Why Venture Capital Market Needs Women Leaders?

Katya, Dorozhkina, Starta Ventures, New York

This piece by Katya Dorozhkina, CEO at Starta Accelerator and a Managing Partner at Starta Ventures, was initially published in Russian in Forbes.ru.

The largest players in the US venture capital market are actively promoting women to partner status. Until recently, this industry was one of the most lagging behind in terms of gender equality. What has changed?

Until recently, in the US venture capital and startup environment, women were practically not represented. They could easily get administrative positions, but early in their career path, they hit a wall, with no opportunities for future growth within their companies. In addition, they often had to deal with a biased attitude from potential partners and investors when growing a business as a CEO or founder. Moreover, outrageous cases of harassment periodically shook up the community. Recently, the situation has improved. Now, almost all the major players in the US venture capital market are actively promoting women to partner status — for many, this is the first time in history. There are two factors for this change — firstly, many companies issued official internal documents stating their commitment to the policy of diversity and equality of representation. The second reason is economic considerations. The statistics and the general vector of business development show that women’s participation in managing business and investments is profitable. In addition, men may miss out on potential “unicorns” from industries that they can’t relate to.

Numbers and people

The Silicon Valley Legend, venture capital firm Sequoia Capital, which has long been under fire, for the first time in its more than 40-year history, appointed a woman, Jess Lee, as a general partner in October of 2016. Over the past two years since this appointment, many large market participants have taken similar steps. However, as of 2017, 74% of venture capital firms still do not have female investment partners. After decades of women’s struggle for equal rights, this seems strange, but the venture capital industry has proven to be one of the most lagging behind in this issue. The atmosphere of the “men’s club” not only prevented women from being promoted but also led successful women, such as an ex-partner of Google Ventures Shanna Tellerman, to quit. According to various estimates, now from 9 to 11% of partners in venture capital firms are women. According to Pitchbook, women occupy 16% of positions that imply investment decisions.

The situation is slowly changing. The founders of Initialized Capital made the search for women investment partners a priority from the very beginning of their work in 2013 and now they are striving for parity in this matter. Currently, three of the company’s eight partners are women. In August of this year, The Andreessen Horowitz Foundation announced Angela Strange as a new general partner.

The second vector of change in the situation is the new foundations established by women professionals. More and more successful women are starting an investment business, after having accumulated knowledge, connections and capital. The number of firms founded and headed by women is growing. Over the past four years, 16 new funds have appeared, such as Cowboy Ventures, Perkins Fund, Aspect Ventures, Female Founders Fund. Many of them state gender as their investment focus, focusing on startups with female founders, but others also invest in traditionally “male” areas, such as IT security. The founder of SheEO, Vicky Saunders from Canada, is working to create a $ 1 billion fund that will be annually supported by 10,000 women entrepreneurs worldwide. Arlan Hamilton founded Backstage Capital, that invests in startups, where at least one of the founders is a woman, a representative of a racial minority or LGBT community.

New “Unicorns”

Naturally, the other side of the coin is a small proportion of venture capital invested in startups with female founders. It remains at 15% in the United States. Last year, the amount was $ 12.4 billion. At the same time, only 2.2% of investments were directed to startups, with only women as their founder. Male investors have more confidence in male founders. Studies show that a woman founder could count on a smaller amount of money that investors were willing to allocate than a man founder with the same idea and technology. So, in 2017, the average volume of venture financing for a startup founded by a woman was $ 5 million versus $ 12 million for a startup founded by a man.

The hi-tech industry is not perfect when it comes to gender equality. According to the Harvard Business Review, 55% of women leave their careers in IT, after reaching the level of a middle manager. Even now, the share of women in the IT field is declining — from 36% in 1991 to 25% today. At the same time, according to the ISACA association, women account for only 21% of leaders in this area. It is clear that the emerging trend will be strengthened not so much by political steps, but by successful investments and projects. The more there are women who found startups and unicorns, the easier it will be for others to follow this path. One of the inspiring examples is Katrina Lake, who founded a personal shopping service Stitch Fix from scratch and only in a few years brought it to the stock exchange. A year after the IPO, the company’s capitalization turned out to be higher than the pre-IPO placement by 85% and now amounts to $ 2.6 billion. Another great example is the attraction of $ 100 million of funding by the start-up, Zola.

In the spring of this year, out of 134 venture capital-backed “unicorns” in the United States, only 16 were founded by women, out of 239 companies in the world — 23, according to the Pitchbook. But there are very interesting projects among them, for example, Houzz, Credit Karma, Nextdoor, Eventbrite, Grab, Didi Chuxing and others. Interestingly, many of them are associated with such industries and user solutions that walk right past the attention of male investors. This is one of the important arguments in favor of including women among investment partners.

Three main reasons:

Based on my experience and opinion of business partners, I identified three main reasons why you need to attract women to your business:

1. To learn about the struggles of an influential consumer group

In the US, women make 85% of personal spending decisions in the family. This gives a great development opportunity to newer consumer tech startups that old players of Silicon Valley may overlook by focusing on finding a new Zuckerberg. Men may simply not understand some of the things women spend money on. This misunderstanding may lead to missing out on investing in some high-potential products. Male investors sometimes need to discuss a startup with their wives or assistants, being unable to evaluate the idea during the meeting. This system “bug” has been around for many years — you can recall the story of a Barbie doll, whose sales have passed over a billion dollars. Ruth Handler came up with an idea of a Barbie doll while observing her children play, and initially her husband, the co-founder of Mattel, and the directors of the company rejected her idea.

2. To increase the profitability of the portfolio

Prejudice is also added to the difficulties in understanding the issue, and as a result, venture firms have fewer women-founded startups in their portfolios. At the same time, studies of existing companies and start-ups show a high efficiency of women managers and owners. According to BCG, start-ups with female founders are 10% more profitable and provide a significantly higher return on investment. A Catalyst study shows that a greater representation of women in management positions of companies correlates with higher financial results. Capital returns and shareholder income is 35% higher in firms that have women among their executives compared to those where all top positions are held exclusively by men.

3. To provide a balanced assessment of projects at the investment stage and further on

Common for women qualities such as a lower risk appetite, great attention to details and an understanding of psychology make them valuable players who can bring important ideas and comments to the table. Mixed teams are better at assessing the whole range of key factors, risks and opportunities of start-ups and markets. Early stage startups cannot be analyzed and evaluated only by using numbers and metrics. Methods that work at later stages may not be applicable. This is when a different perspective is especially important — women`s approach to making decisions, including financial ones, and the ability to intuitively assess the team’s prospects and risks. Women effectively maintain relationships with project founders and often better understand what is happening with the team and the company, and therefore can prevent certain mistakes.

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