This article originally published on Forbes.com
Despite the great investment opportunities that female-founded companies bring to VCs, the level of funding they receive is a small fraction of VC investment. Of the $330 billion in venture funding spent in 2021, just 2% went to all female-founded businesses. More stunning are the stats for the companies founded by women of color: Black female startup founders received just 0.34% of the venture capital in the U.S. Alone, these statistics are dismal, but juxtaposed to the impressive data that proves female founders are worth investing in, they showcase that bias still often outweighs logic, even with a great opportunity.
Some venture capitalists say there aren’t enough female-founded companies that qualify for funding, but that is categorically untrue. I've found it is a network and bias problem, not a pipeline problem. My team at How Women Invest saw more than 400 female-founded venture backable companies in 2021. While we wish we could invest in more of these companies than we do, our firm alone can’t take on all the deals worth supporting in a category ripe with opportunity. Other VCs can and should! I believe it’s long past time for venture firms to eagerly pursue female-founded businesses and the growing market of women LPs with wealth to invest.
Why?
Female founders make more money.
We all know the saying, “money talks.” That’s why I’ll lead with the strongest reason of all for investing in female-founded companies: They will make you more money than male-founded companies, according to decades of data.
In a 2018 study of more than 350 startups conducted by Mass Challenge and BCG, businesses founded by women yielded higher revenue—more than two times as much per dollar invested—than those founded by men. Morgan Stanley calculates that $4.4 trillion are lost in missed revenue for women- and minority-owned business enterprises. In addition to generating higher returns, female founders have proven to be more capital efficient and performance driven, yielding multiple, positive bottom lines over time. The numbers indisputably demonstrate that investing in women is a good business decision.
Female LPs influence more diverse and more profitable investments.
In 2019, women made up only 13% of LPs at venture capital firms in the U.S. According
to research conducted the same year, venture firms benefit from investing in diverse perspectives—gender, race, ethnicity—because doing so accesses wide-ranging networks and experience that leads to more differentiated deals and smarter investments. Still, it’s rare for women with power, influence and wealth to be asked to invest.
Women today have more money and operational expertise than any other generation. They are ready to invest; however, they are also seeking better performance on gender and innovation. If VCs want to attract the surge of women investors, it's important to lead by example to demonstrate they are being responsive to the market and the financial upside.
Female-founded companies are good for the economy—in more ways than one.
From 2007-2018, women-owned companies grew by 58% in volume and 46% in revenue. And a massive portion of that growth comes from women of color. Since 2007, businesses with Black women founders grew 164%, and businesses with Latinx women founders grew 172%. And the growth continues. Coupled with the mass exodus of women from the workforce following the onset of the pandemic is a large percentage of them starting their own businesses in the last two years.
According to one study, 40% of women entrepreneurs who started their businesses during the pandemic did so because of the pandemic. Motivations like the need for more flexible work hours, control over finances and job security are driving female founders to take the leap into entrepreneurship now. The benefits to the economy don’t end there. Once started, women founders hire six times more women.
Today, women founders are often making the decision to forgo venture funding because of the bias in the system, the continued sexual harassment, microaggressions in venture capital and lack of funding for them generally. In my view, we all lose when these founders aren’t given the resources to grow; they could very well fuel economic recovery and generate greater wealth and jobs for all of us.
Women-owned businesses are finding the white space.
Women make up nearly 50% of the global population and are responsible for about $31.8 trillion in spending power, yet they are an underserved consumer market. Which is largely to do with the broken venture capital ecosystem. If most startups that get funding are founded by men, the chances that the product or service they’re selling solves the problems facing women are next to nil. And since women—the ones who typically do solve those problems—aren’t getting their businesses funded, there is a massive gap in the market. This blue ocean of possibilities to innovate around solutions specifically for women is a huge opportunity for VCs, one that female founders can deliver on if given the appropriate funding.
So what can VCs do to close the funding gap and upgrade the venture ecosystem to better serve female entrepreneurs?
First, start by looking at your own investing partnership. What percent are women versus men? Unsurprisingly, more women decision-makers in venture usually results in more women-founded companies getting funding. Second, review your own funding patterns and processes. How are you actively reducing bias in your evaluation process? Instituting practices like “blind auditions” for those early in the pitch process and issuing a standard set of questions that all founders are asked during pitch meetings can go a long way in leveling the playing field.
Funding female entrepreneurs is great for investors and the economy. Women are creating venture-backable, scalable, high-tech companies. I believe investors who are willing to acknowledge the true potential of women-owned businesses and invest in them won’t regret it. It’s imperative to closing the gender funding gap and upgrading the venture capital ecosystem to one that serves all founders, regardless of gender or race.