At the beginning of this year, some VC investors celebrated “record” levels of investment for female-founded startups in the United States: 2.8%, up from 2% a year earlier.
Progress is progress, but there is clearly a long way to go until female entrepreneurs are operating on a level playing field as their male counterparts. And anytime the numbers seem to be moving in the right direction, it seems to be short-lived. Recent data from Pitchbook shows that even before the coronavirus pandemic hit, the first few months of 2020 were proving to be a setback for female founders. Startups founded by women made up seven percent of all VC deals in the first quarter of 2019, but that number dropped to just over four percent in the first quarter of 2020.
This gap is far, far worse for women of color. According to ProjectDiane, a biennial study of Black women founders in the US, the amount of venture or angel funding received by startups led by Black women since 2009 is still just .0006% of the more than $400 billion in total tech venture funding raised in the same period.
In recent years, we’ve seen an acceleration in the creation of new funds, incubators, and initiatives focused on increasing the amount of investment that goes to female founded companies. Here are a few things that we can do to unleash the power of female-led entrepreneurs.
Accelerators: Be conscious of investors’ implicit bias
Incubators and accelerators play a key role in connecting founders and funders. They are in an ideal position to close the gender finance gap, especially in early-stage entrepreneurship.
So, it’ll probably surprise you - as it surprised us - that accelerators are having exactly the opposite impact. In research we conducted with the IFC’s Women’s Entrepreneurship Finance Initiative last year, we found that accelerators are actually widening the gender financing gap.
The simplest way to think about it is this: accelerators are great at helping entrepreneurs meet potential investors. But those investors come into those meetings with their own implicit biases and assumptions about what they’re looking for; biases that can work against female founders, and especially female founders of color. When women enter into rooms to pitch their company, they do not look like the people that they are pitching to. One report found that only 8% of partners in the top 100 venture capital firms are female. Similar-to-me effect indicates that people will show more favoritism towards others who are like them, which is often demonstrated when women attempt to gain VC funding.
By supercharging the number of these investor-entrepreneur meetings, traditional accelerator programs are also unintentionally supercharging the opportunities for bias to play out. It’s an important wakeup call that accelerators can - and must - do more to support female-led companies.
One solution: peer-selected investment. Since 2009 we’ve been running accelerators with a twist: entrepreneurs collectively decide which of their peers receive VC funding. Last year an Emory University study found that this peer-review process mitigates bias against female entrepreneurs, and is just as effective at predicting company success as traditional investment processes. We’ve started licensing our model to incubators and accelerators around the world; for instance, WePOWER in St. Louis recently used the peer-review model for their program focused on Black and Latinx founders building businesses that create living-wage jobs for community members living in poverty.
Corporations: Embrace inclusive acceleration
More and more corporations are getting involved in the startup game. There are now more than seventy corporate accelerators in the United States. One Techstars article about corporate accelerators discusses how they can help company leaders “see the future of your industry through the lens of entrepreneurs who are trying to disrupt it.”
However, the problem is that most of these accelerators rely on the same “one-size-fits-all” model that has resulted in the gender financing gap. Corporations that run accelerators and have a commitment to diversity, equity and inclusion can do things differently. As one example, IBM has baked in a commitment to gender diversity in the sourcing process for their Hyper Protect Program, an accelerator focused on supporting fintech, healthtech and insurtech startups. They have added a number of steps in the sourcing process to ensure diversity. According to Melissa Sassi, they have reached out to more than fifty networks devoted to female founders, including the Global Accelerator Network, which is comprised of more than 50% female-founded companies. As Sassi says, “Going through traditional channels isn’t going to work." They also weigh gender diversity more heavily in the scoring system for selecting founders for the cohort.
Foundations: Lead the way on more inclusive models
More foundations are getting involved in impact investing. There are now more than 200 foundations and family offices that have chosen to invest part of their endowments into impact-driven entrepreneurs and alternative vehicle structures, rather than looking only at financial returns. Foundations have a chance to rethink not just what they invest in, but how they invest, and lead by example by building new and more equitable structures.
As one example: the Heron Foundation is experimenting with a participatory decision-making process where community members would vote on place-based investments. As Dana Bezerra, President of the Heron Foundation told Dennis Price at Impact Alpha, the foundation’s”...role is to speed that agency and accelerate it and not put our fingerprints all over it.”
Some foundations are exploring alternative capital structures. Most investors rely on equity to invest in early-stage startups. We’re partnering with MetLife Foundation on a fund to invest in early-stage startups building solutions to financial health. The fund will explore alternative capital approaches like revenue share where appropriate. There is reason to believe that structures like revenue share can mitigate bias, as those structures require investors to look at numbers on a balance sheet, not just a gut check of an entrepreneur.
All of these organizations have a role to play in closing the gender financing gap. Research from Boston Consulting Group found that if female entrepreneurs received as much support as male entrepreneurs, the global economy would experience a $5 trillion dollar boost. If you’re an accelerator, corporation or foundation who wants to support female founders, we’d love to work with you – reach out.
