of the boat could cause the LPs to pull their money from them. "They don't want to lose their allocations."

Gates is ready to be the Pied Piper towards those funds

Make no mistake, Gates' plan involves pure capitalism. She expects to make big returns on her investment strategy because, Gates says, the white guys are overlooking a lot of great business ideas.

"These big firms often believe in the white guy in a hoodie disrupting a whole industry. So we’re going to disrupt it by making sure we’re indexing for women and minorities because they’ve got great ideas," she says.

REUTERS/Mike TheilerAnd the only way to do that is make sure a lot of women are in the loop.

"Many of them [traditional VCs]  think if they have one female at the table, they’ve done their job," she said. But that's  just an "excuse" to maintain the status quo, because when the firm only has a single woman, that woman is under pressure to assimilate into the boy's club world, not free to change it.

"You put several women on a board and the questions asked of the business become different. So I think the VC firms haven’t quite woken up to that," Gates said. 

"They don’t know what investing in these areas looks like until they get several women who are partners in their firm ... If they’re not seeing the latest innovative, disruptive technology because they don’t understand it or they don’t understand some things that women are spending money on, I think they’re not making great investments," Gates said.

And that's how she'll change the VC industry.  As these companies make money, those female VCs will gain power and other VC firms will start wooing LPs by adding more diversity to their ranks, too.

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