Here’s Why Only 2 Percent Of VC Funding Went to Female Founders Last Year

Here’s Why Only 2% of VC Funding

Went to Female Founders Last Year

We’re now a good six months into the #MeToo movement, and discussions surrounding women’s issues and rights has only intensified as we move further into 2018. So when abysmal numbers were released regarding how much venture capitalists invested in female founders versus their male counterparts throughout 2017, it felt a little bit like a punch in the gut.

According to number crunching by Fortune Magazine — who compiled data from M&A, private equity, and PitchBook (a VC database) — female founders received a near-invisible 2.2% sliver of the funding pie in 2017. The data also found that roughly 79% of funding went to all-male teams, 12% went to mixed-gender teams, and 7% went to “teams whose gender makeup PitchBook was unable to confirm.”

Problem Number One: Lack of Diversity

These numbers are disappointing, disheartening, and can even be dissuading for women who are considering working with a VC firm to fund their startup. For more insight into why this number seems so small despite the flourishing women’s movement and an otherwise apparent increase in VC funds specifically targeting female founders, we reached out to Elisa Miller-Out, the co-founder of Chloe Capital, and Rafferty Jackson, an angel investor who’s invested in Ellevest, Poshly, and Goodworld via Astia Angels.

Elisa Miller-Out. Co-Founder, Chloe Capital

“I agree that the numbers are still shocking, especially given that the data also shows that diverse teams with female leaders outperform financially,” said Miller-Out. “We’re also impressed with the number of talented women-led startups that we’re seeing at Chloe Capital, so we know it’s not just a pipeline problem.”

Miller-Out said that she thinks part of the problem is that there simply are not enough women VC partners and women-led VC firms to begin with.

“There are a number of new ones getting started, and I’m optimistic that we will see growth in this area, but we still have a ways to go,” she said. “We need to look at the full funding stack and see more institutional investors committing more capital to these new women-led VC firms who in turn will drive more capital towards female founders. It’s a fantastic opportunity for them to truly diversify their portfolios, get better returns, and make a real impact in the space.”

Jackson agreed, saying that the businesses presented may be difficult to digest for such a narrow band of people. She said, “VC’s tend to be similar people from similar backgrounds. Echo chambers are horrible decision-making vehicles when an issue is textured and complex.”

Problem Number Two: Perceived “Risk” Factor

Another problem is that investors may not see women-led businesses as true investment opportunities. Because there’s this “fear of the unknown” when it comes to investing in such companies, there’s a perceived higher risk.

“The traditional Silicon Valley VC is unlikely to look at these deals. First, the founders don’t fit the VC founder mold. VC’s are working on speed and assumptions of what has worked in the past,” she said. “It would take time to learn how to work with diverse founders from diverse backgrounds and frankly, that may not be time well spent considering their obligation to return 40x to LPs and their assumptions about women and POC. They have their formula and it works.”

Rafferty pinned it when she said there’s this idea in the VC world that investing in women is merely an “impact investment play” — that it’s just an opportunity to improve our social structure versus cashing in on a legit business opportunity. That’s a false notion, she said, and the preliminary numbers indicating successful investments in these female-led companies prove it. The bottom line is that investing in women and their businesses is not just a social obligation; rather, it’s a financially savvy move.

Miller-Out added, “We know that [Chloe Capital] is raising the bar by investing in women, not lowering it. In many cases, a female founder with the same resume as a male founder had to work harder and overcome more to achieve those same career accomplishments. That shows incredible persistence and drive and those are exactly the types of qualities we’re looking for in a strong founder.”

How we approach the male-dominated VC world during this year of #metoo will define the next phase in female investment
Problem Number Three: Not as Much Funding Per Company

There are many layers to this issue and one challenge is that fewer females, compared to males, are getting funded, explained Miller-Out. However, over the years we’ve seen an increase in the amount of women-led companies receiving funding in general. Why, then, are we still staring at an unacceptable 2% number?

“Another problem is that when they do get funding, it’s still less than their male counterparts in most cases,” explained Miller-Out. “We know that we’ll see several more big, success stories from female founders in the years to come, and we’re hoping to shake up that pattern matching that still associates young, white males in hoodies with success in the tech world.”

Carving a Path Forward

To move forward from here, we must address each of the above issues head on. That means we must actively work to diversify VC firms to include women and people of color. We must also demonstrate and display data that shows investing in women-led companies makes financial sense.

“There may be a reckoning at some time with the Silicon Valley model since the empirical research is starting to point towards diversity returns better investment to shareholders,” noted Jackson. “No one can really point a finger at SV and say they don’t know what they are doing; clearly, they do in their lane. It is up to us to hone our formula in our lane.

Miller-Out added, “Institutions and family offices should see this as an exciting opportunity to diversify and improve their portfolios by moving more capital toward women-led VC firms and women entrepreneurs. We also need to build community around female founders and support them throughout their journey.”

Viveka Hulyalkar

Viveka is the CEO and Cofounder at beam. Prior to founding beam, Viveka was a consultant in McKinsey & Company’s New York headquarters. She decided to leave to focus on Beam full-time when she realized just how acute the need was from her experience with retail and advanced advertising clients.

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