While it may seem like we’ve moved out of an antiquated Mad Men era, we aren’t quite there yet — especially when it comes to the funding gap for startups founded by women and startups led by diverse founders.
Access to capital is controlled by a small but powerful boys’ club of investors. These VCs and LPs choose who gets the funding, and 97.2 percent of the time, that funding is invested in mostly white, usually male founders.
Glass wall
We’ve seen some women break the glass ceiling, the invisible barrier that keeps us from rising beyond a certain level in a hierarchy. However, there’s still a glass wall, a barrier that stalls fundraising for women in leadership positions. It is difficult for women-led startups to raise even a small round of funding, but the funding is even more scarce when they go out to raise series A and beyond.
The annual growth rate of women-owned businesses has more than doubled, so there certainly isn’t a pipeline problem. Women are founding tech companies at unprecedented rates. They’re solving some of the biggest problems this world faces, from health care to debris cleanup in outer space. And yet, once women founders have raised a certain amount of money for their startup, they report hitting a funding wall. When it comes to raising beyond seed stages, investors aren’t continuing to fund women, while men just breeze on by with extraordinarily high investments and exits.
Funding gap
Founding teams composed entirely of men receive an average of $4 million for their first follow-on round, reports PitchBook, compared to just $2.4 million for those founding teams comprised of women who actually are able to secure follow-on funding. This disparate gap in funding is palpable.
How is it that women control 70 to 80 percent of all consumer purchases, according to Forbes, and yet in 2020 only 2.7 percent of funding goes to women founding those consumer products? The inequity of men investing in men undermines half of the world’s population, who are diverse consumers, when these products are created for them but without them.
Diversity matters
This is the story that has been told again and again. Yet, despite the repetition, the pressure to close the funding gap, the diversity pledges, and the hiring frenzy of “diversity officers,” the statistics are stagnant, and they have been for years. It’s still the “good ol’ boys” who dictate the majority of which apps and tech companies get built, as well as those that don’t.
Gender, race, age, and sexual orientation all have profound effects on people’s experiences and advancement working in tech, and closing funding rounds. Sixty-two percent of women seeking funding experienced bias during the fundraising process, according to Inc’s 2018 State of Women and Entrepreneurship survey.
Missed opportunities
If these biases continue preventing women, people of color, and LGBTQ communities from securing funds, investors are missing out on investments of a lifetime. And right now, it’s happening every day. Black women-led startups have raised only .0006% of the $424.7 billion in total tech venture funding raised since 2009, reports ProjectDiane.
Women are trying to get around this glass wall by seeking out other women investors. Thirty-eight percent of women founders raising money intentionally sought women investors. Their reasons varied according to the Inc survey, but many of them did so because they thought they’d be taken more seriously. Unfortunately, the pool is small, given that only 9 percent of partners at American tech venture firms are women, according to All Raise. And while many women VCs and angel investors have the goal of funding more women and people of color, women funding women is just the beginning. We need more men to be allies, take women seriously, and fund their world-changing startups.
Benefits of funding diversity
Funding businesses run by women is not a cause or charity, and women founders don’t want pity. Funding businesses and startups run by women and people of color generates a strong ROI, which is exactly what VCs want. For example, women-founded companies in First Round Capital’s portfolio outperformed companies founded by men by 63 percent.
This is a call to close the funding gap. This is a call for the “good ol’ boys” to reimagine the way they do business, opening their doors to a more collaborative, inclusive community of investors and founders. It’s time for investors to put their money where their mouths are — it isn’t enough for the men to say they support women founders; we need them to write the checks, too. This is a call for all VCs, LPs, and angel investors to look at the hard numbers, and make more informed decisions — private technology companies led by women are more capital-efficient, achieving 35 percent higher ROI, and, when venture-backed, 12 percent higher revenue than startups run by men, according to the Kauffman Foundation.
It’s time for women-led startups to be taken seriously, and that means both supporting and funding them.