1 change that can solve the venture capital funding crisis for women founders
The venture capital industry as we know it is down. At least for women, that is.
In terms of funding for female founders, 2020 was one of the worst years on record. Globally, only 9% of all funds deployed in tech startups went to founding teams that included at least one woman. Solo founders and all-female teams only raised 2% of all venture capital dollars, according to data from Crunchbase.
Surprisingly, this number is actually less than it was when we started counting ten years ago, long before many large-scale diversity initiatives were launched to address this issue.
This funding gap is not just a moral crisis, it is an economic crisis. The lack of investment in startups founded by women is a missed opportunity worth billions of dollars. It’s because of overwhelming evidence that startups founded by women outperform startups founded by men: they generate more income, generate higher profits, and come out faster at higher valuations. And they do all of this while raising a lot less money.
What we are doing is not working. As I researched for my next book on Women Founders, I kept asking myself the same question: When it comes to closing the funding gap for women founders, what is the only thing we can do? who will make everything else easier or unnecessary?
I now believe that our best bet for long-term change is to focus our efforts on increasing the number of female investment partners who can write big seed checks. Here’s why.
Female investors are up to 3 times more likely to fund female founders
Recently one of the best VCs in the world told me how difficult it is to diversify your senior team. He expressed it as an accepted fact and a widespread belief. It’s a common trope in Silicon Valley: Everyone wants diversity, but it’s so difficult to find all the senior women!
In the venture capital industry, the people you hire at the top level are the people you spend time with. And who you hire at the top level determines who your fund will support.
Given that studies now show that female investors are up to three times more likely to invest in female founders, it’s clear that the fastest way to fund more women is to hire more female founders. investment capable of writing checks. The effect on risky businesses? Return.
“When US venture capital firms increased the proportion of female partners, they enjoyed 9.7% more profitable exits and a 1.5% annual increase in overall fund returns,” Lisa explained. Stone of WestRiver Group.
Data from All Raise and PitchBook reinforces the “correlation between hiring female investment decision makers and fund level outperformance,” adding that “69.2% of US VCs who obtained a first quartile fund between 2009 and 2018 had women in decision-making roles.
It should come as no surprise that female investors are more likely to invest in female founders. This is because humans have a propensity to homophilia – the tendency for like to attract like to like and for similitude to create a connection.
Homophilia is the reason why a vegan VC is more likely to invest in vegan food technology, a gamer is more likely to spend time with the game’s founders, or a parent is more likely to invest in a market. parent. People revolve around what they know.
Deena Shakir, who happens to be a wife and mother, recently led Lux Capital’s investment in the Maven women’s health unicorn. Shakir has had several high-risk pregnancies with multiple complications, emergency Caesarean sections, NICU stays and breastfeeding issues.
“It is no coincidence that I am joined on the Maven board of directors by four other mothers… and a brand new father… whose personal journeys have also influenced their professional conviction,” Shakir wrote in a Medium article. .
Why seed controls have the greatest impact on the ecosystem
I think in order to close the funding gap for women founders and restart the virtuous circle of venture capital investment in women, we should focus on getting more startup checks into the hands of women founders. This is because the seed investment is a leading indicator of whether we are going in the right direction in terms of reducing the funding gap for women, according to Jenny Lefcourt, partner at Freestyle and co-founder of All. Raise, the leading nonprofit focused on diversification. the VC industry.
This does not underestimate the importance of the investments made in women founders at later stages. When a founder lands Series D capital, it increases the number of female founders this year and likely brings that founder closer to a liquidity event that will lead her (and her executives) to invest in more women.
That said, the biggest impact on the future ecosystem will come from widening the top of the funnel and allowing more women in the seed stage to one day reach capital Series D funding like Maven. After all, who we finance now becomes who we finance later.
Why large seed controls are the most important
Finally, the size of the check is also important when thinking about how to have the greatest impact on the ecosystem.
I know firsthand that micro-controls are essential to building an inclusive ecosystem. When women invest at the seed level, regardless of the amount, they start a virtuous circle of funding women. That’s why, when I stepped in to lend a hand to my holding company when the solo founder took parental leave, one of my key projects was to develop Jefa House, a way for own executives to Jefa easily invest in other startups founded by women. .
That said, big party rounds made up entirely of little angel checks are rare. Similar challenges face small checks from emerging fund managers. Although the number of emerging managers has increased 9-fold in seven years, the reality is that most emerging managers just don’t have a lot of money.
Are female venture capitalists who run their own microfunds more likely to invest in amazing founders than Tier 1 funds with few or no female investment partners? Yes. Will it take them a long time to compete with those Tier 1 funds in terms of check size? Yes.
This is why it is so important when leading funds hire or promote women to partner level. Not only does this give female founders a better chance to fund themselves from top-tier stores, but the moves that the best funds make are key signals to others in the ecosystem: in venture capital, women investors don’t. do not have to sit in front of the children table.
Why we need to hire women investment partners
We all know that great early stage venture capital returns come from big bets on big ideas that others don’t bet on. This is why venture capital investment is against the grain by definition. Thanks to our increasingly globalized world and clear data showing the importance of diverse teams in making good decisions to get that feedback, no one in 2021 really believes that single white dudes in Palo Alto have a monopoly on billion dollar ideas.
However, due to the nature of homophilia venture capital remains a very homogeneous industry, and the social and economic interactions and decisions of human beings remain deeply influenced by these principles. No matter how much work we do, the birds of a feather really flock – and fund – together.
All of this leads to one place: the clearest way to fund different kinds of founders with different kinds of ideas is to put different kinds of investors on the investor’s side. To get more funding for women founders, we need more women who can write checks. That’s why prioritizing the hiring of female investment partners who can pull off big startup checks is critical to solving the female founders funding crisis and increasing returns from venture capital around the world.