Breaking the Boys Club — The Female Founder Funding Gap
Gender disparity exists within many different aspects of our everyday life and the already very innovative startup and venture capital scene makes no exemption. European venture capitalists, investors, and startups are calling for more capital to flow into female-founded startups to support them and their startups, but also to raise awareness and interest among women to engage in the investment space.
But where does the problem originate from? There are numerous reasons why the funding gap for females continues to be extremely wide. This article elaborates on two reasons, which happen to be two sides of the same coin. A main problem is that female-founded startups are not getting enough capital, the other one regards an aspect of investment decisions taken in VC funds.
Lack of female investors
The gender disparity already starts with a lack of female general partners. Pitchbook data from 2016 to 2020 has shown that only 10% of European VCs have a gender-mixed general partnership team. Since this team also takes on the decision-making function within the fund, fewer women are represented in investment decisions. Increasing the proportion of women in the venture capital scene would lead to more gender-balanced investment decisions, since organizational experience and empirical data suggest that women are twice as likely to invest in companies that are led by or supported by women. Studies from “Kauffman Fellows” are consistent with the broader research and show that female venture capital fund partners invest more in female founders than do their male counterparts, a finding that is also consistent across all startup industries. Nevertheless, the possibility of a general bias towards the same gender cannot be ruled out, no matter whether it is among females or males, but the lack of female investors just makes this funding disparity a more obvious one. The results speak for themselves: companies with female founders performed 63% better than did all-male founding teams. Waverly Deutsch, a Chicago Booth professor, startup mentor, and investor states “[…] that VCs that increased their proportion of female-partner hires by 10 percent saw, on average, a 1.5 percent improvement in annual fund returns and a nearly 10 percent increase in profitable exits”. This clearly amplifies the positive performance of investments in female-led startups and highlights the importance of having female investors in VC funds.
Lack of female founders
Besides the lack of female investors, there is also a clear lack of female founders. According to Statista, only 20% of the global startups have at least one female founder. First Round Capital and BCG analysis show that founding teams with women outperformed men-only founding teams. Founding teams with women are more likely to exit and have a higher internal rate of return — 112% vs. 48%. This data shows that the performance of female-led startups cannot be the reason for the funding gap. BCG analyzed data over five years and found that startups founded or co-founded by women raise less capital but generate more revenue, meaning that these startups generate USD 0.78 for every dollar raised, while startups founded by men generate less than half of that, at just USD 0.31 per dollar invested.
Lack of investment in female founders
This is where the circle closes, as it is only logical that a smaller number of female founders means that fewer female founders can be funded. Indeed, the numbers speak for themselves, as Pitchbook — European VC Founders Dashboard cites “[…] companies founded solely by women garnered just 1% of the total capital invested in venture-backed startups in Europe”.
Capital raised by European startups from 2017 to 2021
After years of increasing investments, a drop in venture capital funding for women-led startups during the Covid-19 Pandemic can be observed. Several recent studies point out that the pandemic takes a greater toll on female workers than does on male workers, with the startup world not being an exception.
Another survey conducted during the Vegan Woman Summit showed that 75% of female founders face gender bias and feel that their male co-founders do not face the same issues. These numbers are concerning. The likelihood of raising capital should be independent of gender and, instead, be based on for example business plans and projections. Unfortunately, however, female founders still do not receive the same level of financial backup as do companies founded by men. Even though the development over the years has been positive, prejudices surrounding women still exist. With these facts at hand, it is partially explained why it is more challenging for females founders to raise money than it is for male founders, a problem and challenge that is expected to be tackled in the future.
Path to success: Diversity
A look at the positive developments of venture capital going towards women shows that more and more VC funds are looking to support female-founded startups. For example, the Berlin-based Female Catalyst Fund “Auxxo” is the first VC fund in Germany that is solely investing in startups with at least one female founder.
By supporting females in advancing their ideas and funding their businesses, the overall need for capital will increase. Simultaneously encouraging female investors and general partners to take roles and leading positions at venture capital firms will increase investment in female-founded startups, thereby increasing the capital available to women-led businesses. Confidence in women’s capabilities and potential has to be present at both ends of the deal. Diversity is key within any part of the startup scene as a recent article from TechCrunch states: “This all leads to one place: The clearest path to funding different kinds of founders with different kinds of ideas is to put different kinds of investors on the investing side of the table”. Overall, it can be concluded that the venture capital industry needs more women both as investors and female founders since diversity is a clear path to success and innovation.
This newsletter is fully independently produced by the members of the Nova Venture Capital and Private Equity Club. This club is run by students of the Nova School of Business and Economics.
You can directly access the sources we used:
75% of Women Face Gender Bias in Plant-Based Industry: “People Have Assumed I Am My Male Co-Founder’s Assistant or an Aide.” — vegconomist: the vegan business magazine. vegconomist — the vegan business magazine. (2020). Retrieved 21 February 2022, from https://vegconomist.com/society/75-of-women-face-gender-bias-in-plant-based-industry-people-have-assumed-i-am-my-male-co-founders-assistant-or-an-aide/.
Abouzahr, K., Krentz, M., Harthorne, J., & Brooks Taplett, F. (2018). Why Women-Owned Startups Are a Better Bet. United States — EN. Retrieved 25 February 2022, from https://www.bcg.com/en-us/publications/2018/why-women-owned-startups-are-better-bet.
Chaturvedi, S. (2021). Council Post: Why We Need More Women Investing In Women. Forbes. Retrieved 28 February 2022, from https://www.forbes.com/sites/forbesfinancecouncil/2021/03/09/why-we-need-more-women-investing-in-women/.
Colin, W., & Sundaramurthy, G. (2020). Women VCs Invest in Up to 2x More Female Founders. Kauffman Fellows. Retrieved 28 February 2022, from https://www.kauffmanfellows.org/journal_posts/women-vcs-invest-in-up-to-2x-more-female-founders.
Deutsch, W. (2021). Women and Minority Investors Are Taking Matters into Their Own Hands. The University of Chicago Booth School of Business. Retrieved 28 February 2022, from https://www.chicagobooth.edu/review/women-and-minority-investors-are-taking-matters-their-own-hands.
Diaz-Ortiz, C. (2021). TechCrunch is part of the Yahoo family of brands. Techcrunch.com. Retrieved 28 February 2022, from https://techcrunch.com/2021/09/18/1-change-that-can-fix-the-vc-funding-crisis-for-women-founders/.
Hodgson, L. (2021). Senior female VCs call out major funding disparity in Europe | PitchBook. Pitchbook.com. Retrieved 24 February 2022, from https://pitchbook.com/news/articles/senior-female-vcs-call-out-major-funding-disparity-in-europe.
Topic: Female-founded startups. Statista. (2022). Retrieved 28 February 2022, from https://www.statista.com/topics/4691/female-founded-startups/#topicHeader__wrapper.
The European VC Female Founders Dashboard | PitchBook. Pitchbook.com. (2022). Retrieved 28 February 2022, from https://pitchbook.com/news/articles/the-european-vc-female-founders-dashboard.
Venture Capital Needs More Women. Kauffman Fellows. (2020). Retrieved 28 February 2022, from https://www.kauffmanfellows.org/venture-capital-needs-more-women.
