Gender reveal parties have been a thing for the past several years, and in a couple of incidents, parents-to-be accidentally started catastrophic wildfires when a reveal event involving pyrotechnics went awry. Someone on Twitter proposed a safer alternative: give participants a wallet, and if they open it to reveal a dollar, it’s a boy, and if it’s 81 cents, it’s a girl.
Ok, that was a little snarky, but the financial disparity would be even greater if the reveal were based on venture capital funding by gender instead of wages: the wallet announcing a girl would contain about three pennies, representing the 2.8% of venture capital female founders raised last year vs. 97 cents for a boy. If there’s a silver lining, it’s that 2019 was an increase from the 2.2% that went to women-owned startups in 2018. It’s too early to predict 2020 funding numbers.
Will COVID-19 be a setback for women-owned startup funding?
COVID-19’s economic effects began in earnest in the latter half of Q1, so Q2 was the first quarter that fully reflected its impact. According to a July 2020 Crunchbase report, in North America, venture dollars invested in the first half of 2020 were down compared to investments in the first half of 2019: $64B this year as compared to $70B last year.
The report shows that venture capital funding is down across every stage in Q2, from seed and angel investing to early-stage and late-stage investments to exits. According to a 2020 Harvard Business Review article, women entrepreneurs who are seeking funding are especially vulnerable at the pitching stage, as demonstrated by numerous studies where pitches from male entrepreneurs outperformed those from women, even when the content was identical.
Given that funding is down across the board, and knowing that the rate at which women are funded in comparison to men was abysmal before the pandemic, it’s reasonable to assume that women entrepreneurs will continue to receive a smaller slice of a smaller pie. And statistics for the boom years leading up to the pandemic-related downturn suggest that even if the economy bounces back quickly, women entrepreneurs will still face unique funding challenges.
People trust people who look like them
The gender disparity in funding isn’t caused by conscious bias, at least not on a widespread scale. It’s human nature. Funding a startup isn’t like approving a home equity loan. By providing funding, a venture capital firm is endorsing an entrepreneur’s vision and entering a very long-term relationship. Once a startup is funded, the company CEO and venture partner will work closely together for many years.
Because of the momentous nature of the decision, people tend to rely on their instincts and perceptions to find a good fit, and that typically results in venture capital firms funding entrepreneurs with a background and appearance similar to the decision-maker’s. In other words, male Stanford graduates tend to fund other male Stanford graduates.
This phenomenon isn’t exclusive to men. A landmark Babson College study conducted several years ago found that venture capital firms with women partners were twice as likely to invest in a startup that had female executives on the team and more than three times as likely to fund startups that are led by a woman as CEO. The problem is, there are too few women in that role.
When I sought Series A funding for my startup several years ago, I ran an experiment by presenting my company and business plan to venture capital funds that were run by men and some that were run by women. You can guess the result. And so that’s why I started advising women entrepreneurs to pitch to a healthy mix of venture firms run by women or who have women partners.
Venture capital firm parity is the only path to funding parity
Unconscious bias in favor of people who look like us and share a similar background may be human nature, but it’s a significant barrier to gender parity (as well as racial, ethnic, non-binary, etc.) in venture capital funding. For gender parity in funding, the solution is greater gender parity at venture capital firms. We’re making progress on that front, but not enough.
According to Axios analysis conducted in 2020, slightly over 12% of venture capital decision-makers in the U.S. are women. That’s an increase from nearly 10% in 2019 and about 9% in 2018. If this slow rate of increase holds steady, we won’t reach gender parity at venture capital firms for many decades, and that’s too long to wait.
To accelerate change, some groups in the tech sector are working on the issue, including an organization called All Raise. With bootcamps that help women and non-binary entrepreneurs prepare pitches, to a speakers bureau that raises awareness, to a community that connects funders with founders, All Raise is engaged in changing the situation on the ground.
Ultimately, it will take a broad commitment across multiple industries, including venture capital, to solve this problem — for women, non-binary people and the BIPOC community alike. These groups will need to be persistent and look for openings. It won’t be easy, but the struggle for equality never is.