Data Shows Women-Founded Companies Perform Better Across the Board. So Why Did Their 2020 Funding Fall?

When tech has never had it so good, where are the women?

Having worked in early-stage venture capital over the past eight years, I recognize the barriers that tech & venture capital can pose to women. But I also see female-led tech businesses deliver consistent above-average results, even in my own 15-company portfolio. In fact, some of my best investments to-date have been in female-led ventures, including ClassPass, the first female-founded wellness tech unicorn of 2020. And it’s not just me; ample data demonstrates the exceptional performance of female-led startups from a venture returns economics perspective:

According to research by the Boston Consulting Group, while women who pitch their ideas to investors receive $1M less on average than men, they deliver more than twice as much per dollar invested than those funded by men (78 cents vs 31 cents, respectively). This points to investment in women-led companies producing better venture capital unit economics and substantially higher returns.

Source: www.bcg.com

A recent Pitchbook report on female founders and CEOs in the US VC Ecosystem shows that US companies founded by women have consistently exited faster than the broader VC market through acquisitions or IPOs for ten years straight (6.7 years vs 7.5).

As per the same report, as of September 2020, total exit value for female-led companies has risen 29.9%, while it has declined by 43.6% for all US venture funded companies over the same timeframe. Despite the disproportionate impact of COVID-19 on women on the deal side, women are still exiting at higher values than all venture-backed US companies.

Lower valuation. Faster time to exit. Higher on average returns. Considering all this, increasing investment in women-led companies seems like a no-brainer.

Not necessarily, it turns out. When my fellow Stanford Graduate School of Business alum and female entrepreneur in Latin America posted this article, I was disappointed, but not surprised; women-led ventures have been consistently overlooked and underestimated, a trend that has intensified in the past year. According to Crunchbase/LABS data, of the total $4.4B invested in Latin American startups in 2020, none came into the hands of female founders without a male business partner. Per the Crunchbase platform, rounds to startups founded exclusively by women in Latin America went from $14M in 2019 to zero in 2020. As for startups co-led by women, money raised fell from $748M in 2019 to $612M in 2020 (nearly half of which went to one venture, Nubank, at which Cristina Junqueira is co-founder and VP, indicating that resources available to mixed teams are even more scarce).

Sadly, this trend is not restricted to Latin America. A recent Pitchbook report on women in the VC ecosystem found that female startup fundraising was disproportionately impacted by COVID-19: female-founded companies based in the US represent only 13% of all VC dollars deployed by September 2020, down from 15.5% in 2019 — the first decline in over a decade.

This is discouraging but also…

What this tells us is that female-led businesses represent an untapped economic opportunity in an asset class that has returned less cash to investors than has been invested since 1997 (as per Kauffman Foundation data), and in which everyone loses money on around half of their deals. Outside of high-profile investors like Sequoia or Benchmark, the venture capital industry sees an extremely moderate ROI of 1.5x on average. This makes it perfectly rational to pursue new opportunities that signal higher potential IRRs and investment multiples.

There has thus never been a better time to re-shape the industry, which is already going through unbundling. How to improve industry performance through cultivating and investing in extraordinary female-led companies? Here are some ideas, based on my experience working closely with female founders to shape and grow their ventures:

  1. Expand our existing networks outside of our comfort zones. Intentionally build relationships with people who are not familiar to you, don’t look and/or act like you, or didn’t go to the same schools as you. Undoing our own internal biases takes work, but as the data shows, it’s more than worth the effort in the long run.
  2. Make female-founded startups a substantial part of investment strategy. And not just a marginal shift in focus; I’m talking about 40%+-substantial. We must be intentional about searching for the most talented female founders and building proactive knowledge of the larger problems they are trying to address — and in what industries. As venture capitalists, we love when founders (still mostly men) have a personal awareness of the problem they are trying to solve. Female founders intervening in feminized industries such as childcare, education, retail, healthcare, and beauty & wellness to solve their most pressing issues are no different.
  3. Include women in the investment decision-making process. If you can’t do it on the general partnership or investment committee level just yet, establish and grow a network of experienced female mentors and advisors from an array of businesses, and consult with them on a regular basis.
  4. Support, mentor, and provide feedback to female founders, the earlier in the funnel, the better (think idea-stage). I’ve committed several hours a week to ‘no specific agenda’ calls with my founders and mentees to discuss their existing challenges, brainstorm, and provide feedback on their formal pitch deck presentations — an approach which has garnered excellent results. After working for over six months with six female founders, I can say that the biggest roadblocks for many are a lack of prior entrepreneurial experience and a general lack of self-confidence. Proper, sustained coaching and support when needed can work magic.

And last, but not least:

5. To female founders — ladies, be ambitious, dream big, and focus on the vision of how big your company can be if everything goes right not just worrying about all the associated risks; and make projections and assumptions accordingly. Familiarize yourself with venture funds that invest primarily or exclusively in female-led companies; according to data compiled for Project Sage, a research initiative conducted by the Wharton Social Impact Initiative $1.3 billion had been committed to 58 private investment funds with a gender lens focus as of October 2017, ranging in size from $1 million to $400 million. When researching more traditional firms, consider focusing on partners with a strong track record of investing in female-led teams.

The data is clear: structural biases against female founders lead investors to overlook big investment opportunities that yield consistent above-market average results, hurting both women entrepreneurs and the industry at large. But it doesn’t have to be this way. With my investment portfolio, I am lucky to be able to collaborate with intelligent, resilient, persistent, and fiercely competitive women to catalyze economic change by disrupting inefficient industries like healthcare, education, and real estate in a sustainable, capital-efficient fashion. It’s heartening to see the explosion in new VC funds raised by women and I’m hoping that more and more investors will come together to move the industry forward through consistently supporting female founders.

No doubt, we still have a long way to go as a society before we fully acknowledge the incredible achievements of women in the global tech industry and beyond — and see this reflected in funding commensurate with their success. The sooner it happens, though, the faster bright young women starting their careers can look to positive examples of ‘female entrepreneurs who made it’, inspiring them to pursue and grow their own ventures with confidence.

Stanford GSB alum, early stage VC in consumer and SaaS, angel investor in ClassPass and Vinebox

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