Venture Capitalists Seek to Minimize Risk. So, Where Are All the Female- Led VC Funded Start-ups?

Ever heard of the Medici Effect? It says the world’s greatest innovations have one thing in common: diversity of input resulting from convergence of ideas in art, science, astronomy, and engineering that occurred in Florence during the fifteenth century.

Study after study proves this to be the case today in business:

• According to McKinsey, a company is 33% and 21% more likely to have above average profitability when in the top quartile for ethnic & cultural and gender diversity in management, respectively.
• According Gartner’s CEB, Gender-diverse and inclusive teams outperformed gender-homogenous, less inclusive teams by 50%, on average.
• According to HBR, Companies with above-average total diversity, had both 19% points higher innovation revenues and 9% points higher EBIT margins, on average.

Diverse and inclusive teams / organizations in terms of gender, racial, ethnic, age, points of views and cognitive approaches bring a rich range of thinking and views to the table, including those of their customers. They not only make better decisions faster and are more innovative, but are also able to better execute on those decisions.

Broader diversity paired with a culture of inclusion are associated with better outcomes for business performance and innovation and should contribute to a perception of lower risk for investors. But in the world of venture capital – the foundation of developing innovation in our society – this is not the case.

Venture capital firms fund male start-ups at a much higher rate than female startups, with more money in initial and subsequent rounds. According to Pitchbook, in 2017, all-male founding teams received about 79% of funding; 12% goes to mixed gender teams with only 2% of funding and 4.4 % of deals went to women-founded start-ups.  A study from the Boston Consulting Group and MassChallenge, a network of startup accelerators, found that of the 350 companies examined, the average woman-founded startup received $935,000 in funding. That’s less than half of the $2.1 million awarded on average to the male-founded startups in the study.

Start-ups that lack diversity early-on often build up ‘diversity debt’ that perpetuates and is hard to reverse as the company grows. We see this with large tech companies now struggling to reverse years of diversity debt.

Why?

Unconscious bias creates a distorted perception of risk.

VC firms tend to avoid risk, and therefore, they invest in people in familiar social networks. Venture capital firms themselves are overwhelmingly male – Tech Crunch reports that only 8% of all firms’ full-time investing partners were women – and men tend to have social networks filled with men. It just feels safer to fund individuals like ourselves.

Beyond social networks and backgrounds, unconscious bias can affect female entrepreneurs and the funding they receive in other important ways. For example, studies show that VCs talk about men and women entrepreneurs differently and ask women different types of questions than men. In the study, 67% of the questions asked to male entrepreneurs were considered to be promotion-oriented. They focused on hopes, achievements, advancement, and ideals. At the same time, 66% of the questions asked to female entrepreneurs were prevention-oriented (risk avoidance), which were categories of concerns about safety, responsibility, security, and vigilance. In laboratory settings and in actual pitch competitions, investors preferred entrepreneurial pitches presented by male entrepreneurs compared with pitches presented by female entrepreneurs, even when the content of the pitch was the same.

A Gartner survey conducted in partnership with Springboard Enterprises shows that female founded start-ups were up to three times more diverse in their founding teams, in leadership and in their workforces than startups and tech organizations at large (see Table 1). The vast majority of respondents, over 75%, exhibited inclusive cultural norms and leadership behaviors, such as encouraging challenging the status quo, encouraging collaboration and teamwork, empowering team members, supporting the proposal of novel ideas and sharing credit for team success. The survey also found that a higher female composition across the company even within this group of female-led companies related to higher market growth.

Table 1: Companies with Female Entrepreneurs Have A More Gender Diverse Workforce Than Start-Ups and Tech Overall

Like with VCs and startups in general, networks also play a role in this female-led start-up population. People start companies with people they have worked with before and serial entrepreneurs often work with the same teams over and over again. But in this population, the networks tend to be more diverse with minimal diversity debt at the outset.  This group also tends to lean towards addressing gender diversity in hiring with 71% of respondents saying they explicitly recruit and mentor women, although most also said they hire the best person for the job regardless of gender.

Most large companies across industries have initiatives underway to address gender and ethnic imbalances mostly because they believe it’s good for business, although some have moved reluctantly only after bad press.  However, we can take lessons from companies such as Alibaba and SAP and Salesforce, which have made diversity and equality core to their values. Jack Ma (Alibaba) said at Davos WEF in 2018:  “If you want your company to be successful; if you want your company to operate with wisdom, with care, then women are the best. He also went on to say that, “37% of senior management in Alibaba are women. Part of the ‘secret sauce’ of our success is because we have so many women colleagues.”

The study from the Boston Consulting Group and MassChallenge also found that  female-founded startups outperformed their male counterparts’ in terms of revenue, bringing in $730,000 over a five-year period versus $662,000 for the men. In other words, they returned 78 cents per dollar compared to 31 cents for the men.

When will investors get on board? When will they view diversity as a way mitigate rather than add to their risk?

I would love to hear your thoughts…

Regards,

Rita

Check out our new research: Diversity and Inclusion in Data and Analytics Fuels Innovation on the Path to Digital Transformation