Why does tech venture capital go to men?
By Fay Capstick
We recently learned that most of all the venture capital invested in tech start-ups goes to male-founded businesses. 98% in Europe, to be precise (1). In the UK the figure is even lower (less than 1p of every invested £1 goes to all female founder teams).
We find this shocking. So how does venture capital funding work, and why is it so biased? Are women put off from even attempting to get funding? And what about minority women? This will be what we investigate this week.
What is Venture Capital anyway?
Put simply, venture capital is money invested into a business, usually a new start-up, to help it grow. This will be a business that the investor feels has strong growth potential, and therefore they would hope for a high return. Investors can be individuals or companies that specialise in looking for high-growth potential investments. In return for the investment, the investor will take a stake in the business. They tend to be higher-risk investments, as the businesses might not fulfil their growth potential and therefore not generate the return that the Venture Capitalist hoped for.
Why would a tech start-up want Venture Captial?
There are advantages and disadvantages of venture capital, both to the investor and the business being invested in.
For the business, they get the benefit of the investment to grow their company. An investor might provide mentoring or networking opportunities that can further speed up the growth of the business. The investor isn’t expecting the money to be repaid.
The disadvantage, for the founders, is that to get the investment, you are giving away shares in your business that could prove to be very valuable in the future. Further, sign away too many shares and you will lose control of decision-making in the business. Also, an investor will want a quick return and might push the business too far and too fast.
Does this mean that most start-ups are male-led?
This does appear to be the case. A small possibility is that more men than women-led start-ups need funding, but the reality is that, yes, most start-ups are male-led.
How much money is involved?
In 2017, entrepreneur.com reported that the biggest funding given to a female team was $165 million dollars. The highest finding for a male-led start-up, in comparison, was $3 billion. So, the funding figures involved can be huge, but it is sobering to think how much more investment a male-led business can attract.
So where do women get their funding from?
Women can try and raise money in a funding round from friends and family. This can be a great way to get started, but it means that new ventures that get off the ground are biased towards women who come from higher-income social groups. Statistics show that in the UK, 75% of founders come from advantaged socio-economic backgrounds.
This is therefore essentially cutting the world of business start-ups off from the majority of women, especially women from minority groups. A sobering statistic states that funding for female black founders in tech is even lower, at 0.0006%. This suggests that the business world has a big problem.
Do women even bother trying for Venture Capital?
Statistics show that only 1% of female-led businesses use venture funding. This could be because they know they are wasting time and effort trying to get it. Again, this is worrying. Women and minority groups need to see that funding is possible, and they need to be encouraged to try and get it. Change has to start somewhere.
Statistics also show that when women-led tech start-ups do get funding, women then pay themselves less than men do. This suggests that women do not have the self-confidence that men have, or that they are more financially prudent. Either way, it is a discrepancy that should not exist.
Figures also show that when funding is granted, women tend only to get a quarter of what they were asking for, compared to half for men. So even when they give funding, Venture Capitalists are showing less faith in female-led teams than male-led teams.
Most worryingly, statistics show that women are more likely to lose more of their company stock during venture funding. Male-led founders kept an average of 42% of their business, as opposed to women’s 25%.
Are there any female Venture Capitalists?
Yes, there are, but less than 20% of Venture Capitalists are female. However, this figure doesn’t explain the lack of confidence that is being shown in women-led businesses. This could be explained by unconscious bias, which would be unfortunate but rectifiable.
We would hope to see the number of female Venture Capitalists expand to become an equal percentage. Having an existing system where the gatekeepers are overwhelmingly male, white, and elite educated is not helping women or minorities.
What do we think?
We think that this situation is shocking, demonstrating that there is a problem in the tech business world. This will limit the aspirations of the next generation of women in business unless the situation changes.
Women losing more of their company shares when getting funding is also very worrying. Women need to be mentored and advised on the worth of their businesses, and venture capitalists need to see women as an equally good bet to men, rather than being underestimated and dismissed.
Again, we are horrified by these statistics and what they mean for women, the next generation, and the world of tech start-ups.
Anything positive to report?
Yes! Hopefully, change is starting to occur. (Ernst & Young LLP) EY have the EY Entrepreneurial Winning Women programme which is helping selected female entrepreneurs to access the resources and network they will need to succeed.
Women need to see the start-up world, a traditionally male-dominated space, as a place where they belong and are welcome. The irony is that research shows that female-founded businesses generate stronger financial returns on any investment (2)
The good news is that the role women play in tech start-ups can easily be changed, and we hope it will be, as it will be to everyone’s benefit.
Final thoughts
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