Tina Simpson, JD, MSPH
Principal
March is Women’s history month here in the United States and a celebration of the economic, political, and social contributions and accomplishments of women throughout history.
While it is important to look back and celebrate how far we have come, it is also necessary to keep in mind the challenges and biases that continue to obstruct gender equality and professional parity.
As a woman-owned and operated firm, we at Atrómitos are acutely aware of the challenges presented in business and entrepreneurship, as well as the strengths that female leadership can lend to any initiative.
That is why, today I want to narrow in on one of the biggest barriers women entrepreneurs face: access to capital.
Entrepreneurship is an important cornerstone of our American economy and self-identity. And, particularly in recent years, and partly in response to necessity, women have led the vanguard in starting new businesses and driving growth. Access to capital is critical to any business, but small businesses and start-ups are particularly vulnerable, where lack of adequate financing can abort a fledgling operation and “big idea” with the speed of a single bill cycle.
While it is well documented that women have less access to financing, receiving shorter term loans at higher interest rates, for less amounts of money, female-founded enterprises have even greater trouble accessing investment in the venture capital or private equity space. This means that access to financing and capital investment represents the single most important limiting factor to the establishment and growth of women (and minority) owned businesses.
LET’S START WITH THE NUMBERS
Last year was a record-breaking year when it came to venture funding – amounting to just under $330 billion, nearly double the amount invested the previous year. This is good news as it relates to economic indicators and national productivity, competition, and innovation. But if we parse out the distribution of capital investment, we see that a rising tide of capital investment didn’t go very far in raising all ships. Very little of that pie went to female-founded companies. Indeed, companies with (only) female founders accounted for less than 2.2% of all venture funding in the past year, amounting to $6.4 billion over 217 deals. Women of color face even bigger hurdles, as reflected by the “even smaller slivers of venture capital” they command: 0.6% of all investments since 2009.
Companies that had both male and female founders fared better – representing 15.6% of the pie. This represents an interesting insight into a specific gender bias, as articulated by Julie Castro Abrams, CEO of the venture capital fund How Women Invest: “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.”
It is hard to argue with that conclusion when female-founded companies reflect less than one percent of the total exit value in 2021, whereas teams with both male and female founders generated more than ten times that value.
FOLLOWING THE FEELING
When it comes to venture capital, there is a high premium on data, numbers, and evidence-based strategies. But, even in an industry that prioritizes spreadsheets and hard data, a lot comes down to what you may call “instinct” and “gut feelings” – which includes and is influenced by gender bias and stereotypes.
Those biases include what is termed “role incongruity,” where female gender stereotypes conflict with perceptions of what it takes to be a successful entrepreneur. Women are implicitly viewed by many as naturally more nurturing, less aggressive and, by extension, less able to shoulder leadership. Women who attempt to avoid this “gender penalty” by strategically and intentionally asserting male-associated characteristics such as assertiveness and lack of ‘emotion’ can precipitate “backlash” for ‘violating’ these gender norms. Women entrepreneurs thus face a “double bind” and a very narrow line to walk when courting investors, and have to be doubly mindful of how they present themselves, their business, their competence, and their “fit” within an industry.
This is all the more difficult to address and confront as these biases are often not even recognized by those holding them. Assumptions of gender roles, as antiquated and inaccurate as they may be, are informed by our experiences, including what we learned from our parents, and the societal norms and mores we grew up with.
Howard Edelman, CEO at Tesa Medical and an Angel Investor, explained the perspective and approach of investors like this: “Investors are always looking for reasons to say no.” In a 2020 Medtech Project podcast he related how, while a “deal” may be scrutinized rigorously from every angle, the final decision to invest or not often comes down to personal gut instinct (and prejudices). Investors are scrutinizing candidates looking for any indication that the venture is not a safe bet. To illustrate this point, Edelman related an anecdote about a mentor of his who walked in to a meeting excited about a prospective project, but ended up passing, explaining “The guy wore white socks and it turned me off somehow.”
If a generally inoffensive haberdashery selection can carry that much weight, just think the impact that preconceptions or biases against women in business leadership can have. Women are held to more stringent standards than their male counterparts, and, as demonstrated by a 2018 study (Gender Bias, Social Impact Framing and the Evaluation of Entrepreneurial Ventures) are in a “double bind,” having to fulfill seemingly competing gender and professional roles (treading the fine line between conveying competence while not ruffling feathers for not being ‘agreeable.’). This alone can go a long way in explaining the dismal disparity in access to capital as experienced by female entrepreneurs.
This bias against female founders is not actually associated with financial performance or the “risk” of such investments. Indeed, an analysis by Boston Consulting Group of data from the MassChallenge program in 2018 indicates that businesses founded by women consistently and substantially outperformed teams featuring only male founders. And by substantially, organizations with at least one female founder offered investors more than twice the return on investment. Women-founded business are, in general, a safer and better bet.
WE UNDERSTAND THE PROBLEM. LET’S TALK ABOUT SOME SOLUTIONS.
As in all things – representation matters. While acknowledging the “dismal” present when it comes to current access to capital, analysts and other stakeholders are pointing to the increasing representation of female funders – as represented by increased presence of female general and managing partners at venture capital firms. Today 15% of general partners at venture capital firms are women. This is important as a woman general partner is two times more likely to invest in female founded ventures than a male counterpart.
Investing in diversity, and specifically diversity in leadership positions is good for business. Firms that increased their proportion of female partners by 10% experienced a corresponding 10 % increase in profitable exits, with an average increase in 1.5% to annual fund returns.
Family Offices, or wealth management and advisory firms representing high-net worth individuals, represent another potential bright spot and position of growth, as they can present greater flexibility than institutional investors. Molly Gochman, with Stardust Equity, explained that 20% of her portfolio targets social impact, with the remaining 80% on market rate returns. Being measured by different metrics than institutional investors can, in such circumstances, make a difference. But it is also, as she explains, good business: “Women under-promise and over-deliver. These investments have been really stable and I see them as much less risky.”
There is a lesson in here for what is still, largely a tight “boys club” in private equity. Profits are made by recognizing not only the next new thing – but, also from seeing the chessboard from a different angle. Continuing “pattern matching habits” and investing in ventures where the founder across the table looks like his funder (and has the right socks) might feel safer – but it is not much of a strategy. Fortunes are made when recognizing something that is currently undervalued and seeing the need for it in the future, not by doing the same-old-same-old. Investors that are doing the work to take a more objective and inclusive evaluation of the changing world are in a position of strength that will pay off.
WORDS OF WISDOM TO (AND FROM) WOMEN FOUNDERS
Only 67% of women businesses ever seek funding. Recognition of the barriers to fair valuation and getting their foot in the door may partly explain this.
But there are some lessons that we women entrepreneurs can and should take from this.
The first is this: Know your Audience
Understand how VCs ask questions (and how those questions are likely to differ based on gender). Understand the environment and practice, practice, practice how you will present yourself and your company. If you have to, run this obstacle course “backwards and in heels” – training helps.
Second: Trust yourself (and your gut).
Yes. Absolutely meet investors where they are at and speak their language. This may involve a pitching bootcamp. Upping your executive presence, being intentional (and succinct) in your communication style. But, let’s not trip ourselves up with assuming that the men in VC (and it is mostly men) know your product, your market, and your customers better than you do.
Allison Long Petrine, Founder of Crescent Ridge Partners, put it this way: “investors aren’t always right about a business they decide not to invest in. Many, like me, may have reasons for saying no that have nothing to do with the quality of the idea.” The ability to roll with the punches (there are a lot of no’s to field) and then to persist is imperative. The ability to filter feedback in an objective manner, accepting and integrating what is helpful but not deferring your own authority and insights is critical.
Third, it isn’t just the men. We have to confront our own, internalized gender biases and be ready to shed behaviors and perspectives that inhibit our ability to live and present our best, (most powerful) and authentic self. This means getting comfortable with the uncomfortable. I say this from personal experience, and I know that many of you reading this will relate deeply. Many of us, as women, are socialized to be modest, more self-effacing, and deferential. This includes not taking proper credit in the absence of external validation. Knowing our value, and asserting that value, in cold dollars and cents, can feel very (very) threatening. But it is also revolutionary and revelatory.
And on that note: Ask for more. First, because you are probably undervaluing yourself and your company (and what you will actually need when the rubber meets asphalt). A common mistake of founders (both male and female, but particularly female) tend to ask for just ‘what they need’ out of fear of rejection. However, a critical principle of negotiation is the need to anchor the negotiation north of where you are able and willing to finally land.
IN CONCLUSION
We have made great progress over the last hundred years, as Atrómitos founder, Michealle Gady, reflected in this month’s newsletter. But we still have a long way to go. While female founders are doing the work to prepare themselves to meet the challenge, we call on venture capitalists and all in private equity to do its own homework. This includes:
- Invest in diversity in leadership positions at VC firms: This means having an intentional (and regularly reinforced) strategy for hiring and retaining more women and minorities in decision making roles. While we applaud the (slow) increase in representation of women partners in VC firms, 15% is still well short of the minimum “tipping point” of 25%, where a minority perspective can have a consistent cultural and systemic impact.
- Ask more Questions: Screening evaluations for investment often tend to be “cursory” and incorporate “only sparse objective information.” This means decisions are all the more likely to be impacted by bias. Women and men tend to have different communication styles. Expanding your own emotional intelligence and interpersonal fluency means expanding your own tool box to better identify and evaluate a winning proposition.
- Follow the Data: Recognize the market opportunity here. Women founded ventures are consistently undervalued because of a demonstrated miscalculation of the risk and benefit they present. Knowing this, incorporate an intentional (and again, consistently reinforced) strategy for incorporating and promoting female-founded ventures in your portfolio, because #thefutureisfemale.