Investing with a gender lens

Venture capital firms play an important role in building tech companies and supporting them to accelerate their growth, yet women entrepreneurs are not being funded equally.

It is well known that there is a significant gender gap in high-growth entrepreneurship. Numerous studies show that women face greater personal scrutiny and receive less money from investors during fundraising. The results of an empirical analysis outlined in a recent (2019) OECD study showed that startups with at least one woman in the team of founders are less likely to receive funding by 5–10% (with the highest percentage found in Europe). But female founders aren’t merely getting less of the pie; they’re finding it harder to get a slice at all. When such startups do receive funding, they receive an amount lower by a third compared to start-ups created by male founders. The gender gap is also visible when looking at incidences of successful ‘exit’ (M&As and IPOs). More specifically, start-ups with at least one female founder are half as likely to be acquired as those founded by men only. [1].

It’s true that, to begin with, the entrepreneurship space consisting of business schools, accelerators, incubator programmes and the like, are dominated by men. According to the 2nd European Start-up Monitor[2], only 14.8% of start-up founders are female. A case can also be made for the small number of women choosing to study STEM. Hence, women are fewer than their male counterparts overall.

But the diversity issue is not just a result of fewer women being around — it goes deeper. In spite of the fact that in the US and Europe an increasing number of businesses are owned by women, a disparity between potential investment opportunity and actual deals made between venture capital firms and women-led businesses exists.

The subconscious bias

People are subject to subconscious biases. A number of empirical studies have confirmed that financiers perceive that men have more of the qualities associated with successful entrepreneurship than women (Eddleston et al., 2014) and that women are perceived to be less competent or trustworthy than men (Becker-Blease and Sohl, 2007), and women-led ventures as less legitimate and riskier than those owned by men (Greene et al., 2001). This is heightened by the fact that venture capitalists subconsciously want to invest in people they like and, often times, people trust people who are similar to them. With a male-dominated investment and business angel market (only about 15% of the total angel population are women and just 7% of partners in the world’s top investment companies are women), it comes as no surprise that the vast majority of VC money goes to all-male teams.

A joke venture capitalist Kerri Golden sometimes tells audiences when she gives lectures is that the good thing about working in a male-dominated industry is that during conferences or events, there’s no lineup for the women’s bathroom. “The bad news,” she says, “is all the deals are happening in the men’s room.”

So is increasing the number of female investors the silver bullet here? Venture capital firms with women partners are more than twice as likely to invest in companies with a woman on the executive team (34% of firms with a woman partner compared to 13% of firms without a woman partner) and more than three times as likely to invest in companies with women CEOs (58% of firms with women partners versus 15% of firms without women partners)[3].

Men are good investments until they prove otherwise. Women are unsound investments until they prove they are worth taking a risk on

In the world of early-stage investing, what venture capitalists arguably care most about is the return on their investment. But they fall short of creating a level playing field. Studies have also found that VCs talk about men and women entrepreneurs differently, and that they ask them different types of questions, which can ultimately affect the funding they receive. Female entrepreneurs are asked if they are married or if they have children and how they can run their start-up if they have family responsibilities.

However, investing in women actually has a lower risk than investing in men. According to Forbes, female-led teams, or at least teams that include women, outperform male-only teams by 63% and women-led startups have a 35% higher return on investment (ROI.) Closing the gender gap and providing greater funding opportunities for women entrepreneurs, not only makes good financial sense for venture capital firms, it also will drive new economic growth and spur innovation.

Closing the gender gap

VCs invest with a gender lens. Human biases lead us to trust what mirrors us and what we see as familiar. We can overcome this by raising awareness, having more women in the VC world, and starting with early education. But to have a real chance for equality, VCs will have to acknowledge their biases, understand how they are being expressed and actively work to overcome them. Investors as a whole need to intentionally fund companies founded by women, and then promote greater inclusivity in their existing portfolio companies.

[1] http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DSTI/CIIE(2019)3/FINAL&docLanguage=En

[2] https://publications.europa.eu/en/publication-detail/-/publication/84bd6dea-2351-11e8-ac73-01aa75ed71a1/language-en

[3] https://www.babson.edu/about/news-events/babson-announcements/venture-capital-funding-women-entrepreneurs-study/