By now, we’re aware that female entrepreneurs face harsh barriers to gaining venture capital (VC) funding. In recent years, studies have shown that only 2.2 percent of all VC funding in the United States goes to female founders. That’s underscored by the fact that only 2 percent of female-owned businesses reach $1 million in revenue, a whopping 3.5 times less than their male counterparts.
The poor state of funding for female leaders should be shocking as women-owned ventures, especially as research shows that revenue from female-led funded companies outperforms that of male-backed companies. But given that women face issues like implicit and unconscious bias, and sexual harassment in the male-dominated VC world, it’s sadly the norm that women don’t get the equal treatment, support or encouragement that they need from financiers.
How can both companies and investors improve the lack of funding for female founders? A combination of new innovations and female-focused initiatives may be the key to unlocking a more equitable funding world:
Promote Female-Focused Brands
With limited funding, female-backed ventures don’t receive the support and exposure they need to get off the ground. This is partially due to the bias that women experience frequently.
Christina Stembel, the co-owner of the floral delivery business, Farmgirl Flowers, is a perfect example of how bias plays a role in VC funding. After bootstrapping to save cash, she scaled her company and made over $900,000 in her third year. As her business was finally starting to get recognized, similar ventures with larger, male founding teams with tech pedigrees started emerging, too. Some categorized themselves as logistics businesses, using flower delivery as a test for on-demand delivery which was a prominent focus in the investment community at the time. However, all these companies had similar products, delivery methods and nearly identical website copy to Farmgirl Flowers. The big difference was that all of these other companies secured at least $9 million in funding. Although profitable and holding a more highly engaged consumer base than the other ventures, Farmgirl Flowers is still bootstrapping for cash despite pitching to over 100 VC firms.
One way professional women and venture capitalists can help change the dynamic is by promoting more female-focused brands, bringing more awareness and thus interest in supporting them.
The F Project is one such initiative that aims to change the VC climate for women. The website acts as a hub where female-led brands can share information about other founders and their products through social media. At the same time, female founders collaborate on brands, share stories and resources to strengthen their business networks.
Female-driven networks are important to help women promote each other, too and where there is more unity, there’s more mobility. The Women’s Business Enterprise National Council and WEConnect International are two other groups that promote women and giving them exposure for their ventures. They have created “Women Owned Logo” for storefronts, websites and products. The label helps identify where women own, lead and control at least 51 percent of the company. Fashion founder Rachel Roy, for instance, supports the continuous Female Founded initiatives which spotlights these women-led businesses, promotes them and helps direct customers to their websites.
Not only can women support each other, but male-led brands can start partnering with these female-led businesses, especially because many male-led funds often lack the expertise or specialty of the industry or female-specific products or services in need of capital. But investors are missing out on a big opportunity here, as women drive 70 to 80 percent of consumer decisions. Additionally, a report from investing firm First Round found that in its first 10 years of investments, female-founded companies have performed 63 percent better than those with male founders.
On top of the support from female support groups and founders, male-led brands should consider partnering and promoting these female companies, giving them the support they need while also benefiting themselves from the partnership. When more people become actively engaged with female-led brands, VC investors will acknowledge the demand and act to support it.
Emerging Technologies Help Improve External Funding and Defeat Bias
Fintech that implements emerging technologies like blockchain and AI can also provide women with more access to external funding resources, easing collateral or credit history burdens that often hinder their financial and professional growth.
Blockchain is another way in which women can more easily receive nearly instantaneous funding, as investors send payments via digital ledgers. In developing nations, blockchain has already improved the financial stability of emerging female entrepreneurs, lowering the barriers to financial inclusion. With an interface that allows for quicker access to funding, investors who start to implement incentives to back female companies can more easily provide money once an agreement is arranged.
Blockchain can make crowdsourcing easier for women to gain capital. Initial coin offerings (ICOs) make fundraising simple and available to investors with large and small funds. Companies give investors coins in exchange for capital. Two types of ICOs in the private equity space include tokens that allow holders the right to future service like access to the company’s cloud platform or tokens that provide a share of the company’s equity like the ones given to stockholders. Although it still has to be seen how the SEC’s securities laws will shape ICOs, it could hold a potential for women to leverage their companies in the future.
Of course, the decision to actually invest in female-founded companies comes down to the investor and their ability to negate unconscious bias. AI-based tools from startups like Founders Factory, for instance, has the ability to filter out unconscious bias and create a more equal funding world. AI can help VCs make investment decisions based on data rather than their feelings or assumptions. Using AI-backed data points with metrics ranging from social media interaction to app downloads, VCs can now monitor real-time data through data driven platforms. They can then identify the companies that may have otherwise missed out on opportunities. Combined with data reporting that shows how many female-led companies actually earn VC funding, these technology-first approaches could contribute to a more equal venture capital environment.
Fostering more Females in the VC Industry
When women control the money, female companies get funded. VC firms with female partners are twice as likely to invest in companies with a woman on the management team. If that’s the case, then VC industries should consider including women as major players during the process of analyzing and reviewing investment pitches from women.
Thankfully, after the #MeToo movement, large VC firms have begun to focus on recruiting more females. Fund managers are starting to wake up to the fact that they are missing out on innovative talent and including women in the process can help them see better deal flows.
Over the past three years, gender-lens investing has become extremely popular. From 2017 to 2018, gender-lens funds grew from 58 to 87. Beyond that, women only make 8 percent of partners in investment firms, but many of them are leaving to create their own firms. In the meantime, VC firms that are actively trying to help more female entrepreneurs can do so by helping them gain funding by promoting more equality initiatives. That goal has seemed to help in some regards as women-led companies increased from 524 to 828 between 2017 and 2018.
Patricia Nakache of Trinity Ventures says, “One thing is that the more women there are making investment decisions, the more women will get funded. It’s a natural part of tapping into existing networks. I also think the more success examples that we have of women building their ventures successfully, the more that will create new patterns of success in the eyes of venture capitalists.”
As women wield more power in the VC and investment industries they can help guide the conversation to support more female business owners. Of course, the culture in VC funding has to change before it will effectively create true equality for women. But consumers, brands and investors can actively participate in the fight to support them by promoting, funding and celebrating the contributions of innovative female leaders through the initiatives and tech tools that will help them succeed. Once we put our focus towards helping female founders succeed just as much as men, the investment world will gain more than mere profit.