The Status of Women in Venture Capital and Startup Funding

For decades, discussions have centered on the necessity of broadening opportunities for women within the venture capital landscape and the realm of startup entrepreneurship. Initial indications suggested a positive trajectory toward a more diverse and equitable ecosystem.

The increased presence of women as investors was anticipated to benefit female founders, a group historically facing challenges in securing funding comparable to their male counterparts. All-female founding teams, in particular, encounter greater difficulties in capital acquisition when contrasted with all-male teams, highlighting a significant imbalance.

The Impact of COVID-19

The arrival of COVID-19 dramatically altered the venture capital and startup environment, initially fostering a risk-averse climate during the first quarter of 2020. Subsequently, the venture world experienced a surge in activity as software sales were perceived as a secure investment during economic uncertainty.

As the accelerated digital transformation of businesses became evident, capital availability increased. However, data suggests this influx of funds wasn't distributed equitably, potentially reversing some of the progress made by female founders in recent years.

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Perspectives from Investors and Founders

Despite increased capital availability, many female founders continue to be overlooked. The Exchange consulted with investors and founders across the United States and Europe to understand how the current venture market impacts female founders.

A common theme emerged: a greater number of women in venture capital roles would likely mitigate the gender disparity in investment allocations. Furthermore, respondents noted that venture capitalists adopted a more cautious approach following the economic disruptions caused by COVID-19.

This conservatism led to a preference for funding repeat founders and leveraging existing networks – demographics that generally lack the diversity found within the broader pool of new founders.

Underlying Challenges

Founders and investors also pointed to the disproportionate burden of domestic responsibilities placed on women during the pandemic, stemming from ingrained societal expectations. This systemic sexism, they argue, remains a persistent issue, with improvements occurring too slowly or not at all.

Before delving into the core obstacles hindering advancements in gender equity within venture funding, it’s important to review the data from the previous year and compare it to historical trends.

Insights from Data Analysis

Reports concerning disparities in funding based on gender are becoming increasingly common, and NGP Capital, a venture capital firm supported by Nokia, has significantly advanced research in this area with its 2021 comprehensive report.

The value of this research lies in two key aspects. Firstly, the dataset utilized is substantial, spanning a period exceeding one year. NGP’s internal AI platform, Q, was employed to analyze a subset of 9,422 European companies that successfully secured venture capital between 2014 and 2019, drawn from a larger pool of 21,289 European startups. Secondly, a deliberate effort was made to isolate various contributing factors; the question isn't simply whether fewer startups are led by women.

The core inquiry focuses on what occurs when comparing founders with comparable backgrounds within the same industry, with gender being the sole differentiating variable. The findings, regrettably, are disheartening.

The report states, “A regression model revealed that, holding all other factors constant, being female alone decreased the likelihood of a founder receiving venture capital by 17%.” Despite the data concluding in 2019, the report anticipates that projections for 2020 would demonstrate similar, or even more pronounced, discrepancies.

Data from Crunchbase confirms a notable decline in global venture funding directed towards companies founded by women in 2020. More recently, an annual report from AllRaise, a U.S.-based nonprofit, indicated a 2.5% decrease in funding for teams including at least one female founder in 2020. This trend extends beyond Europe, with the pandemic’s effects being globally observed.

However, beyond the statistical figures, what are the practical realities at play? To gain a deeper understanding, we consulted with several venture capitalists and founders to gather more detailed perspectives.

All those consulted identified a strong correlation between the limited funding received by female founders and the relatively small number of female venture capital investors, often referred to as “check-writers.” (This term denotes individuals with the authority to make investment decisions, lead deals, and serve on company boards.) While the relationship between female VCs and founders is complex, data supports this correlation; earlier research from the Kauffman Fellows Research Center demonstrated that women VCs invest in up to twice as many female founders.

The challenge, as highlighted by AllRaise’s report, is that 64% of U.S. venture capital firms managing over $25 million in assets have no female check-writers.

Conversely, this observation leads to the same conclusion articulated by Tamara Steffens, managing director at M12: “An increase in the number of women serving as check-writers will expand network access for women, ultimately leading to increased funding opportunities.” However, “network” is a crucial element here, and partially explains why the COVID-19 pandemic exacerbated the situation.

As venture capitalists adopted a more cautious approach to risk, they increasingly relied on their existing networks. The preference for experienced, or “serial,” founders further compounded the issue: “Serial founders are generally simpler investment choices, and they were less impacted by the pandemic. Historically, these individuals have predominantly been men, which has unfortunately widened the funding gap,” explained Diana Koziarska, founding partner at SMOK Ventures, a Polish-American early-stage fund.

Societal Impacts of COVID-19

Data indicates that the effects of the COVID-19 pandemic have not been experienced equally by men and women. Women have been disproportionately forced to leave the workforce due to ingrained societal expectations regarding domestic responsibilities, irrespective of individual preferences.

This trend was particularly pronounced in regions lacking robust social support systems. In the United States, for instance, where healthcare access is fragmented, family leave policies are outdated, and childcare costs are largely borne by individual families, women’s labor force participation declined to 57% earlier this year.

This represents the lowest level observed since 1988, as reported by CNBC. M12’s Steffens highlighted the increased caregiving demands placed on families during the pandemic.

These challenges included supporting children with remote learning and providing care for aging parents. Steffens noted that in the U.S., women have often assumed primary responsibility for caregiving, despite the absence of comprehensive, supportive programs.

It was not surprising, but nonetheless concerning, that women exited the workforce at a rate four times greater than that of men over the past year. Despite a record amount of venture capital funding being distributed, the proportion allocated to women-led businesses decreased.

Leading a company through a pandemic is significantly more difficult when societal norms dictate that one is also the primary caregiver. Terezia Jacova of Neulogy shared insights from female investors and founders.

These individuals reported that the pandemic caused significant disruptions to their businesses, either delaying their launch or hindering their progress, as they were more likely to assume greater responsibility for home and childcare duties. Jacova also pointed out that the types of businesses founded by women may be more vulnerable to the pandemic’s economic effects.

This creates a compounded disadvantage for female founders. Abhinaya Konduru of M25 concurred, emphasizing that traditional gender roles within households have become more prominent during these challenging times.

Beyond these specific challenges, broader issues of sexism continue to persist. Responses varied regarding the progress of addressing sexism, with some expressing cautious optimism and others noting a lack of improvement.

Trisha Bantigue, co-founder of Queenly, stated that while the pace of change isn't accelerating, it hasn't regressed either. Maintaining the status quo, however, is insufficient for an industry historically marked by gender inequality to achieve true equity.

• COVID-19 disproportionately impacted women in the workforce.
• Lack of social safety nets exacerbated the issue.
• Venture capital funding for women-led businesses decreased.
• Traditional gender roles intensified during the pandemic.

Glimmers of Potential Progress

Although the data remains discouraging, certain developments offer limited optimism. Steffens from M12 highlighted AllRaise’s recent finding that 41% of first-time venture capital investors in the United States during the previous year were women.

Furthermore, the overall proportion of women investors in the U.S. experienced a rise, increasing from 12.3% to 13.3% within the same period.

These figures potentially indicate a gradual shift in capital allocation, ultimately benefiting female founders.

Positive Initiatives Observed

Jacova of Neulogy pointed to several encouraging endeavors, stating that “efforts and programs aimed at enhancing diversity within both the investor and entrepreneurial spheres are valuable, significant, and should consistently be supported.”

She also observed an increase in gender-balanced panels and noted that “integrating diverse genders into all activities concerning investment diversity is a trend I’m witnessing more frequently, which is encouraging and represents forward momentum.”

The Need for Accelerated Change

We maintain that the current rate of progress toward greater equity in the venture capital and startup ecosystem is unacceptable.

Continued reporting on these disheartening trends is something we wish to move beyond.