Why Melinda Gates Has Been Funding Female VCs Through Her Secretive Investment Firm

She has been the co-chair of The Bill & Melinda Gates Foundation for 18 years. Now, she has quietly entered the venture capital world by investing in female-led or minority-focused venture firms like Aspect Ventures, Female Founders Fund, and Defy Partners.

“I am a big believer in disruptive innovation, but it’s been incredibly disappointing to watch how few women-led businesses are getting funded,” Gates told Fortune. “Ultimately, if we want more innovation and better products, we’ve got to put more money behind women and minorities. That wasn’t happening, so I decided to step in and see what I could do to help a little bit.”

Through Pivotal Ventures, her Seattle-based investment and incubation company, Gates is betting that non-traditional funds can bring outsize returns. In a conversation with Fortune, Gates discusses the role LPs play in the venture ecosystem, the long-lasting effects of the #MeToo movement, and what industry she’d like to see backed by more venture dollars.

FORTUNE: As a limited partner, what are some specific questions you’re asking fund managers before deciding to invest?

GATES: To be clear, I am both investing in emerging fund managers, like Female Founders Fund, and I’m investing in some long-standing funds as well.

I am specifically looking at funds who over-index on women-led and minority-led businesses. Has this leader done this before? How do they think about business? Where have they done a great job in the past? Or if they are emerging, why am I willing to take a little bit more risk on that situation? What is it about those fund managers that makes me think I’ll still get a great return on my money — because I care a lot about that — but also wow, they’re going to find some new ideas out there that others aren’t already going after.

I’m asking a lot of business questions about how they will go about their funding, how they will over-index on women’s businesses, and how they will hold themselves accountable for a great return.

How do you define diversity?

GATES: I define diversity as when you have a mix of people seated at the table who look representative of our whole society.

What is the target return multiple you expect from these investments?

GATES: I’m not putting a specific number on it publicly. But quite honestly, I want as good a return as I’m getting on the rest of my money. Bill and I are willing to take more risk with some of our money, but I’m looking for an equal return.

The female-led & female-focused firms are relatively small when compared to the more traditional firms on Sand Hill Road. Do you think they are truly in a position to challenge the established players?

GATES: Do I think they can challenge the big VC firms? You bet. Because the big VC funds are leaving money on the table. 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.They’ll start to wake up over time, and there are some opportunities there.

And yes, some of these funds are still small, but as they get a proven track record, believe me — they’re going to get a lot more money from investors.

Some of 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.

Based on your conversations with top-tier VCs, what are the biggest misconceptions you think they have about these types of funds?

GATES: Many of them think if they have one female at the table, they’ve done their job. Another big one is when they say that they have trouble finding women. Those are just excuses. They don’t know what investing in these areas looks like until they get several women who are partners in their firm.

It’s the same thing we see on the board level. You put one woman on a board — the business won’t change much. She has to assimilate. She can’t carry all of that by herself. 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.

So what do you think it’ll take for that to change? More big exits?

GATES: Yes. I think the big exits are helping. I think the #MeToo movement is helping. I think when they start to see some of these small funds getting bigger returns than they are, they’ll start to realize they’ve missed some opportunities. And quite frankly, I think when you start seeing some of these startups get more leverage and turn down traditional VCs’ money, the investors will start to wake up.

Less than 2% of all venture capital went to female founders & fewer than 8% of investors are women. How much of a role do you think LPs have in driving change, and how soon should we expect to see the stats improve?

GATES: Look at how much the #MeToo movement has disrupted what’s expected in society. The conversations have changed drastically since last fall. So I can’t totally predict when the stats will change, but I can put money where I think there are levers. And I think the LP community is one of the levers.

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.

You’ve previously said the #MeToo movement could backfire if men stop taking meetings with women because they’re afraid they’ll get accused for inappropriate behavior. Can you elaborate on some of the ways you think real change can occur?

GATES: I think real change can occur when the VC community starts to demand that the people it invests in have diversity, the right values, and the right behavior. When they start demanding that, then you’re going to see some real change.

It’s like the pressure that #MeToo has put on boards. Now, boards don’t have a choice. When men or women raise a sexual harassment claim, the board can’t just tuck it away anymore. The VC community doesn’t have as much light on it internally as a corporate board does, but when it starts to wake up to the fact that they’ll have to expect the same things from the companies they invest in, then you’ll see a big shift.

What’s one industry that you’d like to see backed by more venture capital dollars?

GATES: I’d love to see more innovations coming forward that have positive outcomes for young teenagers. I’m sure you’ve seen a lot of the stats about the mental health crisis we’re facing as a nation. We need to figure out how to use all of this innovation and technology to have positive messages and outcomes for kids. This generation has been online faster than any other generation before them and yet they are dealing the most severely with the negative consequences of it.

In addition to Pivotal Ventures, you’re also the co-chair of the Bill and Melinda Gates Foundation. How does your investing approach differ from Bill’s, and how do you come to consensus on investment decisions when you disagree?

GATES: At the Foundation, every big strategy decision gets made together. We purposefully decided a decade ago that we didn’t want him to run a piece of it and me to run another piece. So all the big strategy decisions are made together.

But then, when it comes to a specific area, like health, Bill is more an expert on polio so he takes the lead decisions there. In family planning, I take the lead decisions there. And we keep one another informed.

You recently said that when you used to attend meetings with Bill, people would avoid looking you in the eye or including you in the conversation because they assumed Bill was the decision-maker. What is the best thing for a female founder or VC to do if she finds herself in a similar situation?

GATES: First of all, she needs to surround herself with people who have her back, who know she is the leader — man or woman. As soon as the person turns to the male at the table, he would reference back to the female founder and say, “Jane actually knows the answer to that. Jane, you and I were just talking about that. Tell them what you think.”

You do that once or twice and the people at the table will stop asking him the questions and realize that she’s the one that knows this business deeply, and she’s the one who has credibility.