Female Founders: A Venture-Backed Comeback

The Shifting Landscape of Venture Capital Funding for Female Founders

Despite a substantial surge in overall venture capital fundraising during the previous year, fueled by large investment funds and the increased accessibility of virtual meetings, the coronavirus pandemic initially created a disproportionate decrease in funding allocated to companies led by female founders.

This resulted in an imbalanced environment where capital was directed more frequently towards male entrepreneurs than had been typically observed in prior years.

Progress Towards Closing the Gender Gap

However, recent data from PitchBook indicates a gradual narrowing of the gender gap in startup funding. Through the first nine months of 2021, female-founded businesses secured $40.4 billion in funding across 2,661 transactions.

This represents nearly a doubling of the $23.7 billion raised in 2019 and a more than tenfold increase compared to the $3.6 billion recorded in 2011.

Remaining Challenges and the Need for Continued Monitoring

Significant progress remains to be achieved. A truly equitable distribution of funding is still distant, and substantial change is needed before the tracking of this data becomes unnecessary.

Currently, companies with female founders continue to raise smaller amounts of capital and are often assigned lower valuations by investors.

Exploring Signs of a Rebound

Although the benefits of the expanding venture capital market haven't been universally shared, an analysis of available data suggests early indications of a recovery for this historically underrepresented group.

This examination will encompass funding trends, exit strategies, and the representation of women in key decision-making roles within the venture capital ecosystem.

• Funding: Tracking the amount of capital raised by female-founded companies.
• Exits: Analyzing successful exits (e.g., acquisitions, IPOs) of these businesses.
• Decision-makers: Assessing the representation of women in positions of power within venture capital firms.

Growth in Investment for Female-Led Startups

Globally, venture capital investments are experiencing a significant increase, recovering strongly from an initial period of caution during the COVID-19 pandemic which presented fundraising challenges for some startups. Analysis by PitchBook, focusing on U.S.-based startups with at least one female founder, reveals that female founders are achieving unprecedented levels of funding in the current market.

Contrary to potential expectations, 2021 has demonstrated substantial improvements for female-founded startups. In 2020, despite an overall rise in venture capital, U.S. startups led by women witnessed a 2% decrease in the number of deals and a 3% reduction in total investment dollars.

As the total venture capital available expanded, female-founded startups secured funding from fewer investment rounds and received a smaller share of the overall capital, representing a notable reversal from prior trends. PitchBook data indicates that in 2019, female founders secured between 150 and 200 deals each quarter, totaling between $700 million and $950 million. However, in the third quarter of 2020, this cohort only completed 136 rounds, amounting to just $434 million – and this occurred during a generally favorable market.

Fortunately, the trend has reversed significantly in 2021.

The figure of $40.04 billion raised by U.S.-based, female-founded startups may underestimate the accelerating rate at which female founders are attracting capital. Consider the following chart from the PitchBook-NVCA report:

The data clearly demonstrates that female-founded startups achieved their highest quarterly performance on record in terms of total deal value, despite a slight decrease in deal volume compared to previous peaks. This data is exceptionally positive, contrasting sharply with the unfavorable results observed in 2020.

It’s important to remember that venture capital data often reflects past activity, and smaller transactions may not be fully captured due to their private nature and limited public disclosure. Consequently, we can anticipate further investment rounds being added to the PitchBook dataset over time.

This could potentially reveal an even more optimistic outlook for fundraising among domestic female-founded startups than currently indicated.

A closer examination of the PitchBook report shows increasing deal volume for female-founded companies within the health technology, financial technology, and broader technology sectors. For instance, if current fundraising rates continue, 2021 could mark the first year that health tech firms led by women complete 600 deals. More generally, deal volume in the tech sector is projected to increase by 30% this year.

The overall increase in funding for U.S.-based, female-founded startups is driven by substantial investments such as Maven’s $110 million Series D and Modern Health’s $51 million Series C.

However, some challenges remain. The report highlights that median valuations for early-stage startups increased by 15% in the United States during 2020, but female-founded startups experienced a modest 4% gain in median valuation. Furthermore, this valuation gap has persisted throughout 2021, indicating that continued efforts are needed.

Understanding the Growth in Investment for Women-Led Startups

The increasing trend of women securing funding is a positive development regarding equality. However, a compelling investment narrative also supports these figures: ventures established by women are demonstrating substantial exit values, and their performance is accelerating at a rate exceeding that of the general market.

According to the PitchBook-NVCA report, the total exit value for U.S.-based startups founded by women has reached $58.8 billion, representing a 144% increase since 2020. In comparison, the broader U.S. venture capital market has experienced a more moderate 102% rise in exit values over the same period.

These significant financial outcomes are further supported by the number of successful exits: 223 domestic startups with female founders have achieved an exit this year, a 12% improvement compared to the entirety of 2020. Notably, female-founded companies have outperformed the overall market, which has only seen a 3% gain in this metric during the same timeframe.

PitchBook highlights that “2021 is projected to mark the eleventh consecutive year in which companies led by women have exited at a faster rate than the wider market.” It’s perhaps unexpected that, considering these statistics, women didn’t receive a disproportionately large share of venture capital gains in 2020, or even an equitable portion relative to historical standards.

The fact that more female-led ventures were underfunded in 2020, despite superior exit performance, is puzzling, unless one considers the influence of gender bias.

Several prominent female-led exits occurred in 2021, including Ro’s acquisition of Modern Fertility, Mindbody’s purchase of ClassPass, and Rent the Runway’s IPO – a landmark event as the first U.S. company to go public with a female founder, COO, and CFO, as reported by All Raise.

Key Takeaways

• Strong Exit Values: Female-founded startups are generating substantial returns upon exit.
• Faster Exit Rates: These companies are exiting at a quicker pace than the broader market.
• Performance Outpacing the Market: The growth in exit value and rate exceeds overall market trends.

These data points suggest a compelling case for increased investment in women-led ventures, not solely from an equity standpoint, but also from a purely financial perspective. Investing in female founders is proving to be a sound strategy.

The Circulation of Capital in Venture Funding

Numerous factors contribute to the disparity in venture capital funding received by female founders compared to their male counterparts. These range from ingrained sexism and systemic biases to the effects of the pandemic, which prompted investors to prioritize established, predominantly white and male networks. A key driver of positive change, however, lies in increasing the diversity of individuals involved in investment decisions, both on boards and within cap tables.

By disrupting the concentration of financial control within a limited group, future generations of investors can begin to address the existing gender gap in startup fundraising.

Recent Findings on Board Diversity

A report jointly published by JPMorgan and PitchBook provides a more detailed examination of gender diversity within the boardrooms of startups. Currently, nearly 22% of all new appointments to startup boards have been women, representing a doubling of this figure over the past three years, according to the report’s findings.

This advancement, while encouraging, is accompanied by important context. Data indicates that all companies within the S&P 500 now include at least one female board director. Furthermore, Spencer Stuart reports that women comprised 59% of all board appointments within the S&P 500 in 2020.

In September, the Securities and Exchange Commission (SEC) approved new rules proposed by Nasdaq. These rules mandate that most companies listed on Nasdaq either demonstrate the presence of at least two diverse directors or provide a clear explanation for their absence. Additionally, these companies are now required to publicly disclose annual statistics regarding the diversity of their boards.

Anticipatory Changes and Public Markets

It is evident that companies preparing for initial public offerings (IPOs) are increasingly making changes in anticipation of these new requirements. The aforementioned report highlights that, as of August 2021, 59 startups that completed IPOs within the preceding year appointed their first female directors specifically in preparation for going public.

Progress within the venture capital landscape itself, however, has been comparatively gradual. This is attributable to a variety of challenges, including slow promotion rates and limited opportunities for general partner positions within financial firms.

The Rise of Diverse Fund Managers

Despite these hurdles, the emergence of more diverse fund managers has the potential to significantly accelerate the pace of deals secured by minority founders. The community of female angel investors is experiencing substantial growth, with nearly 1,000 active angels currently participating in the market, as per PitchBook data.

Gen Z VC, spearheaded by Meagan Loyst of Lerer Hippeau, has successfully attracted over 11,000 aspiring venture capitalists to its community.

On the institutional front, positive developments are also occurring. Last year, Terri Burns achieved the distinction of becoming GV’s youngest partner and the first Black woman to attain this position. This year witnessed Female Founders Fund successfully closing its third fund with $57 million in capital. Forerunner, under the leadership of Kirsten Green, secured a growth-stage fund, and Variant, with Li Jin joining as a general partner, closed a $110 million fund.

A Shifting Landscape

The concept of technological innovation often being cyclical is frequently discussed. However, the trend of capital being repeatedly channeled to the same founders with similar ideas appears to be diminishing, as demonstrated by available data. As the venture capital market continues to evolve, it is crucial that the data from this year serves as a foundation for future growth, rather than being viewed as an isolated occurrence.

A more comprehensive understanding of 2021’s performance will emerge as all data is compiled following the conclusion of the fourth quarter. However, it is already clear that female-founded startups are experiencing a more favorable year in 2021 than they did in 2020, signifying genuine progress.