Meena Alnajar is an IPilogue Writer, IP Innovation Clinic Fellow, and a 2L JD Candidate at Osgoode Hall Law School.
2021 was a big year for innovation and small businesses—venture capital (“VC”) funding reached an all-time high with 83% higher funding in the US than the total raised in 2020. Venture capitalists are investors who provide funds to small businesses and start-ups that exhibit exceptional growth potential based on market studies. In return, investors get equity in the company and may have a say in future decisions. It is an increasingly popular and fast way to fund new businesses. Yet despite this growth, women-founded companies receive just a small cut of this large investment. In particular, women-founded companies earned only two percent of the total VC funding in 2021. What stands between women’s ideas and the capital that helps them flourish? Industry barriers and sociocultural changes may provide some answers.
With unemployment on the rise, several studies find women are disproportionately affected by industry setbacks. A McKinsey study found that women were 1.8 times more vulnerable to lose work than men in the pandemic, which may have made investors nervous to fund many women-led businesses this year. Beyond the pandemic context, some attitudes within the VC industry that may also drive the disparity between men and women’s VC funding.
In the industry, gender stereotypes not only create a barrier to hiring women in the start-up space, but also seek to discredit a woman’s value when pursuing certain ventures. For instance, Katherine Hays, CEO and Co-Founder of the venture-backed tech company Vivoom, noted that “Male VCs … are very comfortable now giving female entrepreneurs capital for ‘girl stuff’”, like the stereotypical household and baby products, but hesitate to fund cutting-edge software and technology founded by women. While women are now welcome in the venture space, there seems to be only certain rooms they can enter if they want to be well-funded by male VCs. Those in control of the funds seemingly control the gender disparity in VC funding of certain companies. Could the solution to the disparity be to encourage more women to act as investors?
The disparity in funding women-led ventures could stem from the fact that women make up only 6.3% of investors, based on a 2020 study. However, simply including more women as investors is unlikely to alleviate the disparity observed in VC funding. Women-identifying investors face problems when attempting to back ventures. Since women also experience gender disparity in business leadership, women who are investors are less likely to have been CEOs. Entrepreneurs may be hesitant to accept money from (and relinquish equity to) investors without this experience. The proportion of women as venture capitalists is not the only issue; how women venture capitalists are perceived by entrepreneurs is also problematic. On the surface, women-identifying VCs have lower investment success rates than men. Upon further examination, this performance difference is not linked to skill or venture selection, but rather the VC firm’s features such as historic success, mentorship, and firm age. Selecting women-identifying investors is not a proven solution to alleviating gender disparity. However, co-workers and entrepreneurs supporting women investors in their work environments can further women-led VC success.
The gender disparity affects several stages of the VC pipeline, from investor disparities to the lack of women-led VC in prominent sectors like tech. To close this gap, business institutes recommend different assessments of viability of a small business. For example, if a start-up classifies itself as a social impact venture, investors should utilize the peer-assessment model instead of estimating capital flow to determine the “investability” of that venture. In addition, having women in leadership positions may overcome stereotypes and biases from investors by providing evidence that women can lead successful businesses.
The gender disparity not only hinders women-led VC potential but also dismisses women-led VC’s success in the market. Boston Consulting Group found that women-led start-ups can deliver high revenues, nearly twice the amount of every dollar invested. Further, women-led businesses are more likely to employ women and their businesses are more likely to focus on social contribution and employee relationships. When you invest in women, it propagates into more opportunities for women and positive contributions to societal issues like labour relations. Limiting women’s access to funding could deprive us from innovative ideas and employment opportunities. Women have been driving exceptional businesses in the last decade and can continue to do so with greater investment. VCs should therefore consider looking beyond stereotypes and invest in women, to invest in better futures.