Venture capital investment has surged in 2021. Investment dollars for the first three quarters of 2021 have nearly doubled from 2020, according to The Q3 2021 PitchBook-NVCA Venture Monitor.
While investment dollars have increased in startups with at least one female founder, their share of dollars in 2021—17.2%—hasn’t reached the record set in 2018—18.5%—the year the #MeToo movement took off.
A whopping 80.2% of venture capital went to all-male founded companies. Only 2.0% went to all-female-founded companies. That’s an imbalance that Julie Castro Abrams wants to fix. She’s managing partner at How Women Invest, a venture capital fund dedicated to shifting the capital landscape by supporting women-led companies. “Women are getting a message that you have to have a male co-founder to get funding. That’s unacceptable.”
The industry has a lot of work to do! Institutional investors, the government, and accredited women investors can ensure that female-founded companies get their fair share of venture capital.
Institutional Investors Need To Follow The Lead Of Innovators
“Institutional investors are the most powerful force in the venture world,” said Trish Costello, founder and CEO at Portfolio, investment funds designed for women who back innovative companies for returns and impact. “They are the ones with the most significant money.”
“The data shows that funds founded by women and POC return more money to their institutional investors,” Castro Abrams said. “These massive venture firms do not necessarily return consistently well. “
“Family offices are being the most innovative,” said Costello. Family offices are putting their money to work in novel ways that make both financial and social returns by investing in gender-lens venture funds. “Corporate funds also have the leeway to invest in both financial and impact returns. Goldman Sachs, Morgan Stanley, and Salesforce see the opportunities in investing in women and POC and are doing so.” If they can do it, other institutional investors can, too!
“Foundations are not only best positioned among all impact investors to provide catalytic capital, but also have a fiduciary duty to invest in a way that aligns with their social mission and supports their grantees,” writes Tracy Gray and Emilie Cortes in the Stanford Social Innovation Review. Catalytic capital is more patient, risk-tolerant, or concessionary capital that helps attract additional investors to a project.
Yet, foundation (and other institutional investors) investment committees are typically assisted by outside advisors who are overwhelmingly white and male. Guess who they recommend investing in?
Notable exceptions are the Disney and Nathan Cummings Foundations. “Valerie Red-Horse Mohl, CFO at the East Bay Community Foundation, went through a change-management process and came up with a new set of criteria that they’re using to reallocate their portfolio,” said Castro Abrams. The idea is to invest some of their endowment in asset-management firms that look for both social and financial returns.
“I’m a trustee at a small university endowment,” said Gray, managing partner at The 22 Fund, lead partner at Portfolio Green & Sustainability Fund, and a member of Ally Capital Collab. The 22 Fund is a venture fund that invests in tech-based, export-oriented manufacturing companies to create clean jobs in underserved and low- to moderate-income communities. “It’s my fiduciary duty to get the highest return and do the best for the students at the university. Investing in diversity, especially women of colour, leads to higher returns.”
“Pension funds whose members are women and people of colour are taking our money and transferring the wealth to white men,” said Gray. “When you’re taking the money from women and people of colour and not investing back in them, that’s illogical. All the research shows that women and people of colour deliver a higher return on investment.”
Institutional investors need to do better than checking the box. “They need to look for funds that have a third or equal number of women partners,” said Costello. There is no shortage of funds led by women. Check Project Sage 3.0 by Catalyst at Large and Wharton Social Impact. But there is a shortage of women and POC in investment decision-making positions among institutional investors and the consulting firms they hire.
Make SSBICs A Cornerstone Of Federal Policy
Specialized Small Business Investment Companies (SSBICs) are venture funds owned by women and people of color, receiving matching grants from the Small Business Administration (SBA). “Now is a perfect time to look at SSBICs and develop an aggressive program,” said Costello. When the program was first introduced, women and POC hadn’t founded many venture funds. Over the last five years, that’s dramatically changed. “There are now a lot of women and POC with several years in venture capital or as uber angel investors who are starting funds. These are backable funds.”
SSBICs need to have a reasonable application process. “You can’t have a process that takes 100 hours,” said Costello. “People are going to say ‘it’s not worth my time.'” Those that do apply will be those that can’t find money elsewhere. Importantly, the program needs to be run by an industry insider.
Women Are Capable Of Changing The Face Of Venture
“We [women] may still not be on the billionaire list in volume, but we have a lot of money to invest,” said Castro Abrams. Women are poised to inherit a large portion of the $30 trillion that will be passed down from baby boomers. They also are increasingly building wealth on their own.
Women can invest directly in female-founded companies and as limited partners in venture capital funds. According to the Angel Funders Report by the Angel Capital Association, over the last 15 years, angel-backed companies with women CEOs have risen steadily—jumping from 5% in 2015 to 21% in 2020. According to The American Angel, women investors place greater importance on the gender of the founders they invest in than their male counterparts: 51% consider a founder’s gender to be highly important compared to 6% for men.
As trustees of endowments and members of pension funds, they can demand that investments be made in funds founded by women and POC.
How will you help fix the lack of capital going to female-founded venture capital funds and startups?