Changing the Status Quo in Venture Capital

Venture Capital Gender Gap

Imagine you’re one of the founding executives at a promising new software company. You’ve already built and sold two other companies, gaining valuable experience and skills. Together with your co-founders, you’ve steered this company to early success—it’s enjoying sustained growth, robust sales, and a strong valuation in the marketplace. Your office space is in a great neighborhood in New York City, filled with talented, hardworking employees who are excited about the company. You’re well networked with advisers and mentors, and you even have several pitches to venture capitalists coming up, as your startup goes for late-stage funding. And, importantly, you’re a woman.

Only about 1% of all businesses in the United States ever receive venture financing, and for women, the slice of the VC pie is even smaller. Sound discouraging? In terms of what makes for a fundable company, the scenario above is close to ideal for women entrepreneurs in America today. Venture capital investments are most likely to be late stage, and skewed toward companies in biotech, medical device, and software industries where the female executives are experienced, skilled, and already have VC connections.

This situation actually represents marked improvement over even several years ago. The Diana Project, a research program focused on examining venture capital investments in women entrepreneurs, analyzed 6,793 unique companies in the United States that received VC funding between 2011 and 2013 for its report Bridging the Gender Gap in Venture Capital (PDF). It found that the share of VC funding for companies with women on the executive team has tripled since the height of the dot-com bubble, jumping from just 5% of total VC dollars in 1999 to more than 15% today. Still, by not investing more in women entrepreneurs, the venture capital community is missing a huge opportunity for profit.

A Win for Venture Capital

A 2012 Kauffman Foundation report showed that the majority of venture capital investments aren’t worthwhile for investors. Of 100 venture funds, only 20 generated returns that beat the public market (more than 3% annually) and on average, after fees, investors failed to recoup their capital. Yes, venture capital investors are well aware of the risks, but don’t these numbers indicate ample room for improvement?

Ongoing research supports what many of us working with diverse colleagues know firsthand: diversity is good for business. VC-backed companies with women in senior leadership roles are more likely to have IPOs and profitable acquisitions than are companies whose executive teams are all male, and are also more likely to have higher valuations. These same companies generate a 35% higher return on equity and better returns to shareholders, according to research from Bay Area VC firm Illuminate Ventures. Yet, according to the Diana Project, businesses with all-male teams are more than four times as likely to receive funding from VC investors as are companies with even one woman on the team.

“It’s nice to see the trend line going up,” says repeat entrepreneur and Polaris Partners co-founder Terry McGuire. “But I’m disappointed with the numbers overall because we [the venture capital community] can do better than that. I think we should get everyone moving faster in this direction, because it’s not just women that are under-represented, it’s minorities also.”

The gender balance in McGuire’s own portfolio far exceeds the averages reported in the Diana Project report. Like McGuire, savvy venture capitalists should strive to add women entrepreneurs to their portfolios because companies with women at the top are a smart investment, and seemingly hidden in plain sight.

A Win for Women Entrepreneurs

Women stand to benefit greatly from a more balanced VC landscape. Women are majority owners of roughly 10 million businesses in the United States, spanning the gamut from a baking operation run out of a home kitchen to billionaire Sara Blakely’s Spanx headquarters in Atlanta. Granted, only a sliver of these 10 million are appropriate candidates for VC investment, but the Global Entrepreneurship Monitor’s finding that 36% of women with established businesses want to grow their ventures shows that the appetite for funding outpaces the current supply.

“Sometimes, this conversation can sound like we care only about women realizing their potential as individuals. That’s really not what this conversation is primarily about,” says Jules Pieri, co-founder and CEO of The Grommet. “It’s about having a strong economy, and having access to healthy companies. Imagine if we were having this conversation about universities instead of VC. They are another major point of access to opportunity: imagine if they only accepted 2.7% of women, or men for that matter. Imagine that! We’d be up in arms. I see access to capital to build organizations as being equally important.”

A straightforward way for venture capital firms to meet this demand is to start in their boardrooms, suggests Erica Swallow, a General Catalyst summer intern whose blog post about women n VC sparked a firestorm of gender balance discussion last summer. “The majority of self-aware venture capitalists understand there’s a problem,” she says. “Firms that take gender inequality seriously should signal their interest in improvement by speaking with employees—male and female—about their thoughts on the issue.”

To increase their likelihood of investing in women entrepreneurs, VC firms should do everything possible to recruit and retain women investors. Having women at the partner level can make the difference between investing in female companies or not; VC firms with female partners are twice as likely to invest in companies with senior women and three times more likely when the CEO is a woman, compared to investment decisions by all male firms, according to the Diana Project research.

Champions of women entrepreneurs should be encouraged by the progress made so far. The challenge now is to close the gender gap faster, for everyone’s benefit. Women entrepreneurs—and their potential customers and clients everywhere—are worth more than just a 15% investment.

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