Funding Female Led Startups Is Not Charity, It's The Best Investment There Is
Janneke Niessen explores how investing in female founders and female-led startups is a natural by-product of funding the best founders.
Just a month ago, society was celebrating the talent and resilience of women for International Women’s Day. However, ongoing hurdles continue to prevent them from achieving their goals and impacting the world. This is certainly true in venture capital where the best founders are overlooked because of their background or pitching approach. As a result, female founders remain largely underrepresented. Compared to men, startups with strictly female founders received a mere 2.8% of VC funds in 2023, the lowest amount in four years. Rather than advocating for a quota, venture capital firms should simply be investing in the best founders. By doing so, they will naturally cultivate a diverse portfolio with attractive returns. I urge analysts, fund managers, and partners to deconstruct their bias against female founders by branching beyond traditional networks and conventional investing strategies to choose founders with the most potential.
The World Economic Forum's 2022 Global Gender Gap report showed that it will take at least 132 years until gender equality is achieved. Age-old stereotypes like ‘men take charge, women take care’ and ‘think leader, think male’ rule the corporate world. As a result, women generally get less funding than male teams despite the benefits of investing in a female-led company.
Data proves that female entrepreneurs often outperform their male peers by building businesses with higher revenue and job creation. Despite this, female founders encounter more pushback during their pitching and fundraising process. This may be because women utilize out-of-the-box approaches like cold inbound pitches that are rarely considered. Although most VCs prefer their usual networks–which often involve men referring men–investors can tap into a richer, more diverse pool of ideas and founders if they step outside their comfort zone. They miss trillion-dollar opportunities in innovation and growth due to their reluctance to give atypical people and pitches a chance.
Only 8.6% of venture capitalists are women. In this male-dominated field, women are labeled as ‘risky’ investment choices simply because they have been given fewer chances to demonstrate their talent compared to men. According to a study, 65% of female founders were explicitly told they would raise more money if they were men. This biased thinking can come from both female and male VC professionals, and it’s the main barrier keeping female founders from accessing capital.
In recent years, female VCs have tried to bridge investment gaps by creating women-only funds. Women supporting women sounds like a noble cause that will drastically improve the chances of a female-founded startup getting off the ground. However, research shows that exclusively receiving funding from female VCs comes at a cost. Female-owned startups that had an initial investment round financed only by women VCs were two times less likely to close a second round.
These findings partially occur because of conscious bias toward women, but some of it is also caused by attribution bias. When sexism isn’t the culprit, humans assume that the gender or background of a person is tied to a situation’s outcome. Therefore, the study revealed that identical pitches narrated by a man or woman were perceived differently depending on the gender of the financer. When the ‘female’ entrepreneur received funding from a male VC, participants believed she was competent and her pitch was high quality. Participants thought the opposite when their financer was a woman.
It’s clear that the funding gap between male and female entrepreneurs is fueled by gender stereotypes and humans’ preference for people who are similar to them. To finally eliminate biases that prevent female success, industry professionals at all levels should utilize better practices that take bias into account. Women don’t need special treatment, but venture capital needs to consider how marginalized people, women, and many other groups including people of color, are viewed differently in the same settings as men.
Venture capitalists need to look beyond their network and begin seeing diversity not as a quota to be met but as a byproduct of finding the best founders. A quota should not be necessary if firms invest in promising founders, but most funds fail to do so because they have too many biases to consider ‘non-traditional’ founders. In these cases, quotas can be useful because they force venture capitalists to look at the skills a founder brings to the table.
By diversifying investments and advocating for a reevaluation of ‘red flags’ in founder assessments firms could have a transformative effect on society. Instead of filtering out founders with unconventional paths to entrepreneurship, venture capital would recognize the innovative perspectives and solutions these people often have. Their contributions would enrich the ecosystem with diversity in thought and execution. Backing women and other marginalized entrepreneurs would create revolutionary products and services that address underserved markets and overlooked consumers. Some companies that have reached $1 billion in value led by women include Bumble, CreditKarma, 23andMe, and Proactiv.
Considering how International Women’s Day 2024 focused on accelerating progress for women across the globe, venture capital is given another chance to start investing in women not only because it’s the right thing to do, but because the best founders come from all walks of life.
Janneke Niessen is a founding partner at CapitalT, a pre-seed stage European venture capital fund that invests 52% of its portfolio into companies with female founders in software technology. Janneke is also a serial entrepreneur, angel investor, board member, and diversity advocate.
Photo by Mikhail Nilov
