People have been discussing the importance of expanding opportunities for women in venture capital and startup entrepreneurship for decades. And for some time it appeared that progress was being made in building a more diverse and equitable environment.
The prospect of more women writing checks was viewed as a positive for female founders, a cohort that has struggled to attract more than a fraction of the funds that their male peers manage. All-female teams have an especially tough time raising capital compared to all-male teams, underscoring the disparity.
Then COVID-19 arrived and scrambled the venture and startup scene, creating a risk-off environment during the end of Q1 and the start of Q2 2020. Following that, the venture world went into overdrive as software sales became a safe harbor in the business world during uncertain economic times. And when it became clear that the vaunted digital transformation of businesses large and small was accelerating, more capital appeared.
But data indicate that the torrent of new capital has not been distributed equally — indeed, some of the progress that female founders made in recent years may have eroded.
The Exchange explores startups, markets and money.
Read it every morning on Extra Crunch or get The Exchange newsletter every Saturday.
During a time of plenty, many female founders are still going without. The Exchange reached out to a number of American and European investors and founders to get their perspective on how today’s venture market treats female founders.
Recurring among the responses was a general view that more women venture capitalists would help lessen the gender gap in investments, and that VCs became more conservative due to COVID-19 and its constituent economic disruption, reverting to offering capital to repeat founders and their existing networks, both groups that are less diverse than the pool of new founders.
Our collection of founders and investors also said that women have been especially double-tasked during the pandemic to take on more domestic responsibilities in part due to sexist societal expectations, adding that that sexism more generally remains a problem that either isn’t improving or is improving too slowly.
But before we get into the core issues that prevent improvements in gender equity in venture funding, let’s check in on the data from last year and contrast it to its antecedents.
What the data show
While there have already been reports on gender disparities in funding, Nokia-backed VC firm NGP Capital made a great contribution to research on the topic with its 2021 dossier.
First, its dataset is very large and covers more than one year. Using data from Q, its internal AI platform, NGP analyzed the subset of 9,422 European companies that raised VC funding between 2014 and 2019, out of a total sample of 21,289 European startups. Second, it made a great effort to isolate different factors, e.g., are there just fewer female-led startups? There are, but let’s get beyond that — because this is much more than a pipeline problem.
What happens when you look at founders with a similar background in the same sector, with the gender of the founding team as the only variable? The answer, unfortunately, is depressing.
“Based on a regression model, among all founders, all other factors being equal, being of the female gender alone reduced the probability of a founder being allocated venture capital by 17%,” the report highlights. And while its dataset ends in 2019, it cautions that projections for 2020 would look similar or worse.
Crunchbase data indicate that global venture funding to female-founded companies fell significantly in 2020. More recently, the annual U.S.-focused report of nonprofit organization AllRaise revealed that “funding for teams with at least one female founder fell 2.5% in 2020.” In other words, it is not just Europe. The pandemic’s impact is being felt around the world.
But that’s just the numbers; what is really happening on the ground? To find out, we enlisted several VCs and founders to get more granular.
As mentioned, all said they saw a connection between the disproportionately low amount of funding going to female founders and the low number of female check-writers. (As AllRaise notes, the term is a reference to decision-makers in venture capital — people who can write checks, lead deals and sit on boards.) While there are intricacies to the relationships between female VCs and founders, the data back up the correlation on a high level: Women VCs invest in up to twice as many female founders, earlier U.S. research from the Kauffman Fellows Research Center found out.
The problem? According to AllRaise’s report, 64% of VC firms in the U.S. with more than $25 million in assets under management (AUM) have zero female check-writers.
Flip this around, and this will bring you to the same conclusion as M12’s managing director, Tamara Steffens: “As more women become check-writers, more women will have network access, and more women will be funded.” Unfortunately, “network” is the key word here and explains in part why COVID-19 made things worse.
As VCs became temporarily more risk-averse, they relied even more heavily than usual on their networks. The preference for repeat founders also made the issue compounding: “Serial founders [ … ] are much easier choices to give cash to and they were the least affected during the pandemic. Historically, they’re mostly men and that has unfortunately widened the gap again,” we were told by Diana Koziarska, founding partner at Polish-American early-stage fund SMOK Ventures.
Societal issues
As the data imply, the impact of COVID-19 is not being felt equally among the sexes. Women have been forced out of the workforce in greater numbers thanks to sexist expectations about which partner in a heterosexual relationship will undertake rising domestic workloads, beyond personal preference, for example. That dynamic was felt especially in markets with underdeveloped social safety nets.
In the United States, for example, a place where health insurance is broken, leave policies are archaic and most families shoulder their own childcare costs, women’s participation in the labor force slipped to 57% earlier this year, “the lowest it’s been since 1988,” CNBC reported.
M12’s Steffens confirmed the point, writing to The Exchange that “COVID-19 presented new caregiving challenges for families, whether it was helping kids get through a remote school day, caring for elderly parents, or otherwise. In the U.S., women have internalized responsibility for caregiving without widespread, supportive programs.”
Steffens said that it was “no surprise,” but still “devastating that women dropped out of the workforce at four times the rate of men over the past year, going on to note that a “record number of VC dollars were distributed last year, but the percentage of funding to women shrank” and that it’s “hard to build and lead a company through a pandemic if society has also decided that you are the de facto caregiver.”
Neulogy’s Terezia Jacova echoed the sentiment, telling The Exchange that she has heard “from the fellow female investors [and] female founders” that “the pandemic [has] certainly placed either a big pause in starting or progressing with their business as they are more likely to take over the home and children’s care.” The investor also said that the “nature [or] sector” of the businesses that female founders may pursue can prove “more sensitive” to the pandemic’s business impact. So it’s a double-hit to female founder results.
M25’s Abhinaya Konduru agreed, adding that “the role that each gender holds in a household has become more prevalent during these challenging times than ever before.”
Sexism plays a role more broadly, as well. Some respondents said that sexism was not improving, while some were slightly more optimistic about change. Queenly co-founder Trisha Bantigue, for example, when asked if the pace at which sexism is bleeding out of the venture industry was hastening, said that she “wouldn’t say it’s accelerating, but … would say it’s hovering at the same spot.”
A lack of negative progress is better than backsliding. But a stagnant environment is not how a historically sexist industry gets closer to gender equity.
Any cause for hope?
Despite dispiriting data, there are some modest causes for hope. M12’s Steffens cited the recent AllRaise metric that 41% of new check-writers in the U.S. venture capital game last year were women, and noted that the percentage of women check-writers in the U.S. more generally rose from 12.3% to 13.3% over the same time frame.
It could be that those numbers do, over time, help change the ratio of capital that flows to female founders for the better.
Neulogy’s Jacova detailed some efforts that have encouraged her, saying that “actions and initiatives focusing on increasing the diversity in the investor and entrepreneur world [are] great, important and [should] always [be] welcome.” She added that she’s seeing more gender-diverse panels, and that “mixing the gender in all activities related to [diversity in] investments is something I see more and more often these days and makes me happy and that is the step forward in my eyes.”
In our view, there’s no excuse for the slow pace of improvement toward greater equity in the venture capital/startup game. And we’re tired of writing dispiriting posts about it.
Comment