According to a report from Crunchbase, 2018 marked an all-time high for investments in startups with at least one female founder, with nearly $40 billion invested altogether. While this represents only 17% of the total venture investments in 2018, it is nearly double the amount raised by female founders the previous year. These encouraging statistics, as well as fundraising successes such as The Wing ($117.5 million raised to date), Glossier and RentTheRunway (now classified as unicorns valued at $1.2 billion and $1 billion respectively), are certainly cause for optimism.
However, while female entrepreneurship is on the rise, on average the amount raised per startup remains lower – female-founded companies were still far less likely to hit the $100 million mark or higher. Last year, of the $39.8 billion raised by women, only 50 known fundraising rounds hit this threshold, compared to the 338 rounds of this size for male-only founder teams. We have noted the bright spots that indicate change is possible, so what exactly is the hold up for the majority of the startup space?
Implicit or explicit bias
Almost 60% of female founders in a 2018 survey conducted by Fast Company and Inc. cited experiencing gender bias from bankers or investors as one of the major challenges they encountered during the fundraising process. Some of those surveyed said they also experienced instances where vendors or potential partners made assumptions about men on their leadership team, assuming a man must be the CEO. What’s more, one study found that 68% of investors considered pitches presented by men to be more persuasive when compared to their female counterparts, “even when the content of the pitch is the same.” A phenomenon known as similarity or “ingroup” bias may also come into play. This is the tendency to prefer those we perceive as being like us, for example in ethnicity, background, or gender, favoring those in a similar group to ourselves above others.
A Harvard Business School study even found stark differences in the questions female founders were asked during pitches when compared to male founders. In fact, “67% of the questions posed to male entrepreneurs were ‘so-called’ promotion questions, on subjects such as the total addressable market. By contrast, some 66% of the questions asked of female entrepreneurs were prevention-focused: How to defend market share or protect intellectual property, for instance.” Through no fault of their own, women are put in a position to defend their business and its potential losses, while men are assumed to have the ability to conquer the market.
Another difficulty arises when the female management team are pitching their idea to an audience who don’t understand the product or intended target audience. Traditional VCs are overwhelmingly male (75% of VC firms don’t have even one female partner) and consequently may have trouble relating to female-targeted products, for example those centered on parenting, fashion or FemTech, technology-driven products addressing a myriad of health and reproductive issues faced by women. Similarly, difficulties arise when pitching products aimed at serving low-income or minority populations to investors unfamiliar with such underserved demographics. Needless to say, minority female entrepreneurs can face double the presumptive misconceptions.
The pitch itself poses other challenges. Women, and women of color, may feel less comfortable pitching to a majority-white male room than they would in a more diverse room. Stereotype threat is the phenomenon that occurs when there is the opportunity, or perceived opportunity of confirming a negative stereotype, and can affect anyone in a group plagued by damaging preconceptions. Being the only woman, or minority woman, is a prime example of when stereotype threat can negatively impact performance, when confronting biases against them as a member of a certain group. There is also copious evidence demonstrating how the so-called “confidence gap” impacts different genders, another example of why men in the same circumstances may outperform women.
Diversify the decision-makers
If the statistics are discouraging for women, they are even worse when looking at those for women of color. 2018 research carried out by Richard Kerby, a partner at Equal Ventures, found that VCs are predominantly white, over 70%, while 26% are Asian and a mere 3% are black. So what is the solution? Dr. Anita Sengupta, Co-Founder & Chief Product Officer at Airspace Experience Technologies, thinks the answer is increased diversity. Sengupta, who leveraged the SeedInvest platform for her company’s raise, explained that she always disliked being the “token female scientist”, and found it especially challenging when trying to move up in the power structure and break through the glass ceiling. She is a firm believer that diversity of thought leads to diversity of solution, and the evidence for this is encouraging.
A 2018 Harvard Business Review study compared the financial performance of homogenous VC firms (where members shared traits such as ethnicity, gender, schooling background) to more diverse firms. The damaging effect of shared ethnicity was evident – reducing the success rate of acquisitions and IPOs by 26.4%. Conversely, firms with a higher proportion of female partners concluded that on average, 10% saw a 1.5% increase in overall fund returns each year, and had 9.7% more profitable exits. Perhaps the VC world is beginning to take note, as there has been a recent uptick in the number of VC firms started by women, and women of color, notably Backstage Capital and The Female Founders Fund. Additionally, last year in Silicon Valley the most women ever in one year were added as investment partners at venture capital firms.
A step in the right direction
Equity crowdfunding is another fundraising avenue that offers greater opportunity to female and minority founders. The passage of the JOBS Act made it possible to raise capital from Main Street investors and democratized private fundraising. Now founders aren’t dependent on approval from a homogenous investment committee and they can instead raise from communities that more closely resemble themselves, regardless of their investors’ accreditation status.
SeedInvest is proud to support female-founded startups on their fundraising journeys. Check out the companies currently raising on our platform.
This post was written by Alice Hankin on October 17, 2019
The Benefits of Investing in Diversity