It started with a simple question. I’m ashamed to admit this, but at the time it was asked, not only did I not know the answer, I did not even know about the issue it raised.
Five years ago, I was speaking at an event about small businesses raising money from venture capital firms. Venture capitalists are professional investors who buy shares in companies in return for cash so those companies can grow. After my talk, a woman came up and asked me: “Why does so little funding go to female founders?”
“I have no idea,” I replied. “But I’ll find out.” What I found out was absolutely shocking, and in the five years since then, I have done everything I can to raise awareness about this issue, to support female founders and to challenge the venture capital industry.
Let’s first put the issue in context. Statistics published by PitchBook show that the share of venture capital (VC) funding to all-female teams has only twice broken through 2% of total VC funding in the UK and Europe, and it has never broken through 3% in the USA. This data is tracked quarterly and goes back 16 years, to 2008. Those two breakthrough years for the UK and Europe were 2008, when it hit 2.9% and 2010 at 2.3%. Never above 2% since then.
Over the last 10 years, the share of pitch decks submitted by all-female teams to VC firms has been in the 3-5% range in the UK and Europe, and in the 4-7% range in the USA. So, there is a clear underrepresentation, with a ratio of about 1 in 2. Mixed gender teams fare better, but the stark reality is that all-male teams submit around 75% of pitchdecks and receive more than 80% of the money, a ratio of 1.1 to 1.
It’s particularly shocking when you consider that published research from Boston Consulting Group, McKinsey, The Alison Rose Review of Female Entrepreneurship and others provides clear evidence that teams with at least one female founder outperform all-male teams. Venture capitalists are supposed to be investing in successful businesses, yet all the statistics show they are not selecting investments in a fair way when it comes to gender.
Why is this?
Based on my research, it boils down to three main factors:
Inherent gender bias
Lack of women in senior investment management roles
Women tend to be more conservative in their projections
Gender bias is alive and well. When researching my book, Funded Female Founders, I interviewed many female founders in several countries around the world. Here are a few examples of what they experienced:
One was attending an investor event and pitching with a male colleague. The investor completely ignored her. Her male colleague had to turn towards her physically and say to the investor, “She can answer that better than me.”
Another was attending an angel investor event with a male business partner, whose company was using her software in its product. The partner told the angel he really ought to speak with her as the software was excellent and she was also raising. The angel wouldn’t speak to her.
A third attended an event hosted by the VC arm of a major global corporate and was told by one of the investors, “The men who provide the funding want to see it invested in companies run by men like them.”
An extreme instance, which I found online, was a woman in Australia who was at the final stages of agreeing an angel investment of $100K when the investor said that he wanted to have sex with her as part of him making the investment. She declined.
The lack of women in senior investment management roles is another core problem, and one that the industry is slow to address. Five years ago, Morningstar published a study they had done on the fund managers of nearly 1,500 investment funds in the UK. It found that 108 funds were run by men named David. As I’m named David that sounded kind of cool. But wait. The same study found that only 105 funds were run by women. More funds are run by a man called David than by all women!
More recently, Diversity VC published a study it had conducted on the UK VC marketplace, looking at the gender makeup of VC firms. They found the total VC workforce is 38% women, yet only 22% of leadership roles and 27% of advisory roles were held by women. On the other hand, 81% of non-investment roles were held by women. Women are still not fairly represented in the investment decision making roles.
Finally, women tend to be more conservative in their financial projections. To understand the impact this has, we need to look at how the venture capital industry works.
Let’s say a VC firm has raised a fund of $50 million, and they invest in 50 companies. These are high-risk investments, and the investors know that. Looking ahead five years from the investment, it would not be unreasonable to expect:
Ten companies have gone bust, and the funds are lost.
Thirty-five companies are still around, but they haven’t really gone anywhere, and the VC firm would be happy to find a buyer for them who will return some cash to the fund. If the firm cannot find a buyer, it might end up sitting on a ‘zombie’ investment: one which makes enough money to keep going, but not enough to reinvest in the business and grow it.
Five of the companies are successful. Let’s assume three of them return 3× on the investment (typically through a sale of the business), one of them returns 10× on the investment, and one of them becomes a unicorn (a company valued at more than $1 billion) returning 100× on the investment. Based on an average investment of $1 million, that means three companies return $3 million each ($1 million × 3) or $9 million in total; one of them returns $10 million ($1 million × 10); and the unicorn returns $100 million. That’s a total return to the fund of $119 million.
As you can see, it is the unicorn that makes or breaks the VC fund. Without the unicorn, there wouldn’t be enough money to repay the investors, let alone pay any expenses or carried interest to the partners of the VC firm.
Anyone who approaches a VC firm for investment must show that their business has the potential to become a unicorn, or the VC firm just won’t be interested. This is a really important point for female founders, who are often much more conservative than male founders when building financial projections.
In conclusion, female founders face a very uneven playing field when it comes to raising VC funding. That’s not to say it can’t be done, but it is harder than their male counterparts experience. My advice to female founders is to focus on those VC firms that clearly set out their interest in supporting female founders and to find female VCs at a senior level who can make the right investment decisions. It’s not a fair world, but armed with these tips, female founders will have a better chance of securing funding to grow their businesses.
