By Saleha Jaweid (Technical Program Manager) and Tereza Bízková (Ecosystem Communications Manager) of Topl
Experts are already predicting that the fall of SVB will create a less favorable environment for today’s startups. However, for certain groups—such as women—the state of venture capital (VC) funding has always been dire. After all, women-led businesses in the US raised only 1.9% of all VC funds in 2022, despite accounting for 25.5% of the total VC deal count.
Women continue to receive significantly less funding from investors, despite the undeniable benefits of women-led businesses. Research shows that equal participation in the global economy can add $5 trillion to it. And what’s more: According to Forbes, women-led companies have been shown to perform better than those led by men, bringing in more than twice per dollar invested in revenue.
What are the factors that contribute to this gender disparity? And how can they be overcome?
Less female representation
The first obvious factor is the lack of female representation in the VC industry. Today, only 12% of decision-makers in VC firms are women, and a staggering 65% of VC firms don’t have a single female partner. Furthermore, out of the female employees at VC firms, the overwhelming majority occupy administrative positions—94%, according to CSIS.
This underrepresentation of women at the leadership level only perpetuates the gender gap in VC funding. Representation matters, and as female investors are more likely to invest in female-led businesses, we need to address the lack of gender diversity in VC and promote more women to leadership positions.
A potential solution is developing diversity-focused strategies for VC firms. With accountability metrics for leadership, along with clear benchmarks and a time for reaching the goals, VC firms could better materialize their diversity aspirations. On top of that, HR departments of VC funds should identify any potential bias in their hiring process and look toward external and perhaps non-traditional networks to tap into when hiring leadership and senior talent.
Not enough money for women-focused funds
There are various funds and incubators targeting women-led businesses. But despite the hype and publicity they receive, they tend to be severely underfunded, meaning they can’t be making “big bets” on female founders to close the investment gap. These funds also often prioritize early-stage investments, where the risk is higher and the amount of investment amounts smaller. Ultimately, this makes it difficult for women-led businesses to secure the funding needed to grow and scale their operations.
Furthermore, recent studies show that women-led companies that secure their first round of funding exclusively from female VC partners are much less likely to raise a second round. Naturally, this puts them on a challenging path for subsequent rounds of investment, limiting their potential for future growth. Increasing access to resources and opportunities for women-led ventures is thus vital.
This is why VC funds should consider building accelerator programs catering specifically to women founders, helping them overcome the unique challenges they face, as well as designing a strategy to reach more women-led businesses.
The effects of social familiarity
It’s no secret that VCs minimize risks by investing in familiar networks—but these often lack significant female representation. By promoting more diverse networks, for example, by partnering with organizations that highlight underrepresented founders, VC funds can work toward creating a more equitable and inclusive industry that benefits everyone.
Moreover, rather than merely relying on social familiarity, VCs can directly support human-centered business models and impact-driven companies to become a driver for societal change. Women-led companies tend to hire more women, so by investing in those, VCs can trigger a chain reaction of change that propagates outward over time.
Women-led businesses are also more likely to rely on self-funding, friends, and family for early-stage funding, which can limit their potential for scale. This further emphasizes the importance of improving access to funding, support, and resources for women-led businesses, especially during the crucial stage of fundraising.
Gaps in access and education
While women are statistically more highly educated than male peers, they tend to be active in less technical fields and are also underrepresented in business and finance. This can result in less access, as they’re also less likely to seek financing compared to their male counterparts—something that particularly affects groups like black women founders, who received only 0.27% of all VC funding in 2021.
To address this, there needs to be greater gender diversity in tech and access to mentorship programs with the ultimate goal of more women becoming leaders and mentors. After all, women are in the best position to understand the challenges women face and work to break the barriers down.
In addition, VCs should promote more robust opportunities for women to develop expertise in traditionally male-dominated sectors. For example, accelerators and funds can establish initiatives that offer scholarships, fellowships, and grants that are specifically aimed at supporting women in technology.
Bias during VC pitching and beyond
Studies confirm gender bias across the fundraising process, including in pitching to VCs for male versus female founders—both at the line of questioning and evaluation. For example, men tend to be asked about their potential for gains, while women are more likely to be questioned about their potential for losses. This difference in questioning can impact the overall evaluation of responses, further perpetuating the gender gap in VC funding. To tackle these biases, it is crucial to raise awareness of their impact and implement measures to mitigate their effects, such as standardized evaluation criteria and blind review processes.
Unfortunately, biases can also contribute to a culture of harassment in the VC industry. Statistically, around 42% of women have experienced harassment at the hands of a supervisor, and, despite this, only 33% of firms have mandatory prevention programs, with the rest showing inadequate commitment to issues of harassment and discrimination. VC firms can lead the way and develop clear and comprehensive policies and accountability systems.
There are various contributing factors to the notorious gender disparity problem in VC funding. The way forward is for the industry to adopt strategies that promote gender diversity in leadership, create programs specifically catering to women founders, open up investment networks, identify and mitigate bias, and improve access to support and mentorship. This way, it can introduce a more equitable and inclusive VC industry that benefits everyone—and unlocks the full potential of women-led businesses.