The recent coronavirus pandemic will have an impact on the way we do business for the foreseeable future, and maybe forever as the probability of pandemics will become part of our normal risk assessment and scenario planning. One of the key lessons we should take away from this period is that we need to make a shift toward a more sustainable way of living and working. We need to seriously rethink the way we connect, consume, transact, and invest - including the entrepreneurs we support to commercialize innovation and sustainability solutions.
Sustainability considerations span all areas of the economy and include rethinking the gender balance in entrepreneurship and venture capital. While women are making progress in attracting venture capital and angel funding, they still are vastly underrepresented in the funding league tables. According to figures from Crunchbase*, in 2019 women-founded startups attracted only 3% of all venture capital funding globally and mixed teams with at least one female founder received a further 10%. These numbers have remained relatively stable over the last five years since 2015 with women-led teams in most years capturing between 2-3% of global venture capital dollar volume and mixed teams capturing a further 8%-11%.
It would be easy to explain away the gap as simple sexism but in fact it is multidimensional: women start fewer companies, women pitch less to investors, and women typically receive less capital than men. Women have made tremendous strides globally in increasing their numbers in educational and professional attainment in the past 25 years, however, the worlds of entrepreneurship and venture capital remain relatively static, as predominantly white and male. While these are important pieces of the puzzle, the real reasons that women attract less capital are more fundamental: fewer women sit on company boards and women are underrepresented in the ranks of investors who make the decisions. The composition of company boards and the decision makers in the venture capital firms who fund them are intertwined in such a way that they create a form of institutionalized and self-reenforcing bias. To understand why, it’s necessary to give a bit of context on how VC funding works.
VCs normally take equity stakes in their portfolio companies. Their returns depend entirely on the company’s future performance: profitability, the ability to attract talent, ability to understand the market and pivot accordingly, and the ultimate holy grail, gaining a position of defensibility - all of which hopefully lead to a successful exit when investors get paid. Most VC investments fail, meaning that they either lose money or only break even. Out of an illustrative portfolio of 10 investments, the fund will make all of its profits on one or two exits. Most VCs have to vet 100-150 startups to find one they will place a bet on and most prospective investments are sourced through their own social and professional networks as “warm introductions.”
To increase their chances of a successful exit, VCs want to be able to influence management, so they populate governance structures, i.e. the board, with their own people and those they hand-pick from their networks. The problem with this is that they tend to pick people who look like them, think like them, have similar backgrounds, and also share the same blind spots. Therein lies the vicious circle of self-reenforcing bias. A study published in the Harvard Business Review found homogeneous teams had the worst investment performance but that it’s actually not the decision to invest in a particular startup that predicted success or failure - it was how they advised and mentored the company on strategy and hiring post investment that made the difference. Lack of diversity in teams leads to missing the business model and execution failures that are hiding in plain sight. More diverse teams are able to bring a variety of perspectives that may help management identify issues earlier and uncover a wider range of solutions to problems that inevitably arise in launching and scaling a startup.
Numerous studies have shown that women-founded startups outperform companies founded by all male teams in both returns and revenues generated. If this is true, then investors should be clamoring to invest in women-founded companies but yet fundraising by male founders far outpaces that of female founders. The entire ecosystem of entrepreneurship and VC funding is driven by personal relationships and in turn, perceptions about an entrepreneur’s potential to be successful. The process of raising venture capital is inherently partial, even unfair, from gaining acceptance into an accelerator program to finding mentors, to securing meetings with investors, to ultimately getting funded. Along with this bias comes a whole host of assumptions about the abilities of women to be innovators and managers. A 2018 study examining the kinds of questions posed by prospective investors of both genders during pitch competitions revealed that men and women entrepreneurs are perceived very differently before their pitch is even heard. Men were asked “promotion” questions and women were asked “prevention” questions. To put it another way, the men’s ideas were evaluated through a lens of possibility and expansiveness while those of women were seen in terms of managing downside risk. The ideas that women entrepreneurs want to get funded are often not understood by male VCs or are considered “not big enough.” These dynamics might help to explain some of the reasons why women on average raise less money per round than men.
We began this discussion by talking about how the coronavirus pandemic will require the global community to reexamine how we connect, consume, transact, and invest - including the entrepreneurs we back to come up with new products and services that account for the externalities which may - or may not - bend the arc of human activity towards a regenerative future. So what does gender balance in entrepreneurship have to do with sustainability? A lot, as it turns out. Women are more likely to start triple bottom line companies that prioritize performance along a range of environmental, social, and governance (ESG) vectors that comprise the core tenets of sustainability. Research led by Kellie McElhaney at the Center for Responsible Business at Berkley’s Haas School of Business found that companies that had more women serving on their boards also performed better on ESG metrics. Hers and other research teams also found that better ESG performance leads to better financial performance in the medium to long run. They argue that having at least three women on the board of a company is the inflection point that leads to lasting change toward sustainable practices. Additionally, as mentioned above, diverse teams - whether or not they prioritize sustainability - generate better returns to investors.
The companies that will find innovative solutions to our current sustainability challenges are not going to look like companies of the past. If we are to survive as a species and find resilience beyond the havoc wreaked by the current coronavirus pandemic, we must look beyond funding the same kinds of founders that have created our past successes - and failures. Minting more women investors is the critical first step to funding more women-led startups and getting more women on corporate boards who will guide the companies of tomorrow toward a more equitable and sustainable future.
*I cite funding figures from Crunchbase and sources that refer to Crunchbase because they have a more expansive, inclusive definition of funding than sources that use Pitchbook data. Crunchbase updates its figures more regularly for late-reported deals that closed in a given year but were not counted in the year-end totals until later. In 2019, Crunchbase recorded $26.7 billion in venture funding going to teams with at least one female founder vs $17.2 billion by Pitchbook.
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