Pre-Covid data showed some progress was being made. But that looks to have been reversed in the aftermath of the pandemic. In the US between 2016 and 2019, for example, venture funding going to female-only founded companies rose from 2.5% to 3.3%. That figure has since dropped back down to 2.2% in 2021, according to Crunchbase.
The lack of venture capital funding being funneled into female-founded startups is at odds with research that shows startups founded and cofounded by women generate more cumulative revenue, and provide stronger financial returns per dollar invested than male-founded startups.
So, what’s going on?
“I think a lot of portfolio managers in funds have doubled down on their existing portfolio companies to make sure they have enough capital to survive and grow,” explains Dana Kanze, assistant professor of organizational behavior at London Business School, “so that has increased the amount of capital that has gone to what is primarily male dominated existing portfolios.”
Early stage venture capital: The challenges facing female startup founders
The venture capital funding problem affects women in three ways.
The first relates to the line of questioning used by investors when screening potential startups to finance.
Dana from LBS co-authored a research paper with Mark Conley, assistant professor of entrepreneurship at Stockholm School of Economics; Laura Huang, associate professor of business administration at Harvard Business School; and E. Tory Higgins, Stanley Schachter Professor of Psychology and professor of business at Columbia University, that shows early stage investors are more likely to ask female startup founders prevention questions and male founders promotion questions. That bias was present whether it was a female or male investor asking the questions.
Male entrepreneurs were asked questions focusing on hopes, achievements, advancement, and ideals, whereas female entrepreneurs were questioned on safety, responsibility, security, and vigilance, leaving them on the defensive. Founders who answered primarily prevention questions raised about seven times less than those who fielded mostly promotion questions.
Women also face barriers to entry in what are typically seen as male-dominated industries. The technology and transportation industries, for example.
Further research by Mark (pictured) and Dana, alongside The University of Queensland’s Tyler Okimoto, Columbia Business School’s Damon Phillips, and George Washington University’s Jennifer Merluzzi, shows that male-led ventures raise on average 10 times more than female-led ventures in male dominated industries.
Female founding CEOs raise 6.7 times more in funding in industries where they dominate, but there’s also no significant reduction in funding for male-led startups across the same sectors. That’s an issue with historical levels of inaccessibility.
“Women are still viewed as ‘other’ and historically have not been invited to be part of the ‘club’ where these critical relationships are formed and cultivated between founders and investors and mentors”, says Cynthia Franklin, director of the NYU Stern Berkley Center for Entrepreneurship.
“This means they’re more likely to be underestimated and dismissed by those who write the majority of the checks.”
The barriers in place and the reversal of progress in the aftermath of the Covid pandemic has hit the confidence of female founders. 60% feel their gender has held them back in 2021, compared to just 4% of male founders, according to January Ventures, a female-led VC fund solving the gap in VC funding to female and underrepresented founders.
A lack of confidence is also likely to be exacerbated if investors are indeed doubling down on existing portfolios, further restricting access to capital in male dominated industries.
"When it comes to investing in early stage companies there often isn't a lot of data or financial results available,” explains Jenny Abramson, founder and managing partner of Rethink Impact, the largest US-based venture capital firm with a focus solely on female-led startups.
“So many investors end up using pattern matching to evaluate companies and look to invest in companies that match their past winners. If capital in the past has gone to a certain type of individual, then you keep repeating that cycle.”
The diversity problem
A bigger problem emerges when gender data is broken down across racial and socio-economic lines.
According to Cornerstone Partners, an investment platform, three-quarters of founders in the UK come from advantaged socio-economic backgrounds, and Black and racially minoritized women are among the worst represented in VC funded cohorts.
In the US, for every $1 men raise in early stage venture capital, women raise an average of $0.38, and Black women raise just $0.02.
“It’s far worse for Black founders,” explains Jenny (pictured). “The business case is there for investing in women, and so the capital is not going to the right places when you have that kind of data but see the trend moving backward in terms of allocation of capital.
“These trends are horrendous across the board, and for women of color even more so.”
How to solve venture capital’s gender problem
There are four ways venture capital can solve its gender problem. The first is urgently addressing the lack of diverse venture teams. In the US, only 13% of decision makers at venture capital firms greater than $25 million are women.
Diverse teams are more likely to invest in diverse founding teams, and Jenny believes the onus of building heterogenous portfolios is on venture funds to increase portfolio diversity and limited partners to push their funds about the benefits and importance of doing so.
“So many of the largest business opportunities right now really come from untapped markets that I think women and diverse entrepreneurs are particularly well positioned to tackle,” Jenny notes. “It needs to be a priority because it's too easy to continue to invest in funds you've already invested in.”
Investors also need to be aware of the biases that can creep into their questioning of entrepreneurs. Although more women entering venture capital is a good thing, that doesn’t necessarily mean the gender gap in funding will narrow.
“Both men and women who evaluate startups appear to display the same bias in their questioning, inadvertently favoring male entrepreneurs over female ones,” Mark explains. “Being cognizant of this phenomenon can help investors approach interactions more evenhandedly.”
Mark advises investors to do one of two things: Either consistently ask a balance of promotion and prevention questions to every entrepreneur, regardless of gender, or work in teams of two with one investor asking all promotion questions, and the other all prevention questions.
Increased access also needs to be built at the upper end of the capital funnel, where it’s hardest to attract a support system of investors and mentors.
“If you can build more potential at the beginning of the funnel, that would definitely be a big improvement,” thinks Frida Rustøen (pictured), investment manager at Idekapital in Norway.
"In my experience there is a tendency for investors to subconsciously favor, or perhaps communicate better with, counterparts that are similar to themselves. Naturally, with traditionally a greater proportion of investors being men, this may create a bias towards investing in companies built by men as well.
"Being aware of these biases is something we at Idekapital always try to consider, and we see this as a potential edge towards other investors at our stage of the funnel."
Emily Bailard saw the benefit of that early support first-hand. She’s the CEO of EveryDay Labs, an edtech startup working with school districts in the US to reduce K-12 chronic absenteeism. Rethink Impact led the firm’s Series A round.
“Jenny led our Series A, and that's an all-female team, Reach Capital led my seed round and that team is mostly women, and a lot of our angel investors are women too,” she explains.
Things are starting to change in that area. January Ventures, for example, invests early in visionary female founders. And ideas 42 Venture Studio is a startup incubator that recruits ventures with founders who’ve had direct lived experiences in the organization’s focus areas.
One startup is helping to create new career pathways for young single mothers, while another is creating new sources of emergency funding for those who need financial assistance. The organization is also working with EveryDay Labs.
“I think if you can couple programs like that with more diversity when it comes to investors that's when you can see change happen,” Emily asserts.
Finally, opportunity needs to continue to be decoupled from a select few startup capitals like Silicon Valley and London.
In the UK, cities like Manchester, Leeds, and Glasgow are now burgeoning tech startup hubs. While in the US, the states of Georgia and New York rivalled California as the top states where the majority of Black and Latinx women-led startups were founded, according to ProjectDiane’s database, the first biennial demographic study that provides a snapshot of the state of Black and Latinx female founders in the US.
“More things being built, solving a wider range of problems, by a more diverse group of people is fundamentally good for the tech ecosystem,” says Maren Bannon, founding partner of January Ventures.
The value is clearly there when it comes to investing in a wide network of diverse, female founders, but Covid has threatened to reset any slim progress that was being made. In a year when global venture capital hit an all-time high, there’s no excuse for the gender gap to widen.
The pandemic provided a period of intense introspection, and the venture capital industry needs to take that chance to assess the areas where progress desperately needs to be made. To redress the imbalance of funding going to male-led and female-led startups, VC firms need to resist the urge to be conservative, and instead double down on building a diverse pipeline of promising ventures.
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