The venture capital industry, long notorious for being a “boys’ club”, is seeing a surge of female-founded firms intent on swaying the global sex-distribution of funding dollars—but is it enough?
In 2019, men received 87 percent of global venture capital dollars, with 3 percent going towards female-founded startups. Globally, only eight women made it into the top 100 venture capital partners last year, even lower than the nine women who made it in 2018. And 65 percent of US venture capital firms still have zero female partners—despite 2019 being a record year for women making partner in venture capital firms in the US.
As the financial gateway for many new businesses, venture capitalism plays an essential role in deciding which business ideas make it and which won’t. But the world of venture capital has long been notorious for being a “boys’ club”, known for its tendency to fund a disproportionately large number of white, male founders, resulting in a lack of funding for products and services pitched by women founders.
This exclusion of women in the funding process has dangerous consequences not only for women founders, but for society as a whole. The lower the number of female venture capital partners, the higher the chance that companies will assume men to be the default sex in the design process, causing what Caroline Creido Perez, a journalist focused on gender issues, calls a “one-size-fits-men” approach.
While the issue of a lack of women representation is prevalent in almost all industries, technology is a particular hotbed for “one-size-fits-men” designs. When Apple first launched its health app in 2014 it was able to track minute changes in a person’s blood alcohol content and even a person’s sodium intake, yet it couldn’t track a woman’s menstrual cycle; speech-recognition software has a higher chance of understanding male voices compared to women’s (Google’s software is 70 percent more likely to understand men); and on average, smartphones are 5.5 inches in length, which is considered too big for most women’s hands and too large to fit into women’s pockets.
This is where women-founded companies should come in. Companies founded by women have a unique advantage that no male-founded company can compete with: the ability to intimately understand the true needs and wants of women.
A UNIQUE SELLING PROPOSITION
Co-founded by Whitney Wolfe Herd, dating app Bumble, one of the world’s most successful dating apps, has a unique selling proposition: it prioritises women’s safety by allowing only women to initiate the conversation. It has proved to be an effective strategy. Since its founding in 2014, the app has acquired over 100 million users and is now set to IPO at a US$6 billion valuation.
In 2012, entrepreneur Sara Blakely became the world’s youngest self-made female billionaire after she revolutionised the industry of shapewear with her own creation, Spanx. It was her personal experience dealing with uncomfortable and easily visible alternatives that spurred her to design Spanx—a product for women, by women. “I remember thinking [during the design process], ‘Where are the women? Why am I not speaking to any women here?’ And then it dawned on me that maybe that’s why our pantyhose had been so uncomfortable for so long, because the people making them aren’t wearing them,” Blakely told Inc.
Herd and Blakely’s ability to pay attention to the wants of women and go to market with successful products that met those wants was far from chance. Other women founders have gone on to establish some of the biggest brands in the world, including dating site Coffee Meets Bagel, which was started by sister-founders Arum, Dawoon and Soo Kang; The Body Shop, founded by Anita Roddick; ClassPass, founded by Payal Kadakia and Mary Biggins; and Canva, founded by a trio of founders including Melanie Perkins, who is now Australia’s youngest billionaire with a personal fortune of US$1.3 billion.
There is so much research that shows the success rate of a diverse portfolio, and that research ties directly to the bottom line of their fund—this is the part where I get very surprised that at least they haven’t woken up to that yet
— Kate Brodock
FEMALE-FOUNDED VC FIRMS ARE STEPPING IN
The gender-blindness towards women’s ideas and products is possibly a direct consequence of the concentrated male leadership within the venture capital industry, says Pocket Sun, the co-founder and managing partner of venture capital firm SoGal Ventures. “It produces a big blind spot where these male investors tend to share similar points of views and similar interests in what they like to invest in.” This leaves a considerable chunk of the investment opportunities ignored or pushed to the side, she says.
“Male investors have told me: ‘I invested in three female founders before and they didn’t do that well, so I’m not investing in female founders again.’ Which is ridiculous because he’ll probably invest in 30 male founders and I’m sure more than three of them didn’t do that well, but you don’t just give up on male founders,” says Sun.
Female-founded venture capital firms such as SoGal Ventures have seen substantial growth the last few years, with many intent on catering to this largely untapped class of diverse entrepreneurs.
Jennifer Neundorfer, the founding partner of January Ventures, a US-based firm focused on funding underrepresented founders, is one of the women who has joined the growing pool of female founding partners. Her firm focuses on funding “the founders of the future”. In an attempt to attract a greater diversity of entrepreneurs, January Ventures doesn’t require a pitch deck or “warm” introduction—the latter being an accepted industry norm used to “quality-control” and limit the number of applications by requiring candidates to get an introduction from another founder within the firm’s investment portfolio.
While Neundorfer has a different vetting process from most VC firms, her objectives are the same. “We are not a charity. We focus on returns, not gender. We’re investing in an overlooked asset class that is over performing… If I felt like women were underperforming or weren’t as ambitious, then I wouldn’t have started [January Ventures],” she says.
The growth of female-founded venture capital firms is helping to push female founders into the spotlight and providing proof of the high returns that come with investing in women. But despite their success, both Sun and Neundorfer are realistic that as microfunds they alone cannot sway the global sex-distribution of funding dollars. That responsibility should be falling upon traditional large-scale venture capital firms, they say.
Male investors have told me: ‘I invested in three female founders before and they didn’t do that well, so I’m not investing in female founders again.’ Which is ridiculous because he’ll probably invest in 30 male founders and I’m sure more than three of them didn’t do that well, but you don’t just give up on male founders
— Pocket Sun
CHANGING THE SYSTEM
Kate Brodock, founding partner of venture capital firm The W Fund, believes that to induce change across the industry, firms need to start by reflecting on their internal policies. Particularly the need for warm introductions, the style of pitching that’s accepted and the line of questioning towards founders.
“[Traditional fund managers] need to look at how their company assesses founders and where they’re getting their deal flow from… There is so much research that shows the success rate of a diverse portfolio, and that research ties directly to the bottom line of their fund—this is the part where I get very surprised that at least they haven’t woken up to that yet. They need to understand that they are going to have better fund performance if they take this on and do this work.”
The importance of funding more diverse founders is being recognised, albeit slowly, with some established venture capital firms committing to invest in female-founded startups, and many taking part in The Billion Dollar Fund, a global campaign that aims to raise US$1 billion in funding by 2020 specifically for companies founded by women.
Despite this positive momentum, the underlying shift towards equality in funding still hasn’t seen considerable change. A 2018 study funded by Morgan Stanley shows that the current mindset of investors certainly hasn’t changed: out of 101 investors, nearly 60 percent believed that women and minority-owned businesses receive “about the right amount of capital”, while 20 percent believed they receive “more capital than they deserve”.
A fundamental change in the venture capital industry will take time and only come about when the results speak for themselves, says Neundorfer. “It’s not going to be out of the goodness of anyone’s heart,” she says. “As we talk about more successful female founders, young women and little girls are going to see entrepreneurship as a viable path, so we believe we’re at the beginning of a real wave of female founders. And that’s really exciting.”