The State Of Venture Capital Investments In Female Founders: Change Is In The Wind
While not all arrows are pointing up for female founders raising venture capital, most trends suggest that momentum is building. According to Q4 2021 PitchBook NVCA Venture Monitor:
Venture capital invested in private companies surged 98% from 2020 to $329.9 billion in 2021. That’s good news for the economy. These companies are the most likely to innovate, increase U.S. competitiveness and productivity, create well-paying jobs, and grow the economy.
Though still small in amount—$54.8 billion—there was a whopping 138% rise in venture capital going to private companies with at least one female founder in just one year. They recovered some ground lost since the height of the #MeToo movement in 2017 when the portion of venture capital going to founder teams with women was 18.4%. In 2021, mixed-gender founding teams received 17.3% of venture capital.
Funding to all female-founded teams continues to backslide. A pathetic 2.0% or $6.4 billion of venture capital went to these companies in 2021, down from its height of 2.8% in 2009. That’s an imbalance that Julie Castro Abrams wants to fix. She’s managing partner at How Women Invest, a venture capital fund dedicated to shifting the capital landscape by supporting women-led companies. VCs are sending a message that you need to have a man on your founding team, not because he adds value, but because otherwise, they won’t give you the time of day. This unfounded message is costly to women’s confidence and VC fund performance.
“Good outcomes are not driving investment behavior,” said Castro Abrams. First Round Capital and Boston Consulting Group’s analysis of MassChallenge accelerator program participants showed that founder teams with women outperformed men-only teams. Despite being less likely to raise follow-on funding, founder teams with women are more likely to exit and have a higher internal rate of return (IRR) — 112% versus 48%.
The importance of women GPs cannot be underestimated. “When you have a woman general partner, she is up to two times as likely to invest in female founders than a male GP,” said Castro Abrams. There has been growth—from 12.0% in 2019 to 15.3% in 2021, according to PitchBook. However, 15.3% is a far cry from the 25% needed for a tipping point to happen.
“When you don’t have diversity in [VC] leadership, it’s a real risk area,” said Abrams. “You’re not getting a huge portion of the quality deals that are out there.” Research finds that VCs who increased their proportion of female partner hires by 10% averaged a 1.5% improvement in annual fund returns and a nearly 10% increase in profitable exits, writes Waverly Deutsch, a Chicago Booth professor, startup mentor, and investor. Venture firms have increased their diversity initiatives from 24% in 2016 to 43% in 2020.
The state of venture capital investments in female founders: change is in the wind