Fixing the Female Venture Funding Gap Will Boost Innovation and Returns-The HSB Blog 5/24/21






Our Take:


An increase of women’s representation on both ends of venture capital-investments and startup entrepreneurship- will result in substantive benefits. By providing opportunities for women-founded companies, venture capitalists create room for billions of dollars in GDP growth and work toward closing the gender gap. Differently, if left undealt with, the lack of women in tech roles could have detrimental effects on the economy, rewind the progress made in gender equity, as well as stunt the growth of industries where women compose large portions of users and intuitively help drive innovation such as healthcare. Although the recent COVID-19 pandemic revealed and exacerbated cracks in venture capital, there are a few areas where improvements can be made to solve this issue such as hiring more women into leadership roles in venture capital firms and supporting women founded startups.


Key Takeaways:


  • Despite almost a 15% increase in venture funding in 2020, women-founded companies raised just 2.2% of the total, down from only 2.6% in 2019

  • For every $1 in funding, women-founded companies returned more than 2.5x in revenues per dollar invested than companies founded by men

  • Women venture capitalists are twice as likely to invest in women founded companies

  • Gender-neutral venture evaluation is a false premise. Investor standards are applied in gendered ways and female entrepreneurs must be prepared to navigate within this flawed system


The Problem:


As noted in an article entitled Venture Capital Funding Boomed in 2020. But Women’s Share of the Pie Shrank to 2.2%, while venture capitalists raised a total of $150 billion in 2020, a 13% increase from 2019, startups founded by women were left behind. For example, while venture funding increased 13% in 2020, women-founded companies raised just 2.2% of the total, a slight decrease from the 2.6% of total venture funds raised in 2019. By contrast, the percentage of venture capital funds allocated to male-founded companies increased to 85.8% from 83.5% in 2020. While there isn’t yet a clear understanding for this year’s drop in venture capital received by women-founded companies, many have speculated it is related to the continued effects of the COVID-19 pandemic and women’s roles as primary caregivers for children and family.


The Backdrop:


From child care to caring for sick family members, women’s lives were disproportionately affected by the pandemic in 2020. A Harvard Business Review analysis showed that women’s jobs were 1.8 times more likely to be affected than men’s jobs. Furthermore, even though women make up only 39% of the global employment, they were affected by over 50% of the job losses in 2020. The loss of women in employment has major repercussions not only on gender equity but on the economy as a whole. According to a Boston Consulting Group analysis, for every $1 in funding, women founded companies returned more than 2.5x in revenues per dollar invested than companies founded by men. Although according to the U.S. Census Bureau women hold more than three quarters of healthcare jobs, an Oliver Wyman study showed women hold only 13% of CEO roles and 33% of leadership positions. Furthermore, as one looks at the leadership of venture capital firms, there is a minimal women’s presence. Many women serve as associates and analysts but only 12% of decision makers at venture capital firms are women, while many don’t have any female partners at all. An analysis conducted by All Raise found that only 27 women joined venture capital firms in 2020 compared to 54 in 2019. Of these 27 women, only one woman was Black while none identified as Latinx. All Raise founder Pam Kostka named another impact of the COVID-19 pandemic that affected women in venture capital; due to social distancing, fear and increasing illness, less networking events occurred that allowed women to network and promote their ideas. Kostka called this inability to connect with new startups, “known founder effect”, where investors essentially stuck to what and who they knew prior to 2020 which, in a historically male dominated field, means men. This was best illustrated by the increase of funding given to later-stage deals in comparison to such in 2019. Harvard Business Review writers, Ashley Bittner and Brigette Lau, likened the current state of the venture capital community to a “boys club”, making it even more difficult for women founders to participate. An article entitled, Why Women-Owned Startups Are a Better Bet, looked at why the disparity exists in venture capital and came to three conclusions. First, women generally received more pushback and challenges during their presentations when compared with men and were less likely to directly address criticism. This was particularly true around the amount of technical knowledge they possess regarding their own ideas. Secondly, men were more likely to over-sell themselves and their ideas during pitches while women remained generally conservative- even asking for less than men. Lastly, male venture capitalists were generally less familiar with the services and products that women were founding. As one founder noted in the article “this lack of understanding shows up also in terms of social class when entrepreneurs pitch products for people at socioeconomic levels significantly lower than that of the typical angel or VC investor.”


Implications:


The lack of women in venture capital has a number of effects that if left unaddressed may lead to an undoing of progress in social equity, contribute to a continued lack of diversity in the workforce and potentially leave a number of market opportunities poorly addressed or even unaddressed entirely.


This issue is one that is representative of matters of gender inequity, difficulties in women’s employment, and minimal growth of women in leadership roles across the industry. For example, since studies show that women venture capitalists are twice as likely to invest in women-founded companies, women who have the means to do so are empowered to build a virtuous cycle by starting their own firms and even their own venture capital firms. Women owned firms also help increase diversity in the workforce as they tend to fill their staff with 2.5 times more women and these startups often have social (as well as financial) missions that create lasting, long term impacts for others. When women create, they create companies that focus on making social contributions and build healthy relationships with employees. Also, as noted by Frost, “with 50% of the global population as target customers and a market potential of $50 billion by 2025” female entrepreneurs are ideally positioned to capture a good portion of this market. Failing to empower them to do so would clearly lead to missed opportunities. That being the case, what can be done to improve the amount of capital directed towards female founders? The 2018 Canada-United States Council for Advancement of Women Entrepreneurs and Business Leaders Report on increasing women’s access to capital recommended the following things, among others, 1) given that female entrepreneurs ask on average for $89,000 in debt financing while males ask for $124,500 lending institutions must work with female entrepreneurs by shifting their conversation from a transactional one to a strategic one; 2) examining the business plan to assess which amount of capital can be reasonably required given the business potential; 3) lenders could be encouraged to invest concomitantly with government-funded loans, as well as cooperate with their female entrepreneur customers to seek out lower cost financing sources that, in turn, can be leveraged further with private debt; 4) Governments…should continue to pursue programs that ensure female-owned businesses are included in Government tender processes on a preferred basis. In addition, a recent article in the MIT Sloan Management Review entitled, How Women Can Improve Their Venture Pitch Outcomes, noted that in dialogues where women stress risk, the likelihood of obtaining a positive funding proposal was significantly reduced. Avoiding words such as ‘risk’ and ‘defend’ increased the likelihood of women getting what they were asking for. In addition, based on the difference in perception by investors the authors suggested that female entrepreneurs specifically focus on promoting goals and upsides rather than highlighting how they will prevent downsides. Moreover the article noted that female founders are encouraged to do their homework on the gender composition of investors well in advance of pitching their ideas and they should go in being prepared to shift their pitch so as to ensure a focus promoting returns. As the authors note in concluding the article, “these findings indicate that gender-neutral venture evaluation is a false premise ...our results show that investor standards are applied in gendered ways.” As such, female entrepreneurs must be prepared to “navigate within this flawed system” to increase chances of success.


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