The Power of the Purse: The Role of VC Funding in Closing the Tech Gender Gap

Author: Julia Molo | UC Berkeley School of Law | J.D. Candidate 2020 | Posted: October 15th, 2018 | Download PDF

Venture capital (VC) funds play a critical role in determining the tech leaders of tomorrow. As such, closing the “gender investment gap” is one of the most talked about issues in the tech industry. As are the benefits – and unrealized opportunities – that will come from closing the gap. Indeed, report after report has shown that businesses founded by women outperform their male-founded counterparts, growing faster and ultimately delivering higher revenue.

Nonetheless, a staggering gender investment gap persists.

Only 2% of VC funding went to women in 2017. Since 2013, the average male entrepreneur has raised more than four times the funding than his female counterpart. And the numbers are even worse for women of color – a mere .0006% of VC funding has gone to black female founders since 2009.

So why aren’t more women getting funded? Academics, policymakers, and practitioners frequently point to:

  • The lack of female VC partners (only 8% of partners at the top 100 VC firms are women, with half of the top firms lacking a single female partner);
  • men and women are held to different standards in determining funding (investors tend to ask men about the potential for gains and women about the potential for losses, and view young male entrepreneurs as “promising” but young female entrepreneurs as “inexperienced”); and
  • women are more likely to start businesses in different industries than men, where VCs have less investment experience (women are almost twice as likely to start a healthcare or consumer products and services business than men).

While the numbers are still dismal, a range of organizations have cropped up in the past few years to address both women founders’ lack of funding as well as their limited access to early-stage support (such as startup accelerators) that is widely available to their male counterparts.

Over the last four years, more than 16 women-led funds have been started, including Aileen Lee’s Cowboy Ventures, Sonja Perkins’s Perkins Fund, and Theresia Gouw and Jennifer Fonstad’s Aspect Ventures. There has also been an explosion of funds and initiatives focused exclusively on funding female-founded early-stage startups, including Female Founders Fund, BBG Ventures, and Bumble Fund. Alongside these funds, initiatives like Female Founders Alliance and AllRaise have formed. Both are networks of female startup founders that provide one-on-one mentorship, accelerator programs, and access to a community of female founders and investors.

And their numbers are growing. Indeed, tech news today is inundated by new announcements, initiatives, and features on women in VC. But significant work remains. “I know it seems to people like there’s a lot happening around female founders and diverse founders, but in the context of the size and scale of that gender gap, we are barely getting started,” Female Founders Alliance founder Leslie Feinzaig said in a recent interview. “We need all the accelerators. We need hundreds of funds. We are nowhere close to making a real dent in equal leadership.”

The question remains when – or whether – these new funds can compete with the more established, industry-shaping funds. Critics argue the real problem lies with fixing established funds, rather than creating new funds. Having more women VC partners or exclusively women-focused funds is far from a “silver bullet” to fixing an ingrained industry problem, Stephanie Palmeri, a partner at Uncork Capital, stated recently. “At the end of the day, female founders shouldn’t be constrained to work with only female VCs. If we invested only in people who look like us, we would be in trouble as an industry. That’s really one of the reasons why we are in trouble as an industry.”

Moreover, VCs do not operate in isolation. Most VC investments are made with one of two expectations in mind: that the company receiving the VC funds will either go public or that a larger company will acquire it. Today, a company is more than six times more likely to be acquired than it is to go public. Because VCs are more likely to invest where an exit through M&A is more likely, M&A due diligence practices influence VC investments. Given this influence, some argue that gender equity considerations should be built into M&A due diligence. The overall logic is that if an acquisition target lacks gender diversity, or falls short in other ESG criteria accounted for in due diligence, the company is less likely to be acquired and, in turn, is a less attractive investment for VC funds. With U.S. executives expecting merger activity to continue at record levels and growing industry research on the value of analyzing ESG in M&A transactions, this argument may gain more steam in the near future.

Whether or not VC firm structure or M&A due diligence is the optimal solution, these discussions and industry trends highlight the importance of industry-wide efforts to address deep-rooted, systematic problems. At the very least, the female VC wave has already played a strong role in increasing visibility and support for the issue. And in the near-term, it is an important step in increasing social pressure on VC firms to diversify.