As a female founder, I have personally experienced the challenge of fundraising in an unlevel playing field. This challenge stems from the injustice in venture capital.
In this article, I review pertinent research for an objective inspection of the said injustice, get personal with my own account encountering it, and propose action items for female founders, investors and policymakers.
In mid-2019, I sought outside investment for the startup I birthed and now run, VenturePole. I had poured time and money into building unbiased investor tools powered by AI, which is the foundation of the venture investment platform we call VenturePole.
Although the average seed funding raised is $1.9 million after 36 meetings with investors, my experience was different – I raised only a quarter of the average seed amount, despite having double the average number of investor meetings. I delved deeper into my seed round journey in the podcast interview by fellow female founder and VC, Varika Pinnam.
This was in 2019, when investment in women-led startups was at an all-time high of 2.8%, the rest went to male founders, marking this abominating gender gap that I call injustice. Then it dropped to 2.3% in 2020, in the global economic downturn that hit startups.
If there is one takeaway from this article, it is that investing in women-led companies is great business for investors.
Pitchbook and Beyond The Billion Fund reported extraordinary growth in both fundraising and general performance from female founders. From 2019 to 2020, female-founded exits increased 16% year-over-year, while male-founded exits declined by 2%. Furthermore, Female CEO exit value soared 30%, while male CEO figure plummeted 44%.
This track record is no fluke, women have always kicked ass. Female-founded companies have been exiting faster than the broader market every year since 2010, and apart from 2018, female CEOs have exited faster than male CEOs.
Source: Beyond the Billion
When women-led startups do get funded, we generate higher returns for investors. We “ultimately deliver higher revenue — more than twice as much per dollar invested” Boston Consulting Group reported. By not investing in diversity-led ventures, investors are missing out on a $3-trillion-dollar opportunity, according to Morgan Stanley.
Need more facts? The World Bank observed that a gender balanced leadership results in higher returns for investors, improved decision making, heightened creativity and overall higher potential for investors.
Despite higher returns and superior performance, investing in women-led startups is often seen as charity. Jesse Draper, founding partner of Halogen Ventures, observed and argued:
“It’s a way to invest money in businesses that will exit faster for double the return. It’s a way to take advantage of wide-open spaces many other VCs can’t (or won’t) see. It’s a way to get in on consumer products that are poised to capture the imaginations of the people who make up the majority of household buying decisions.”
The takeaway that investing in women is great business is concluded by Kamal Hassan, Founding Partner of Loyal VC, Monisha Varadan, Partner at Zephyr Ventures and Claudia Zeisberger, Academic Director of the Global Private Equity Initiative at INSEAD:
"From our perspective, bias within the VC industry is preventing funds from being allocated to the best investment opportunities. (After all, a growing body of evidence recommends diversity as a guiding principle when building profitable VC investment portfolios).”
Then why do so few women founders get funded? Why are we only able to raise so little?
Many investors tell me that this gender gap is caused by a shortage of female entrepreneurs, when in reality, there are plenty of female founders to fund. Actually, for every four male founders, there are three female founders doing exactly the same thing – building a business.
A study conducted by Women in VC found that only 2.4% of women US-based VCs are founding partners — who, as Fast Company notes, “control an outsize proportion of a firm’s investment decisions.” The disenfranchisement of women is the biggest cause of this injustice in venture capital.
Women VCs invest up to twice more in female founders, while male VCs stick to one founder profile — homogeneously male. This proves to be especially true during an economic downturn, as investments in women-led startups dropped to a meager 2.3% in 2020.
Cat Hernandez, Partner at The Venture Collective stated,
“The gender and racial makeup of the venture capital industry are staggeringly homogenous and while we have made strides in the last decade or so, there is still a lot of work to be done to ensure that diverse perspectives are represented around the check-writing table. In my opinion, that is the single biggest determinant for the fundraising challenges underrepresented founders experience on a daily basis.”
In 2019, I was selected as a finalist in a national startup competition for a public grant. As customary, I was the only female founder finalist, pitching to a jury that was made up of homogeneously middle-aged white men. After my pitch, a jury member representing one of the nation’s most established angle clubs asked whether I could verify the traction stated in my presentation, questioning my credibility in front of the whole jury.
I was the only female founder finalist, pitching to a jury that was made up of homogeneously middle-aged white men.
Everything I had built up, as a consultant and researcher, to a technologist and investor, now an entrepreneur, along with my company, was on the line. I knew that I had much more to lose, aware of the odds against me having received rejections from many investors. However shocked and appalled, I did not succumb to his bias and responded with poise.
The pitching process demonstrates how the venture investment process is infested with gender bias, namely investors’ pre-established preference towards male entrepreneurs. Three Harvard studies show that even when the content of the pitch is the same, 70% of investors prefer pitches presented by male entrepreneurs.
Another research studying entrepreneurship found “investors ask men to win, and women not to lose.” Investors asked different questions solely based on the founders’ gender - while men are asked “promotion-focused” questions, women are asked “prevention-focused” questions, doubting our capability and ambition, therefore greatly reducing our chance of raising funding.
We need to eradicate this bias and level out the playing field for better investment opportunities, as well as better leadership in venture capital. That jury member did not ask other male finalists if they could verify their traction.
Women score higher in 12 of the 16 competencies that go into outstanding leadership. Two of the traits where women outscored men to the highest degree — “taking initiative” and “driving for results” — have long been thought of as particularly male strengths. The bias that women are too emotional is also wrong.
Women-led startups are more profitable for investors. Ashley Bittner and Brigette Lau, Founding Partners at Fireworks Ventures, believe that the “heavier pushback by investors” for women, means that we need especially strong business plans. Albeit unfair, forcing us to jump through more hoops fortifies our resilience and adaptability, both are traits of a successful entrepreneur.
Furthermore, women perform better in a crisis. During the COVID-19 pandemic, female leaders outscored men in leadership skills, showing greater initiative, agility, motivation and engagement with their team. Countries which have been led by women during the pandemic have had fewer cases and deaths.
Fundraising is difficult, exponentially so if you are a woman. I know.
Action items for female founders:
Jonathan Greechan, Co-Founder of Founder Institute, shares my view on why we need more investors driven by the right values: "Startup investors can be the financial backbone for mass disruption...we believe in the need for more VCs with strong values: Because they will prop up the companies that will build a brighter future for humanity."
Action items for investors:
The system needs to do better in eradicating the injustice in venture capital.
Make policies that favor and incentivize equity: I view economist Milton Friedman's justification for mandatory education apropos to this action item: “A stable and democratic society is impossible without widespread acceptance of some common set of values and without a minimum degree of literacy and knowledge on the part of most citizens.” A stable and democratic society is impossible without equitable opportunities for women, who are the majority of citizens, to build better products, companies and industries.
But really, the only justification funds, family offices, corporates, accelerators, angels and YOU, need to invest in women-led ventures is just that it is damn great business!