The statistics tell the tale: “Companies founded solely by women receive less than 3% of all venture capital investments.” Read that again. It’s the startup world which has taken a bashing in the past six months, but it’s female-founded startups who are bearing the disproportionate brunt of it.
So there’s a lot to unpack here, which is why hearing the voices of female VCs is essential if we want to see the gap close once and for all. These women didn’t hold back on sharing their insights on the VC funding gap, and offer advice to up and coming female founders looking to raise capital in the current climate.
Why does the VC funding gap exist?
Context matters here. Sure, the statistics point to the undeniable underfunding of women-funded startups, but it’s always important to consider whether data is comparing mixed gender founding teams, or all-male versus all-female founding teams, for example. And then there’s the question of the total number of female founders seeking VC funding in each industry. So let’s dive into it.
VC funding prioritises male-dominated industries
Venture capital is just one source of funding for founders, and they tend to be looking for a very particular type of company: one that has exponential growth potential. “As an investor, you always have to put the money where the billion euro opportunity is,” says Madeline Lawrence, an investor at venture capital firm Peak. These high-potential companies are often in fields like deep tech, in which women are woefully underrepresented. “It’s a big problem that starts with what we teach kids in school,” says Lisa Brouwer, an investor at Amsterdam-based Curiosity VC. If fewer girls go into STEM subjects, they won’t be starting deep-tech companies later on, for example, and the cycle continues. “Obviously, VCs can’t invest in companies that don’t exist!” adds Brouwer.
VC networks close women off
Venture capital is also famously an insiders game. “VC has historically been an old boys network,” says Lawrence. “A lot of people get a front seat at an investor table because they have warm interests – people they studied with, founders they know who have already raised funding, friends and family friends, and people who were in your fraternity.”
These networks are by default less inclusive of women, which means they’re likely to have fewer connections to investors. This lack of diversity on the investor side has a substantial negative impact for fundraising founders. “VCs typically leverage their own network to source founder introductions, and their networks typically reflect their own profiles,” says Christina Calje, a former Goldman Sachs investment banker-turned-founder and angel investor.
Founders of colour are disproportionately affected
Women aren’t the only ones affected by this closed network. In fact, it’s female founders of colour who are the worst off. “Historical underfunding of diverse founders creates a perceived higher risk profile of these founders,” says Calje. Many of these diverse founders are bootstrapping their growth – using their own money to fund the early stages of their startup. The personal connection factor comes back into play here: “Without a proper support network of investors to help advise and fund their plans, this stunts the growth of the business, and therefore exacerbates the headwinds of future fundraising rounds,” explains Calje.
"VCs are becoming much more critical, which can strengthen the effect of the funding gap”
A rocky six months for founders
The start of 2023 marked a turbulent period for founders and investors – a macroeconomic landscape so turbulent it led to mass layoffs at Alphabet (Google’s parent company), Meta, Netflix and Twitter, to name a few. While it’s too early to make concrete conclusions on the disproportionate impact this had on female-led startups, anecdotal evidence shows that once again, women were more impacted than their male counterparts.
Again, context is important here: this could be in part because of the type of startup that women typically found. “There’s very little investor money going towards, let’s say, consumer facing health right now,” says Lawrence. “The same goes for HR, and when the going gets tough in the economy, one of the first things companies will slash is their HR budget, which means startups in this space are more vulnerable.”
VCs are tightening their belts
On a general note, it's harder for most founders to raise investment now than it was a year ago. “The economic downturn has led to a lot of VCs becoming much more critical, which can strengthen the effect of the funding gap,” says Brouwer. And in tough markets, people are far more likely to stick to what they know. “It seems that most VCs are relying more heavily on their internal networks to counteract the economic climate, and of course, this can make it harder for founders from underrepresented backgrounds to break in,” says Meagan Loyst, founder of Gen Z VC – a community of over 25,000 young people working in venture capital.
Christina Calje agrees. “The ‘market correction’ in the VC fundraising market has impacted all founder profiles, though disproportionately affected black, brown, female founders as investors revert to their norms in terms of deal sourcing and perceived risk,” she says. This is backed by research and “according to Atomico’s latest State of European Tech report, 87% of VC funding in Europe is raised by men-only founding teams. Funding raised by women-only teams has dropped from 3% to 1% over the last four years,” she says.
What are VCs doing to close the gap?
Each investor I spoke to emphasised the measures being taken within the industry to ensure access to fundraising for all founders, regardless of their gender or background. Yes, there is a light at the end of the tunnel.
1. Increased monitoring of VC funding
“There are now hard requirements for investors that raise from a certain type of LP, whether that’s public, or from government funds. And even if there aren’t always hard requirements, it’s starting to move that way. Investors are having to report on these aspects, like the percentage of female founders they invest in, and then the next step is to start improving on how you score in the allocation of capital towards diverse founders,” says Lawrence.
2. Improving connections between women
Brouwer does her best to connect female founders she comes across to investors that might be a match. “Everyone is so supportive towards female founders, and I’m noticing an extra push in this ecosystem of women helping women. If someone comes to me and her business doesn’t fit in our fund strategy, I ask myself ‘who could be another interesting person to connect her to?’” she adds. “You do see change happening, but happening slowly. We’re trying to accelerate that.”
3. Embracing diversity at the VC level
Investors are taking action on an individual level too, and Christina Calje builds her personal network with diversity front of mind. “I actively connect with other investors that have a strong track record of funding companies that have diverse founders,” she says. “These networks amplify my access to quality deal flow, provide me with extra perspective, and increase the capital access that I bring to founders as they raise their current round and follow-on rounds.”
4. Encouraging women to be venture capitalists themselves
At Gen Z VC, Loyst focuses on offering initiatives that demystify the world of VC, both for founders and for those who want to work in the field. After all, as the VCs pointed out, the funding gap will only be fixed once women are well represented as venture capitalists on the other side of the table. “Our mentorship program has mentored 350+ students over the past 2 years who want to break into VC, many of whom are women and from diverse backgrounds. We also launched a VC 101 course that has educated 1,300 plus people on the fundamentals of investing. All of our initiatives aim to make VC and tech more inclusive and accessible for the next generation…and that starts with knowing these types of jobs exist and that you have the skills to break in and succeed on day one.”
Final thoughts on the VC funding gap
The current statistics around VC funding may paint a bleak picture, but the experts I spoke to offer a hopeful vision for a future where VC funding gap is narrowed once and for all. Bold initiatives are surfacing across the landscape which seek to encourage young girls into entrepreneurship, increase diversity at VC level, and initiatives that offer women access to mentorship, resources and connections. The tide may be shifting slowly, but here’s to hoping we see a snowball effect in the years to come.