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When it comes to small-to-medium-sized enterprises (SMEs), about one in seven are majority owned by women. When it comes to self-employed entrepreneurs, however, this figure increases substantially. Roughly 37 percent of these individuals are female, and like their business-owner counterparts, they require financial support as well. But in today’s climate, acquiring capital and VC funding for female founders is incredibly challenging. Many face significant barriers that their male colleagues do not. And one of the largest involves a lack of venture capital diversity among firms they approach. In essence, there seems to be a significant trickle-down effect when it comes to resistance toward gender inclusion.

Unfortunately, the problem that underlies the difficulties in pursuing VC funding for female founders is self-propagating. The obstacles women entrepreneurs face negatively affect their own abilities to acquire much-needed capital. At the same time, a paucity of women investors and limited venture capital diversity limit their opportunities. These same issues also undermine female entrepreneurs’ chances of receiving needed guidance and mentorship. Without question, the inclusion problem facing women’s ability to raise capital is a major one throughout the world. And in order to overcome it, a broad effort from everyone involved will be required.

Research shows that women who pitch to VC investors are asked more questions about their track-record as opposed to their potential, compared to male counterparts, and are less likely to be granted funding as a result. Many first-time women entrepreneurs, therefore, don’t even apply, because they know what they’re up against going in.”- Dr. Wendy Cukier, Founder of the Diversity Institute, Ryerson University

Perpetuated Stereotypes of Women Entrepreneurs

One of the most significant and enduring hurdles for VC funding for female founders relates to their perceived stereotype. Many see women as being less aggressive than men, and as a result, a more hesitant to invest in their businesses. A lack of venture capital diversity among investors doesn’t help the situation. Likewise, women owners tend to focus on additional areas like sustainability and social advancement. They are certainly interested in growth and profits as well, but many investors have a hard time seeing past these “softer” pursuits. From the very start, women entrepreneurs have the deck stacked against them when it comes to funding. (Read more about how female entrepreneurs have the deck stacked against them in this Bold story!)

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VC funding for female founders is sorely lacking. How can we fix this?

Research has documented that investors tend to have implicit biases against women business owners. This bias also tends to increase when investors are fatigued or have little time to spend examining opportunities. In addition, these same investors have statistical biases against VC funding for female businesses as well. In other words, because women-owned businesses have historically lower profits, they receive less attention. This speaks directly to the vicious cycle that a lack of venture capital diversity perpetuates. Reduced funding opportunities lead to less support, which leads to fewer opportunities to shine. All of this causes the undeserved stereotypes to persist.

“Men disproportionality invest in men. Women venture capitalists do have a much higher fraction of their investments in women-founded companies and startups. So this lack of gender diversity in venture really affects the ability of female founders to get capital.” – Paul A. Gompers, Professor of Business Administration, Harvard Business School

Networking Barriers Due to Poor Inclusion

As is the case for capital-raising in general, networking is key. The reason networking is so important is because of the small number of investors usually available for a business founder. Only a few may be willing to invest in your industry sector, and even fewer in your specific product or service. Then, on top of that, there is usually a limited amount of time to give your company’s pitch. The more network support you have, however, the better your chances for being heard or considered. This is why some startups choose to locate in specific cities. Unfortunately, VC funding for female founders faces additional obstacles here as well.

The lack of venture capital diversity among investors means female entrepreneurs will likely have fewer networking resources. In 2019, less than 18% of senior VC professionals were women. Because male venture capitalists tend to associate more with male entrepreneurs, this places women founders at a disadvantage. Their network is smaller, and therefore, the support they have at the table is reduced when compared to male founders. This same lack of venture capital diversity also reduces potential mentors they might enjoy who could coach and guide them. All of this leads to decreased chances for VC funding for female founders to succeed in their efforts.

“I believe we require allies and support beyond basic networking and spanning gender and race. We need everyone who has a stake in the game to join the fight for women, with focused attention on the challenges encountered by women of color.” – Shanea Leven, Co-founder and CEO, CodeSee

Shifting the Tide Toward Greater Venture Capital Diversity

In 2015, there was a high-profile case involving Ellen Pao and the venture capital firm, Kleiner Perkins. Pao alleged discrimination due to a lack of promotion in the firm. Despite the court ruling against her, the publicity associated with the trial notably increased the number of women moved into senior VC roles. In essence, this helped venture capital diversity, but only to a small degree. For more impactful changes to take place, greater and broader efforts will be needed. Only then will VC funding for female founders approach the same level of access as male founders.

Given the lack of venture capital diversity, women alone will not be able to overcome current obstacles. In order to improve VC funding for female founders, all stakeholders need to pursue changes that move toward gender inclusion. Financial institutions, including VC firms, that tout diversity and inclusion should be held accountable. This means greater transparency regarding gender ownership of the startups they support. It also means that government programs behind startup incubators be more discriminative in their support. In essence, positive change will require effort not only from VC firms but from society at large.

 

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