Allison Robinson, the founder and chief executive officer of The Mom Project, had difficulty raising funding for her digital talent marketplace and community that connects mothers returning to the workforce with job opportunities that offer flexibility. After more than 100 meetings with venture capitalists, she noticed a trend. “If I had to pick an example of a stark difference between pitching men versus women, it would be that many male venture capitalists didn’t fundamentally understand the problem we were solving. I made it to a number of late-stage discussions to then be passed over on the grounds of the addressable market being too small,” Robinson says, “It’s mind-boggling. There are over 40 million moms in the U.S. and 86% will change employers for an opportunity that better fits her work-life considerations.” Robinson successfully pitched the female-led, early-stage venture capital firm BBG Ventures, which only invests in companies with at least one female founder. “They believed in both the need we were solving and how we were going to market to solve it,” Robinson says, “They stayed by us even when it took longer to close our first round.”
When Susan Lyne, the president and founding partner of BBG Ventures, was the chief executive officer and chair of the shopping website Gilt, female founders would come to her office for advice. She started a monthly breakfast club that became packed with female founders from startups including Rent the Runway, The Skimm, LearnVest, and Birchbox. The founders all shared similar stories about the difficulties of pitching their companies to a room full mostly of male venture capitalists.
“Over time I started believing this was not just a problem that had to be solved, but a big opportunity, particularly in the consumer space because women are far and away the dominant consumer,” Lyne says, “It just felt like there was a competitive advantage if you had someone on the founding team who intuitively understood that end user.” Lyne and her cofounder Nisha Dua launched BBG Ventures in 2014 with a $10 million investment from AOL. (Lyne was the chief executive officer of AOL Brand Group from 2013 to 2014 and was previously director of the board.)
Part of the reason Lyne started BBG Ventures was to help to close the venture capital gender gap in the U.S. In 2018, female founders raised just 2.3% of the total venture capital funding invested, according to the financial data and software company Pitchbook. Mixed-gender founding teams received 10.3%. Of the $130.9 billion invested, just $2.9 billion went to female founders and $13.3 billion went to companies with mixed-gender founding teams. Women of color have raised less than 1% of all venture capital funding since 2009, according to incubator and research center DigitalUndivided. The researchers found that black women raised .0006% and that Latina women raised .32%.
It is harder for female founders to raise funding and it’s also harder for female venture capitalists to raise capital. “You can’t raise institutional money right off the bat. They will always want to see how your first fund does and how your second fund does before they commit to you,” Lyne says, adding that there are some exceptions if the investor was at a well-known venture capital firm before starting her own fund.
“We thought of it as proof of concept,” Lyne says, “Can we demonstrate that we can pick well, that there is a big enough pool of women who are starting companies that you would have sufficient deal flow and build a really viable portfolio and would these women would want us on their cap table?” Lyne and Dua invested in 40 companies for their first fund. The average check was between $100,000 and $250,000 and they reserved 40% for follow-up investments. After getting more capital from AOL, which is now owned by Verizon Media, they invested in 22 more companies for their second fund. They wrote larger checks for between $350,000 and $500,000 and asked for more ownership of each company — between 3% and 6%. BBG Ventures’ portfolio includes high-profile companies like the wedding registry site Zola, the women’s co-working space The Wing and the reproductive care company LOLA. The strategy has been beneficial for BBG Ventures. Companies in the fund are still maturing, but valuations have increased and they see a path to very strong returns as portfolio companies continue to grow.
BBG Ventures isn’t the only female-founded fund that invests in female founders — others include Halogen Ventures, Forerunner Ventures, SoGal Ventures and Female Founders Fund — and that might help close the venture capital gender gap sooner. To understand why the gap exists, it’s essential to look at who is making the investment decisions. In 2018, 82% of U.S. venture capitalists were men and 70% were white according to an analysis of about 1,500 venture capitalists by Richard Kerby, a partner at the venture capital firm Equal Ventures. Of the 18% of female venture capitalists, a majority of them were white. (40% of all of the venture capitalists surveyed also attended Stanford University or Harvard University for their undergraduate or graduate degree.) “It is not a coincidence that the amount of capital raised by minorities and women closely resembles their representation among venture capitalists,” Kerby wrote, “And furthermore, it is no surprise as to why the demographics of most venture-backed startups also reflects the demographics of the venture capitalists that fund these companies.”
If the number of female venture capitalists increases, will the amount of money that goes to female founders increase? Sutian Dong, a partner at the early-stage venture capital firm Female Founders Fund agrees with that hypothesis. “A big way to solve for this funding gap is to increase the number of female fund managers and check-writers, whether they are angels or partners, at venture capital funds significantly,” Dong says. She thinks it is easier for venture capitalists to get excited about a product or service if they understand the problem the company is trying to solve and what the founders are creating. Often, it’s because the venture capitalists have experienced the problem like difficulty finding a flexible job that lets them work and still pick their kids up from school.
Venture capitalists aim to make money by backing companies that will generate a significant return on investment. When founders are raising growth-stage funding, they have more concrete success metrics like revenue, cash flow, and customer growth. When founders are raising early-stage funding, they don’t have the same metrics and are really selling their idea and their ability to execute it. When venture capitalists are thinking of ways to minimize risks, Dong says they’ll think about whether they’ve successfully invested in a similar company or founder. In the venture capital world, the decision to invest in similar companies is called pattern matching.
Venture capitalists want to invest in people they like and, oftentimes, people trust people who are similar to them. “There is certainly a fair amount of unconscious bias that plays into this,” Dong says, “It’s easier to find people who resonate with you on a personal level. I think having more women fund managers at the early stages plays a significant role in getting more female-founded companies funded.”
When Naomi Hirabayashi and Marah Lidey raised money for their self-care and meditation app and community Shine, which is part of the Female Founders Fund portfolio, they say they faced unconscious bias. “We weren’t able to raise without traction,” says Hirabayashi, “We had to have numbers. We couldn’t have the idea on a napkin that a lot of male founders have when they raise.”
Founders raising funding need to have access to venture capitalists and, while anyone can send cold emails, founders are more likely to get a meeting and a check if they have an “in” either because they have an introduction or are in a similar professional and personal network. Most entrepreneurs are from middle to upper-class backgrounds and top tier schools. “Those pools are largely white and male so the industry has been built around that,” Hirabayashi says, “When we are asked questions like where we went to school, what our parents did or to tell us more about your family and your background, those assumptions are baked in because of the old boys’ club network.” Hirabayashi thinks that more people are becoming aware of the bias but that, “It is generally still easier for white men to get people on board at the early stages because of those stats and trusting and relying on people who look like them and come from the middle to upper-class backgrounds.”
Hirabayashi and Lidey benefit from the strong entrepreneurial community Female Founders Fund has created and the frequent check-ins with the team. “If we need anything or anybody, their network is so useful. They are helping us fight the old boys’ club by building a network of female founders and people who support female founders,” says Hirabayashi, “Those people obviously don’t have to be female, but they are helping to rebuild this old boys’ club and make it more female-centric.”
Hirabayashi and Lidey urge entrepreneurs to evaluate venture capitalists before taking a check. Lidey says they look for investors with different backgrounds, industries, and skills and if they think the investor has empathy for Shine’s members. They have turned down checks if they think investors are biased or don’t share the same personal and professional values. “It is a privilege to be able to have rounds that go so well that we can say ‘no’ to people if we sense misalignment,” says Hirabayashi, “If founders have that opportunity, or honestly even if they don’t, I think it’s better to work with a smaller budget and a smaller team than to have people with partial control of your company that you misalign with.”
With growth-stage funding, pattern matching, and personal inclinations come into play less because companies have success metrics. “We are seeing the companies that five years ago or seven years ago raised their Series C now get to max maturity. You see examples like Glossier and Zola and Rent the Runway and Tala and 23andMe raise fairly large rounds because they continue to execute successfully,” says Dong, “But the people they are raising money from now are investing in not just themselves as a founder but their proven ability to build something useful.” Even though there is arguably less bias because there are quantitative metrics, female founders still raise less growth-stage funding than men. “It is harder to raise, generally speaking when you are looking for $100 million than $1 million,” Dong says, “That being said, I think it is harder for women as they raise larger rounds of financing. I think a big reason for this is the lack of female fund managers at the later stages.” Women predominantly invest in early-stage companies — 66% invest at the Seed stage, 71% invest in Series A, 44% invest in Series B, and 30% invest in growth-stage deals, according to data compiled by The Global Women in VC Directory.
As there are more female-founded unicorn companies like Rent the Runway, Glossier, and Away and more female-founded companies like Stitch Fix and Eventbrite that go public, it’s likely that more venture capitalists will invest in similar companies and founders. When venture capitalists realize they are missing out on a big market, they are more likely to invest. “I think when people see money moving away from them and opportunities moving away from them, that’s when venture capitalists will start taking a harder look at their processes and historical framework and think about why those might not be as applicable as they look to invest in the next successful companies,” says Dong.
There is not only an ethical reason to close the venture capital gender gap; it’s also a smart business decision. A 2018 Boston Consulting Group study looked at 350 startups in the Boston area and found that even though women raised less than half as much money as their male counterparts, they earned 78 cents per dollar invested compared to 31 cents for the men. A 2018 McKinsey & Company report found that companies in the top quartile for gender diversity on their executive teams were 21% more likely to experience above-average profits.
It has been a smart business decision for BBG Ventures. “Women are half of the country — half of the world — and the lack of investment in female founders and even companies with a female focus presents a huge opportunity,” says Lyne, “If you can focus on the best of those women founders, you’re going to have a great return. We always lead with the fact that this is a great business opportunity but there is no question that there is an impact on success.”
