On International Women’s Day 2019, David H. Crean, managing director for Objective Capital Partners, highlights the progress that has been made to close the gender investment gap, touching on key trends and biases in venture capital funding and outlining why investing in women matters.
When women business owners pitch their ideas to investors for early-stage capital, they receive significantly less than men. Yet businesses founded by women ultimately deliver higher revenues than those founded by men.
Women’s History Month gives us a great opportunity to recognize the numerous impressive female founders across industries including the life sciences & healthcare sector. This month is a celebration of women’s achievements, their tenacity to challenge bias, and a call-to-action for driving gender balance across the world.
Women are making strides when it comes to influence. In Washington, a record number of women hold seats in Congress. In Hollywood, a record number of films feature female lead characters. However, when it comes to the world of public companies, the number of women in leadership is unfortunately low. Only three percent of companies that went public from 1996 to 2013 had women CEOs. It is also clear that particular barriers still exist for women in entrepreneurship in addition to those already faced in related fields. Nevertheless, we are seeing a powerful progression of women leadership. Women represent nearly half of the workforce (47 percent), roughly a third of business ownership (36 percent), and three out of ten people employed in the high-tech industry (30 percent). The number of businesses owned by women in the US has more than doubled in 20 years, as has their revenue, according to the annual State of Women-Owned Businesses report. Women are starting an average of 849 new businesses per day, up three percent year-on-year. There are 11.6 million women-owned businesses, employing nearly nine million people and generating more than USD 1.7 trillion in revenue.
The gender pay gap is well documented and shows women make about 80 cents for every dollar that a man earns. Less well known is the gender investment gap. According to research by others, when women business owners pitch their ideas to investors for early-stage capital, they receive significantly less – a disparity that averages more than USD one million – than men. Yet businesses founded by women ultimately deliver higher revenue – more than twice as much per dollar invested – than those founded by men, making women-owned companies better investments for financial backers. Women have come a long way, yet clearly there is still progress to be made. So, why the disconnect and what are we currently seeing in venture funding?
Venture capital (VC) funding overall has increased in recent years, but the numbers haven’t sprung forward for female founders at the same pace. In 2018, companies founded solely by women garnered around two percent of the total capital invested in venture-backed startups in the US last year. According to Pitchbook, US VC funding for female-founded or co-founded companies has been trending up in recent years, and 2018 saw the creation of several women-led funds, incubators for female founders and more new companies.
VC funding overall has increased in recent years, but the numbers haven’t sprung forward for female founders at the same pace
Upon delving deeper into US investment trends for women over the last 11 years, we see the following activities within deal counts by industry and stage in female-founded startups and firms shown in the charts below. Greater capital was invested in 2018 versus prior years. Deal count in 2018 was on par with levels in 2014-2015 and 2017. The final quarter of 2018 (4Q 2018) experienced a tremendous spike in capital invested and deal count versus prior periods. Deal count by founder mix, deal stage and industry display interesting trends highlighting optimism for 2019 activities in women founder investment activities. Female-founders only raised USD 14.7B in capital (3,603 deals) versus USD 67.2B (10,376 deals) for female & male founders in 2018. Angel and early stage VC dominated the capital financing stage for female founders. Angel and early stage VC financing recorded USD 8.1B (6,946 deals) and USD 33.1B (4,839 deals), respectively. Later stage VC financing was USD 40.7B (2,174 deals). Software and Pharma/ Bio recorded over USD 40B in capital between nearly 6,400 deals. Healthcare devices and services accounted nearly USD 9B in capital over approximately 1,500 deals. Despite the numbers showing more deals being done with women founders, the fundamental issue remains that the bulk of large dollars are going to male-only founders.
US Venture Capital Deal Flow by Female (Co-)founded Companies
So why the discrepancy? Many of the same issues have been discussed for years: implicit and explicit bias among investors, a lack of women making investment decisions, prejudice against women’s style of pitching to investors, and more. With every gain we see in the space, there’s a counter view with male dominated firms being founded or a male dominated company getting a super-sized round and more attention by retail, high net worth investors and institutional firms.
Do Women Founders Have a Harder Time Raising Venture Capital?
When investors are deciding who to allocate capital to, they, of course, look at “hard data”—things like company financials, size of the market opportunity, the management team (i.e., the horse jockey and trainers), and the product or service (i.e., the horse) to indicate business viability. Though they want to be investing in a great product and/or service, it is perhaps even more important that when a founder faces adversity, they have the wherewithal and tenacity to persevere. In fact, investors will overwhelmingly invest in founders who have demonstrated prior success. Unfortunately, women founders have a briefer history of success. In this way, funding invites bias.
There is clearly a widespread disparity in funding – a disparity most notably observed through differences in the capital-raising experiences of male founders versus female founders whereby women are less likely to be given funding for their business. For women founders, the numbers are clear: they own 38 percent of all businesses in the United States, yet they only receive two percent of all venture financing. And even when they are able to raise money, women founders find that it is in amounts much lower than their male counterparts. Some argue that it is about the quality of companies that are being formed by women versus men. Others claim that it is because there is a relative scarcity of female financiers and role models from whom women can turn to for support and resources. Still others assert that it is a pipeline issue.
Unfortunately, women founders have a briefer history of success. In this way, funding invites bias
From a recent study published by the Academy of Management in 2018, the researchers found that it may be the quality of the interaction between a women founder and an investor that is driving the disparity. Investors (both male and female investors) are more likely to approach men with questions about how they will “win”, whereas female founders are approached with questions on how they will “avoid losing.” These stereotypes limit the possibilities for women, of course, but investors themselves may also be missing out on an entire sector of companies that have the potential to introduce valuable, disruptive technologies and services.
What this suggests is that despite the disheartening difference in how different categories of founders are being treated, there are distinct ways that these entrepreneurs can take matters into their own hands. You can drive the focus of the conversation to prompt motivating and successful dialogue. Once you recognize that you are being asked a prevention question—one that is focused on risks and limitations—by all means, give a response. But then drive the focus and rapidly change the conversation in such a way that allows you to promote the potential of the company, the growth prospects, and the ways in which you are not only avoiding loss but growing the company. Think “glass half-filled versus glass half empty”.
Why Investing in Women Matters
The tendency for male Managing Partners/ Managing Directors of VCs to view female founders less seriously is something that I see as a current and active issue, albeit trending in the right direction. Most women face problems to be seen as professional entrepreneurs. There are cultural biases that society has formed that are hard to overcome and ultimately affect the funding received by women founders. At a base level, having male-dominated investment teams leads to the fulfillment of the familiarity principle: people gravitating toward and liking more things that are familiar to or resemble them. Investors will invest in founders because they trust someone most like themselves. According to PitchBook data, only 15 percent of investment level positions at VC firms in Europe are filled by women. This is significantly lower than the already-underweight percentages for other regions, such as 18.4 percent for the US and 17 percent globally.
At a base level, having male-dominated investment teams leads to the fulfillment of the familiarity principle: people gravitating toward and liking more things that are familiar to or resemble them
For many, one key way to overcome this is to correct the imbalance on both investment and founder teams. In 2018, Silicon Valley added 36 women as investment partners at venture capital firms—the most ever in a single year. Data around this topic can be somewhat demotivating based on sheer numbers from previous years, but the industry is changing. In this writer’s opinion, one of the most effective methods is for women to set up their own venture firms, rather than by speeding up the rate of progression internally at existing VCs or focusing on an existing niche. Setting up their own firm gives them more influence. Progressing through the ranks of an established VC or coming from the corporate side seems to be more challenging based on the biases still being seen in the industry. One such women founded firm is Jane VC, a US-founded fund which launched recently.
While specialized funds investing solely in female founders and clubs address some of the problem, the ultimate aim should be to foster an environment where diversity—across all forms—is the default modus operandi for investors. Operating a firm that has a wide range of perspectives at the decision-making level—people of various generations, women, men, those with different ethnicities and backgrounds—provides different ways of thinking and helps influence the decision-making process. Changing Limited Partner (LP) attitudes requires clear parameters being set and adhered to, or else the familiarity principle will kick back in. From a General Partner (GP) perspective, you need to provide LPs guidance to focus on. Without that, and having the same people making the decisions, not much will change, unfortunately. As well as practicing what they preach, LPs need to put the pressure on GPs in a reciprocal manner when it comes to diversity. We’re a long way from being a progressive industry, but we’re on the right path and trajectory. Our primary objective should be to create value for the shareholders of these investments, and diversity in leadership is valuable for the bottom line.
Many things are changing for women in leadership within the startup and venture capital world. While we need to encourage more women to start companies, the only way to close the gender fundraising gap is to increase investments in them. The size of the gender gap is staggering, but there is a sliver of a silver lining: It’s smaller than in year’s past and progress is being made to close the gap. The data on return on investment in women founder businesses supports such recommendation. Many women founders that I know are intelligent, entrepreneurial, have disruptive technologies and are capable of delivering tremendous shareholder value. They have built diverse and quality board of director groups around them to add value and increase the probability of a success in the business. This is an example of how women are breaking glass ceilings and changing expectations, by innovating processes while also being aware of current industry standards. Let’s celebrate women’s efforts and continue to support quality and strong business ideas with requisite capital financings to advance their technologies and industry position.
References and Additional Reading
David H. Crean, Ph.D., is a Managing Director for Objective Capital Partners, a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. Services include M&A sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. Additional information on Objective Capital Partners is available at www.objectivecp.com.
This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.