Investing in Female-led Startups: How VCs can benefit from more inclusive investment practices

This article is the first in a series from Noga Tal addressing the inclusion of women in the startup industry. From accelerators to entrepreneurs, from investors to government policy and programs, we'll explore the current state of women's inclusion in our industry and provide some tips and best practices for further advancements.

It should come as no surprise to anyone that women are underrepresented in the tech industry.  The state of affairs in Silicon Valley and other top startup ecosystems seems bleak for women and one major reason for this is funding – or rather the lack thereof.

Without financial backing, few companies ever make it off the ground and female-led businesses receive a fraction of the venture capital and angel investment that men do. In 2014, U.S. tech startups with female founders received just 8.3 percent of venture capital funding, while according to Ethan Mollick, professor of management at Wharton “about 38 percent of new businesses in [the U.S] are started by women but only between 2-6 percent of those founders receive VC funding.”

Meanwhile, TechCrunch reports that only 7 percent of partners in the top one hundred venture firms are women. At the same time, Bloomberg reports that female business owners drew in an average of $77 million compared to the $100 million pulled in by men – a result that is slightly worse than the existing gender pay gap where women earn 79 cents to the dollar.

Researchers found that women who start a business are less likely to ask for venture funding.

Why, in 2016, are women still at a huge disadvantage when it comes to funding?

Researchers found that women who start a business are less likely to ask for venture funding. One such survey of almost 350 female tech startup leaders found that 80% used their personal savings as their main source of capital when starting their businesses. Reasons for not asking include being put off by the ‘macho’ male environment existing in these industries, as well as their perceived ‘boys’ clubs’ that promote a 24/7, hyper-competitive atmosphere.

There are numerous attitudes and cultures woven into these traditionally male industries that put women at a serious disadvantage when it comes to funding; however, a few of these barriers stand out above others. 

Executive director of Angel Labs, Tugce Ergul, identified investment banking, financial consulting and successful entrepreneurial experience as the main routes to gaining venture capital. As she highlights, this puts women at a serious disadvantage: “These pools have very few women to begin with. There are fewer female-founded companies, which means fewer women have the money to recycle back into startups."

Fortunately, there is growing support within the industry, with some – but not enough – investors realizing the benefit of nurturing, advising, and most importantly, funding female entrepreneurs. Progress is slow, but it is noticeable.

While some companies like Golden Seeds are focusing solely on women, others, like Angel Labs, are tweaking their existing model to attract more female entrepreneurs. Angel Lab’s initiatives prove women can compete on the same platform as men and the company reports that after building a global community of 6,000 people, 47% are female and women make up 44% of those going through their accelerator programs.

Women are the future for growth expansion in tech

The capability of women as entrepreneurs is dynamic and impressive. Time and again, they bring an extraordinary amount of savvy, enthusiasm and expertise to the table, offering much-needed diversity, new ideas and business prowess.

Back in 2012, when female entrepreneurs were at an even greater disadvantage than they are today, women-owned businesses employed 7.7 million people that's forty percent more than the U.S.’s three largest employers combined (IBM, McDonald's and Walmart).

Just in the last 15 years, women-owned businesses saw a striking 58 percent increase in revenue, and this very revenue has skyrocketed at a rate that is more than twice the amount of the states' population growth during those same fifteen years. Even more compelling, Fortune reveals that women-led Fortune 500 companies outperform those led by males.

Fortune reveals that women-led Fortune 500 companies outperform those led by males.

While female entrepreneurs have proven they can start companies with half as much funding as men, they shouldn’t need to. Not only does it exclude a huge percentage of women without savings from entrepreneurship, but more money needs to be entrusted to women if investors want to see significant returns throughout the next decade. This is something that is echoed by experienced industry leaders, like Sara Brand of True Wealth Ventures who says research shows “investing in companies with a larger percentage of women in leadership…leads to higher returns and capital efficiency”.

Investors that are nailing the inclusion of female-led startups

There are a number of investment firms that are currently way ahead of the curve when it comes to supporting female entrepreneurs.

Astia was founded in Silicon Valley in 1999 as a non-profit organization that identifies investment-ready companies with women in positions of leadership, providing them with access to capital and resources. Golden Seeds is an early-stage investment firm established in 2005 that, to date, has invested over $70 million in 65 women-led enterprises.

There are also more specialized firms, like Female Founders Fund, which backs female-led businesses specializing in e-com, media, and web-enabled products, and Intel Capital whose priority is tech startups run by women and underrepresented minorities. BBG Ventures is an early stage fund that focuses on mobile and consumer internet startups, while True Wealth Ventures invests in companies that design, market, and scale health and sustainable products and technology.

Women are getting in on the investment side as well. Two out of Aspect Venture’s three founders are women and the firm closed a $150 million fund in May 2015, focused mostly on health, millennial and security services. Cowboy Ventures, founded by Aileen Lee, supports seed-stage startups and has an all-female partner rank.

While female entrepreneurs have proven they can start companies with half as much funding as men, they shouldn’t need to.

So what can other investors do to start addressing these gender gaps? Stay tuned for the next post in this series where we’ll cover a few tried and true tactics you can adopt to begin incorporating a female-friendly approach.