Fewer women in VC firms = lower returns from diverse investment teams

Navanwita Sachdev
Thu, 09 May 2019 15:21:23 +0000
Business, gender gap, vc, venture capital

In spite of profits, efficiency, and innovation that gender diversity promises to bring, the gender gap is not being filled when it comes to corporate venture funds.

“In 2019, most of us can agree that there are not enough women making decisions about the future of industries and innovation”

According to the Women in Corporate Venture Report 2019, venture capital funds with women managing partners across Canada and the US got only 10% of all dollars invested in in 2018. The rest of the 90% went to all-male funds.

This makes sense seeing that only 13.5% of all partners at US/Canadian venture capital firms are women, and only 8.9% of women are in managing partner roles.

The report by Highline BETA, a startup co-creation and new venture development company, looked at 4,500 team members in over 300 venture capital firms in the US and Canada, as well as active corporate venture funds, groups or teams – including 903 team members from 113 corporate venture groups.

Lauren Robinson

“In 2019, most of us can agree that there are not enough women making decisions about the future of industries and innovation,” says Lauren Robinson, Highline Beta General Partner and Female Funders Executive Director.

“But there is still too much talk, and not enough action. The intent of this report is to give venture capital firms, angels, and LP investors the information we need to benchmark ourselves, and to make concrete change.

“We hope by bringing greater transparency to these systemic problems, we can provide the inspiration and insight that will catalyze a different future for venture capital,” she adds.

For the VC firms in the US, 168 different funds of less than $5 million that made less than one investment in 2018. These funds represent an estimated total of $65.9 billion in active investments.

The numbers reveal that the gender gap in venture capital across North America is greater because of lower representation of women in VC firms.

This low representation of women in corporate firms may be leading to opportunities missed out on the returns that diverse investment teams drive.

“Gender diversity (or lack thereof) among these emerging corporate venture leaders impacts corporations, startups, and venture capital investors alike”

It is now proven that diversity within firms leads to better decision making and drives innovation. McKinsey & Company came out with research in 2015 that gender-diverse companies are 15% more likely to outperform those with all male companies.

Also, a Harvard Business Review report found in 2013 that companies with diversity out-innovate and out-perform others. Employees at these companies were 45% likelier to report that their firm’s market share had grown in the previous year and 70% likelier to report that the firm has acquired a new market.

Gender lens investing has been catching up at a rapid rate as a business trend throughout the 2010s. This kind of investment signifies investments with the objective of generating not just a financial return, but also a quantifiable and profitable social or environmental effect.

Read More: How gender lens investing is becoming a roaring business trend

There also exists a gap between the capital women entrepreneurs seek and the credit they have access to. Venture capitalists can see this as a major opportunity for business.

However, from what the Women in Corporate Venture report reveals, low representation of women in venture capital firms is hindering venture capitalists from taking that advantage, which means the world of business may yet not have reached the heights it can reach.

The current report suggests that corporate venture groups across the board are still largely missing out on the broader range of networks and experience that gender diversity brings.

Women in Leadership Roles

Another trend that has been revealed in the report is that having women in leadership roles at firms might form the investment interests of that firm. A 2013 report from the US Small Business Administration shows that deal flow is often sourced from pre-existing networks.

The social capital of a VC firm can influence its future investments in women-led businesses, but in complicated ways. Gender diversity or its lack among leaders in emerging corporate ventures can have a cascading effect on corporations, startups, and venture capital investors.

To avoid risks, VC firms lean towards investing within familiar social networks. VC firms with long-term relationships that invest as a group on a regular basis with the same VC firms lean towards investing in a higher percentage of women led businesses, since it helps them share the risk.

On the other hand, VC firms co-investing with other VC firms that do not regularly co-invest with one another, tend to invest less in women-led businesses. According to a report from Babson, venture firms are twice as likely to invest in women-led startups if they have at least one female partner on their team.

As the report states, “Those in corporate venture capital roles not only invest in startups – they also often find opportunities for the core business to leverage the technology, networks, and learnings of the startups in their portfolio. Gender diversity (or lack thereof) among these emerging corporate venture leaders impacts corporations, startups, and venture capital investors alike.”

“Angel investors and venture capitalists can have a huge impact by helping to bring more women to the table,” says Tara McLean, a participant in Female Funders Angel Academy, who recently made her first two angel investments after completing the program. “Mentorship from an experienced investor gave me the comfort I needed to make my first angel investments. I hope to play a role in closing the gender gap in investing, and help make the process of raising capital more accessible to women founders.”

Also, often it’s not just about the money. Apart from funds, corporate venture teams also offer support for building partnerships, helping start pilots, obtaining contracts, and other support. Such initial support can impact the future of the startup.

Female Leadership Representation in Different Sectors

Almost 16% of leadership (partners, executives) at corporate venture capital firms are women, according to the Highline BETA report.

The report also revealed that representation of women decreased with seniority, only 15.9% of women occupying posts of partners or investing executives, as opposed to 47.4% occupying posts of analysts.

Other trends shown by the report are the different percentages of women representation in different sectors, the highest representation seen in CPG and health, both showing more than 35%. On the other hand, the least represented sectors were automotive and energy, both showing less than 12%.

While women all over the world have started showing interest in STEM (Science, Technology, Engineering and Mathematics) businesses, women entrepreneurs are finding it increasingly hard to acquire funds and support in that sector.

Read More: Women entrepreneurs in STEM still find themselves cash strapped

General research from the National Women’s Business Council (NWBC), released in 2018, shows that women, in the past as well as now, do not find it easy to gather capital for business as men, even if the funds they seek are less than what men seek.

At the same time, the current report proves that women are facing funding problems in general business as well.

More women entrepreneurs are forced to fall back on personal funds than men. Consequently, women-led businesses are becoming cash strapped, so it’s another cascading effect.