Movements can take a long time to build, and funding for women founders is no doubt true.
While not all arrows are pointing up, most trends suggest momentum is building. According to Q4 2021 PitchBook NVCA Venture Monitor:
- Venture capital invested in private companies increased 98% from 2020 to $329.9 billion in 2021. That’s good news for the economy. These companies are most likely to innovate, increase US competitiveness and productivity, create good-paying jobs, and grow the economy.
- While the amount is still small — $54.8 billion — in just one year, venture capital has grown by a whopping 138% to private companies with at least one female founder. They’ve gained some ground since the peak of the #MeToo movement in 2017, when the percentage of venture capital going to founding teams with women was 18.4%. In 2021, mixed-gender founding teams received 17.3% of venture capital.
- Funding for all teams founded by women continues to decline. A pathetic 2.0%, or $6.4 billion, in venture capital went to these companies in 2021, compared to a 2009 peak of 2.8%. That’s an imbalance Julie Castro Abrams is hoping to correct. She is a Managing Partner at How Women Invest, a venture capital fund dedicated to transforming the capital landscape by supporting women-owned companies. VCs send a message that you need to have a man on your founding team, not because he adds value, but because they don’t give you the time of day otherwise. This unfounded message hurts women’s confidence and VC fund performance.
“Good results don’t drive investment behavior,” Castro Abrams said. Analysis by participants in the MassChallenge Accelerator program from First Round Capital and the Boston Consulting Group showed that female founding teams outperformed all-male teams. While less likely to raise follow-on funding, founding teams with women are more likely to exit and have a higher internal rate of return (IRR) — 112% vs. 48%.
The importance of general practitioners should not be underestimated. “If you have a general partner, she is up to twice as likely to invest in female founders than a male GP,” Castro Abrams said. According to PitchBook, there has been growth — from 12.0% in 2019 to 15.3% in 2021. However, 15.3% is a far cry from the 25% needed for an inflection point.
“If there is no diversity [VC] Leadership, it’s a real risk area,” Abrams said. “They don’t get a huge chunk of the quality deals that are out there.” Research found that VCs who increased their percentage of hired female partners by 10% achieved an average of 1.5%. Improving annual fund returns and a nearly 10 percent increase in profitable exits, writes Waverly Deutsch, Chicago Booth professor, startup mentor, and investor. Venture firms have increased their diversity initiatives from 24% in 2016 to 43% in 2020 elevated.
In line with its values, One Family Office invests in various female-led VC funds
Four out of ten VCs report that limited partners (LPs) — pension funds and other institutions, endowments, corporate investment branches, family offices, and the high-net-worth individuals who provide the capital investing in the VC fund — ask about their diversity strategies. Family offices have an estimated $6 trillion to $7 trillion in assets under management Family Offices: A remnant of the shadow financial system.
Attractive above-market returns have prompted them to invest in venture capital. Many invest their money where their values lie – impact investing, and gender lens investing is a form of impact investing.
Molly Gochman founded her family office, Stardust Equity, about 15 years ago. About four years ago she broadened her investment focus to include venture capital. “I invest with gender equality in mind,” Gochman said. “Women under-promise and over-deliver… These investments have been really stable and I see them as a lot less risky.” It doesn’t just invest in female founders; It invests in services and products that make life easier for women.
“I have more flexibility and discretion in what to invest in and how to prioritize risk and return [compared to VCs or institutional investors]’ Gochman said. Approximately 20% of their portfolio catalyzes change and impacts society. While 80% focus on market returns, “we have different ways of measuring them,” she said.
Unlike institutional investors like pension funds, Stardust has no minimum size for the VC funds in which it invests. None of her female GPs have crossed the $100 million threshold. Gochman’s mission is to use more of these managers and help them scale.
“Last year we invested in 19 funds, many of which are emerging venture capital managers, mostly women and managers of color,” said Helena Hasselmann, managing director of Stardust Equity. The company also set up a fund of funds within a large banking institution, which also raised capital from other customers.
“We are finding incredible direct investment opportunities from these emerging managers,” said Hasselmann. Most of the funds they invest in are small and don’t have the resources to make follow-up investments. Stardust does.
Various emerging fund managers can benefit from public-private partnerships
As the steward of taxpayers’ money, the SBA has a responsibility and mission to create, sustain and grow small businesses, particularly those struggling to access capital. These challenges can be due to gender, race, ethnicity, industry, geographic location, etc. Through Small Business Investment Corporations (SBICs), the SBA provides licensed private equity fund managers with low-cost, government-backed capital to invest in US small businesses and startups.
“There has been a tremendous increase in the number of seed-stage venture funds created by a variety of emerging managers,” said Bailey DeVries, associate administrator, Office of Investment & Innovation US Small Business Administration. “We [the SBA through SBICs] are poised and well positioned to make early-stage and equity investments on a broader basis. This means that the SBIC needs to be adjusted [rules, regulation, and procedures] which we are actively working on.”
Because VCs, their LPs, and portfolio companies are not required to report demographic information about their teams, diversity data is limited and inconsistent. The Office of Investment & Innovation has prioritized data collection and building its technology infrastructure to provide granular, disaggregated data that researchers can analyze to better understand the impact of diversity, equity and inclusion practices on fund and portfolio company performance .
What trends do you see that will impact the ability of female founders to raise venture capital?