Karen McCormick, partner and chief investment officer at Beringea, explores how an increased number of female VCs may mean more female-founded startups achieve funding.
This week, thousands of events and competitions will take place in the name of Global Entrepreneurship week. The initiative takes place every November with the aim of inspiring more people to engage with entrepreneurship across the world.
Britain has put considerable resource behind boosting entrepreneurship as a way of driving the economy, and it’s working. We are now the fourth most entrepreneurial country in the world, and last year there was over 600,000 new businesses launched in the UK; almost 30,000 more than the previous year and a record for the country.
The amount of female-led businesses is growing at an even faster rate. The number of self-employed women increased 40% between 2008 and 2016; compared to a 13% increase in self-employed men. These female-led businesses are making a substantial contribution to the economy. Earlier this year, Founders4Schools revealed over 2,250 female-led businesses with revenues of £1m to £250m are growing by at least 20% per year. Their average revenue is £12m.
Despite this, the amount of venture capital backed female founders is still disproportionately low. Just 10% of venture dollars spent globally between 2010 and 2015 – a total of $31.5bn – funded startups with at least one female founder.
Why aren’t more female founders backed?
The success and attributes of female founders makes the lack of VC-funding a curious scenario. According to the 2016 “BNP Paribas Global Entrepreneur Report”, companies helmed by female entrepreneurs had 13% higher revenues than those run by men, and finished 9% above the average for all entrepreneurs surveyed. Contrary to popular belief, women are also more calculated risk-takers. Research from the Centre of Entrepreneurship revealed 87% of women see themselves as financial risk takers, compared to 73% of men.
There are varying theories around the lack of VC-backed female founders, but one is the disproportionate representation of women in top VC roles. A recent study found that women make up just 7% of partners in the top 100 venture firms. The 44% of these firms that are investing at above-average levels in female founders have at least one female partner. More tellingly though, when singling out firms that have a high number of rounds in female-founded firms, representing a high percentage of their total, they share a clear attribute: the partnership was either founded by a woman and/or there is a relatively high percentage of female partners.
This suggests that getting more women into partner roles at VCs could increase the amount of female founders that are backed by venture capital. Furthermore, increase in female partners could drive more successful businesses for women. Research by Sahil Raina, an assistant finance professor at the University of Alberta, found that women had a 15% chance of a successful exit when partners of the VC firm that had invested in their first round were all men; this is compared to 40% success rate for male founders. However, when the a VC firm with female partners invested in a startup’s first round, female-led businesses had about an equal chance of a successful exit as men; around 40%.
Reinventing the old boys’ club
With the suggestion that greater representation of women in top VC roles would lead to more backing for female founders, and greater success of their businesses, redressing the balance is crucial.
From my own experience, it isn’t an issue of attracting women into the VC industry; it’s a case of keeping them. From associate to investment director level, there tends to be a better representation of women, but it decreases quite rapidly at the more senior level. As much as I hate to say it, the reasons are driven biologically. As a partner in a venture capital firm, it is essential to have recent experience and to maintain your network so that you can have a good deal flow, offer valuable consultancy and drive success. This can be difficult if you spend time away from work to raise a family, or even if you take an extended maternity break.
In addition to that, there is a structural compensation issue in the form of carried interest agreements. These agreements remunerate investors based on the return of a fund, but you generally need to be with the fund for a while to qualify for the reward. Good investors with a track record will be looking for longevity and participation in the carried interest, and therefore, trying to ‘back fill’ maternity or family leave becomes difficult if it’s only for a short period.
While there isn’t an easy solution to these issues, we need to find ways around it. One way is for women to make sure they stay relevant when they take time out, and for VC firms to help them do it in a way that works for both sides. That might be retaining portfolio roles or attending board meetings while you’re away, going along to industry events or finding other ways to maintain your network that still allows you to balance your life. For employers, flexibility and support is essential for retaining great female investors for the long haul.
Making an impact
Successful entrepreneurs create revenue and provide jobs, both of which are essential to the economy. Venture capital has a key role to play in maximising the impact of business on the economy, and investors have to find businesses with extraordinary potential to be able to maximise the output. Given the success of female led business, and the growth rate, funding has to become more proportionate.
As the number of female entrepreneurs increases, VC backing will likely increase organically. However, more needs to be done to ensure women are comfortable approaching VC firms for support, and that they are set up for success when they do. Increasing the representation of women in partner roles of VCs is therefore crucial to increasing the support of female founders, and driving impact on the economy.