Fixing the VC Funding Crisis for Women Founders

The Current State of Venture Capital Funding for Women

The traditional venture capital landscape is demonstrably flawed, particularly concerning its support for women entrepreneurs.

Data indicates that 2020 represented a particularly challenging year for funding directed towards women founders. Globally, a mere 9% of all capital allocated to technology startups was invested in companies with at least one female founder.

Disappointing Trends in Funding

Alarmingly, the proportion of funding reaching solo female founders and all-women teams was only 2% of total venture capital dollars, as reported by Crunchbase.

This statistic is particularly concerning as it represents a decrease from levels recorded a decade prior, even before the implementation of numerous diversity programs aimed at addressing this imbalance.

The Economic Impact of Underfunding

This disparity in funding isn't solely an ethical concern; it also represents a significant economic disadvantage. The underinvestment in women-led startups signifies a lost economic opportunity potentially amounting to trillions of dollars.

Extensive research demonstrates that startups with women founders consistently outperform those founded by men, achieving greater revenue, higher profitability, and quicker, more valuable exits.

Notably, these superior results are often attained with significantly less capital investment.

A Search for Effective Solutions

Current strategies are proving ineffective. My research for an upcoming book focusing on women founders and funders led me to repeatedly consider a crucial question: what single action could most effectively address the funding gap for women, potentially simplifying or even eliminating the need for other interventions?

The Importance of Women Investors

I've concluded that prioritizing an increase in the number of women serving as investing partners – specifically those capable of making substantial seed investments – offers the most promising path toward lasting change.

This approach is considered vital for long-term progress.

Female Investors Demonstrate a Significantly Higher Propensity to Fund Female Founders

A leading venture capitalist recently confided in me regarding the difficulties encountered when attempting to diversify their senior leadership team. This sentiment was presented as a widely held and accepted truth within the industry. A prevalent narrative in Silicon Valley suggests a universal desire for gender diversity, coupled with the perceived challenge of identifying qualified senior women.

Within the venture capital landscape, the individuals recruited to senior positions directly influence the network of professionals with whom partners interact. Consequently, these hiring decisions fundamentally shape the investment direction of the fund.

Considering research indicates that women investors are up to three times more inclined to invest in companies led by women, a clear pathway to increased funding for female founders emerges: the recruitment of more women into investment partner roles with direct investment authority. The resulting impact on venture firms is demonstrably positive, leading to improved returns.

Lisa Stone of WestRiver Group highlighted, “An increase in the proportion of female partners within U.S. VC firms correlated with 9.7% more profitable exits and a 1.5% annual increase in overall fund returns.”

Data compiled by All Raise and PitchBook further substantiates the “relationship between the presence of female decision-makers at the investment level and superior fund performance.” Their findings reveal that “69.2% of U.S. VC firms achieving top-quartile fund performance between 2009 and 2018 included women in key decision-making roles.”

The Role of Homophily in Investment Decisions

It is unsurprising that women investors exhibit a greater likelihood of investing in women-led ventures. This phenomenon is rooted in the principle of homophily — a fundamental human tendency where individuals are drawn to those with similar characteristics and experiences, fostering connection and rapport.

Homophily explains why a venture capitalist adhering to a vegan lifestyle might prioritize investments in vegan food technology, a gaming enthusiast would likely connect with founders in the gaming sector, or a parent would be more inclined to support a marketplace catering to parents. Individuals naturally gravitate towards areas of personal familiarity.

Deena Shakir, a woman and mother, recently spearheaded Lux Capital’s investment in Maven, a prominent women’s health unicorn. Shakir’s personal experiences included multiple high-risk pregnancies, complications, emergency C-sections, NICU stays, and challenges with breastfeeding.

“It is noteworthy that I am joined on Maven’s board of directors by four other mothers… and a new father… whose personal experiences have profoundly shaped their professional convictions,” Shakir articulated in a Medium publication.

The Significant Influence of Seed Funding on the Startup Ecosystem

Addressing the disparity in funding for women founders and initiating a positive feedback loop in venture capital requires a concentrated effort on increasing seed checks directed towards them. This approach is considered a crucial indicator of progress in closing the funding gap, as highlighted by Jenny Lefcourt, partner at Freestyle and co-founder of All Raise.

While later-stage investments in women-led companies are undoubtedly valuable, their impact is secondary to that of seed funding. Securing Series D funding for a woman founder not only improves current statistics but also positions her for potential liquidity events.

These events, in turn, often lead to reinvestment in other women-led ventures by the founder and her team. However, the most substantial effect on the long-term health of the ecosystem will stem from expanding the initial pool of candidates.

Providing more women with seed stage opportunities is paramount. It’s through these early investments that we cultivate the next generation of successful founders who will eventually attract larger funding rounds, such as the Series D funding recently achieved by Maven.

Ultimately, the decisions made regarding early-stage funding directly shape the landscape of future investments; who receives funding today determines who will be funded tomorrow.

The Significance of Substantial Seed Investments

Ultimately, the magnitude of the investment plays a crucial role in determining the potential for significant impact within the startup ecosystem.

From direct experience, I understand that smaller investments are vital for fostering a more inclusive environment. When women contribute capital at the seed stage – regardless of the specific amount – it initiates a positive feedback loop where women are more likely to fund other women-led ventures. This principle motivated my involvement with a portfolio company during the founder’s parental leave, leading to the creation of Jefa House.

Jefa House provides a streamlined platform for the company’s leadership team to readily invest in startups founded by women.

However, large funding rounds comprised solely of numerous, small angel investments are relatively uncommon. Comparable difficulties are encountered by emerging fund managers making smaller investments. Despite a ninefold increase in the number of emerging managers over the past seven years, the majority lack substantial capital reserves.

Is there a greater propensity for women venture capitalists leading microfunds to invest in exceptional women founders compared to Tier 1 funds with limited female representation among their investing partners? The answer is affirmative. However, it will require considerable time for these microfunds to attain comparable check sizes to those of Tier 1 funds.

Therefore, the decisions of prominent funds to hire or promote women to partner positions are exceptionally important. Such actions not only enhance the prospects of women founders securing funding from highly respected firms, but also send a powerful message throughout the venture capital landscape: women investors are not relegated to a secondary position.

The Imperative of Employing Female Investment Partners

Exceptional returns within early-stage venture capital are consistently generated by substantial investments in innovative concepts that are currently undervalued by the broader market. This inherent characteristic defines venture capital investing as a fundamentally contrarian practice.

Given our increasingly interconnected global landscape and compelling evidence demonstrating the benefits of diverse teams in effective decision-making, the notion that investment opportunities are solely concentrated among a specific demographic in Palo Alto is outdated.

Despite this understanding, the principle of homophily continues to shape the venture capital industry, resulting in a lack of diversity. Human social interactions and financial choices are profoundly influenced by this tendency; individuals tend to connect with and support those who share similar characteristics.

Consequently, a straightforward solution emerges: to facilitate funding for a wider range of founders with diverse ideas, it is essential to increase the representation of diverse investors in the investment process.

Addressing the Funding Gap for Women Founders

Specifically, increasing the number of women capable of making significant seed investments is crucial. This is a key step towards resolving the funding challenges faced by women founders and enhancing venture capital returns globally.

Prioritizing the recruitment of women investing partners who possess the authority to deploy substantial capital is not merely a matter of equity, but a strategic imperative for maximizing investment outcomes.

The current imbalance in the venture capital landscape necessitates a proactive approach to ensure that innovative ideas from all sources receive the funding they deserve.