Home News Female-founded startups are a better financial bet—so why aren’t they being funded?

Female-founded startups are a better financial bet—so why aren’t they being funded?

Closed Loop Plastics founders Sharon To, Aldrin Lupisan and Will Amos at the Bay Area Maker Faire in San Mateo in 2019. Photograph courtesy of Closed Loop Plastic.

When Nassim Abdi began shopping around the concept for her company to investors, she was optimistic. With companies like Amazon and Google as paying clients—her company, Storybolt, offers equity and diversity training—she was confident they would bite. When many didn’t, she was confused.

“Is it that I’m lacking something?” Abdi remembers asking herself. “I started really doubting myself.”

Companies founded by women produce higher returns on investment and cumulative revenues than those led by men—still they receive only a fraction of overall funding from investors. The pandemic has worsened this funding gap: already minuscule, the percentage of venture capital investment flowing to female founders dropped dramatically last year.

According to Crunchbase, a company that collects data on private and public companies, only $2.3% of venture capital investment went to female founders in 2020. The total amount of funding invested in female-founded companies also decreased by 27% compared to the previous year.

“Abysmal,” said Andrea White-Kjoss, managing director of the Long Beach Accelerator, of these numbers. “They’re absolutely terrible, no matter what metric you apply.”

So why are female-founded companies having such a hard time attracting investors?

Abdi said she noticed that potential investors often asked her about the potential risks the company might face, rather than inquire about her vision for the future. She soon began to suspect that her being a woman and an immigrant who speaks with an accent—she immigrated to the U.S. from Iran in 2003—had something to do with that.

“They don’t trust you because you’re not like them,” she said.

And there’s research to back up Abdi’s intuition. After having similar experiences as the co-founder of a venture-funded startup, former investment banker and strategic consultant Dana Kanze set out to test her hypothesis that women founders weren’t given the same shot at funding as their male counterparts.

To do so, Kanze transcribed and analyzed years pitch presentations from TechCrunch’s Disrupt Startup Battlefield, an event that has helped launch companies that have since become household names, such as Dropbox, Fitbit and Mint, by placing them in front of top venture capital firms.

Using a linguistic analysis software as well as manual coding in a research lab, Kanze determined the frequency with which female founders were asked questions aimed at prevention rather than promotion. For example, a prevention approach would be to ask a founder how they planned to retain customers, rather than asking them how many they expected to add in the future.

Kanze’s research, the results of which she presented in a 2017 TED Talk, showed a startling imbalance. Of the questions posed to male founders by investors, 67% were “promotion-coded,” meaning that they focused on a founder’s vision for growing the company. Meanwhile, the numbers were reversed for female founders—66% of questions directed at them were focused on prevention.

“When it comes to venture funding, entrepreneurs need to convince investors of their start-up’s home run potential,” Kanze said in her TED Talk. “It’s not enough to merely demonstrate you’re not going to lose your investors’ money.”

Being asked limiting questions, she concluded, meant that women had less of a chance to shine in front of investors—resulting in less enthusiasm to fund their business ventures.

While Kanze’s research found that female venture capitalists were displaying the same bias against female founders as male venture capitalists, a phenomenon called “similarity bias” likely also works against women founders, said White-Kjoss, of the Long Beach Accelerator.

“There’s this tendency to talk to people who look like you,” she said.

This makes things difficult for anyone who’s not a white man, demographic data of the venture capital landscape shows. According to the National Venture Capital Association, 80% of investment partners at venture capital firms were White and only 14% were women.

“If all of the people making decisions are White men, they are likely to gravitate and talk to White men,” White-Kjoss said.

That experience is one Sharon To, a 24-year-old cofounder of Long Beach-based Closed Loop Plastics, can confirm. As a Chinese American woman who co-founded the plastics recycling company together with two male co-founders, To said she often found investors deferring to them during pitch meetings.

“As the computer engineer, I do work on the algorithm and the control systems that we use in our process, so I am the expert on that,” To said. Still, she said, investors often directed their technological questions toward her male co-founders.

In the short-term, some women founders like To have taken it upon themselves to make up for the lack of trust they sense among their audience of investors. “This is the type of room that I will be walking into,” she said. “I do try to emit more confidence than I normally have.”

Kanze’s research showed that this approach can make an impact. In her analysis, she found that by responding to limiting questions with promotion-driven answers, founders were able to raise 14 times more funding than those who went along with the prevention-focused approach.

In the long-term, investors have to change the way they approach female founders, from the questions they ask to the outreach they do, said White-Kjoss. “It has to be really committed to correcting these outcomes.”

There are multiple ways to achieve this, she added, from equity and diversity training to setting a minimum percentage of women-founded companies a firm funds and reaching out to local, national, global organizations for female founders.

“It’s really important when you cast your net that you’re fishing in the right waters,” White-Kjoss said.

Unwilling to wait for traditional venture capital firms to change, a growing number of social equity-driven investment funds are hoping to impact the demographics of the investment landscape and company boardrooms.

“Women really need to step up as investors,” said Julie Castro Abrams, co-founder of How Women Invest, an investment fund that exclusively invests in women-founded companies. “That’s probably one of the biggest things that could change the game.”

How Women Invest currently boasts a network of 211 investors, 90% of whom are women. In its first year, the venture capital firm drummed up $10 million in funding for women-founded companies, two of which have been selected so far.

If women continue to avoid the male-dominated venture capital world, “we’re missing out on the power, wealth and influence that we could have investing in venture,” Castro Abrams said. Meanwhile, as other investors shy away from women-founded companies with high revenue potential, “those of us who are investing in women-founded companies can make a lot of money,” she added.

Whether it’s to create change within existing venture capital firms or forming new ones to invest in founders who have long been overlooked, like women and founders of color, awareness of the bias they face is key, said Storybolt-founder Abdi.

“We need to be more vocal about it as female founders that this bias exists,” she said. This, Abdi hopes, will help spur more diversity and equity programs in venture capital. “Silicon Valley could benefit from that,” she said.

LEAVE A REPLY

Please enter your comment!
Please enter your name here