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The economic case for female-led start-ups is clear. Why, then, is venture capital still plagued by a preference for male founders?
Venture capital (VC) funding is a type of financing that investors provide to small businesses and start-ups that they believe will have long-term growth potential. Although it’s not the only financing option available to young companies, it is an important driver of innovation and has been behind the astronomical growth enjoyed by Google, Starbucks, Slack, Facebook, Dropbox, Spotify, Amazon, and so on. In Australia, VC has been behind SEEK, Canva, Fiverr and more.
It’s more than a little concerning, then, that VC appears to have a gender problem – both in terms of representation within VC firms and the kinds of investments they tend to make.
The gender problem
“The reality is that VC has been and still is predominantly dominated by males,” Jacqui Bull, co-founder of Sidekicker, told HR Leader. “And so a lot of the actual investments they make go into male-led companies.”
Indeed, while 22 per cent of start-ups were founded by women, just 0.7 per cent of secured early-stage funding went to them, said Deloitte. Concerningly, the amount of funding going to women-founded and -led start-ups has halved since 2020 to just 3 per cent.
The underinvestment in female-led companies is hardly surprising when since women are underrepresented in decision-making positions within VC firms. According to research cited by the Harvard Business Review, only 15 per cent of VC “checkwriters” (i.e. those who can “‘write checks, lead deals, and sit on boards”) are female.
The consequences of overlooking female-led initiatives and failing to achieve representation within VC positions are wide-reaching. The business case for female representation in positions of seniority is clear.
For instance, the Workplace Gender Equality Agency found that a 10 per cent increase in female representation on boards of ASX-listed companies added 4.9 per cent in company market value. This equates to, on average, an additional $78.5 million in additional value per company.
Moreover, as noted by the Diversity Council of Australia, women-founded start-ups, on average, produce a higher level of return per dollar of funding (78¢ for women-founded start-ups compared with 31¢ for male-founded start-ups).
What’s behind the underrepresentation?
According to Ms Bull, the reasons for the imbalance are twofold: “One, I have spoken to a lot of people about this, is the fact that you are more likely to invest in things that you understand and that you can relate with.”
This accords with the sentiments of a male investor interviewed by the Harvard Business Review, who said the early stages of venture capital investing are a “people thing”.
“People are just more comfortable betting on somebody that is more like them, looks like them, talks like them, went to the same schools, eats the same food, goes to the same restaurant, drinks the same wine, goes to the same country club – all these little things,” he said.
“They’re not overtly racist or overtly discriminatory; it’s just comfort.”
So-called “homophily” – the social theory that similar individuals tend to be more drawn to one another – can cost investors significantly. As noted by Paul Gompers, professor of business administration at the Harvard Business School, the evidence is incontrovertible that VC investments into companies with greater diversity tend to perform better across key financial metrics.
The second driver of the imbalance in funding for female-led start-ups, said Ms Bull, is that there simply are not enough of them to be competing for funding.
“There are actually a lot less female-led companies to invest in,” she said. “The deal flow of female-led companies that are approaching VCs is actually a lot lower.”
While the issue is the result of a complex interplay of factors – both within and external to the VC world – many see gender pay disparity and social roles as playing a significant role.
“When you earn less, you are less likely to be able to save up and start your business. This is exacerbated by the primary caregiving responsibilities, largely affecting women still,” wrote Maria Halasz.
For more on the work being done to address gender pay disparity, click here.
The transcript of this podcast episode was slightly edited for publishing purposes. To listen to the full conversation with Jacqui Bull, click below:
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According to the Australian Human Rights Commission, discrimination occurs when one individual or group of people is regarded less favourably than another because of their origins or certain personality traits. When a regulation or policy is unfairly applied to everyone yet disadvantages some persons due to a shared personal trait, that is also discrimination.
Nick Wilson
Nick Wilson is a journalist with HR Leader. With a background in environmental law and communications consultancy, Nick has a passion for language and fact-driven storytelling.
