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Finding More Investment Support for Gender-Diverse Founding Teams

This post was originally published on the Stanford Social Innovation Review and was authored by Devyani Singh.   

Attending a startup conference often feels like an anthropological study in contrasts. Growing unease sets in alongside the convenience of an empty women’s bathroom, while, on the other side of the door, male-dominated panels on gender diversity attempt to break down the cause for female-starved investment portfolios. Women are advised to apologize less, make bolder projections, and dole out firmer handshakes, as though exhibiting traditional male characteristics is the solution for this lack of representation. The underlying issue is deeper, and we need to shift the focus away from the entrepreneurs themselves and toward the people signing the checks.

Businesses co-run by women are outperforming their male-only counterparts, but not enough investors are betting on them. A recent report published by the Global Accelerator Learning Initiative (GALI)—a partnership between the Aspen Network of Development Entrepreneurs (ANDE) and Emory University that has collected data from nearly 14,000 early-stage ventures—found that ventures with women on their founding teams are significantly more likely to report positive prior-year revenues. However, they are significantly less likely to attract equity investors. Even though more than 50 percent of these ventures were run or co-run by women (indicating that there are, in fact, enough women running entrepreneurial endeavors), there was still less capital available to them compared to all-male founding teams.

This study further broke down the data to account for entrepreneurial experience and, regardless of prior experience, ventures run by men were more likely to have raised equity and less likely to have reported prior-year revenue than those with women. This trend remained consistent when the analysts isolated data for specific countries. For example, India-based ventures with women on the founding team were more likely to report revenue and employees, yet more than 60 percent of the ventures were comprised of all-male founders. Organizations such as Asha Impact, an ANDE member and impact-investing platform in India, are combatting this statistic by spawning businesses that account for gender inclusivity, but this imbalance was not unique to India. The data also showed that Mexico-based ventures led by women were four times less likely to have raised equity than ventures with all-male teams.

There is overwhelming evidence that businesses with women on the founding team deliver better return on investments. A 2018 study by BCG and MassChallenge showed that startups founded or co-founded by women generated 10 percent more in cumulative revenue over a five-year period ($730,000 compared with $662,000). A First Round Capital report found that companies with a female founder performed 63 percent better with their investments than all-male teams. And a Credit Suisse Research Institute paper concluded that companies with at least one woman on the board delivered higher average returns on equity and better average growth over the previous six years than their all-male counterparts.

Why, then, are investors less inclined to support women-run businesses?

One reason may be the implicit-egotism effect: an unconscious bias where people are drawn toward those with whom they perceive to have shared experiences. The problem may not be that investment firms don’t want a diverse portfolio, but that investment firms may be incapable of accounting for entrepreneurial diversity until they can identify and address their own lack of diversity. Luckily, this can change, and it is, in fact, changing already.

“Positive screens” for gender-representative teams

Asha Impact has a 50-50 ratio of men to women at all levels of the organization, and women-run or co-run ventures make up 40 percent of its investment portfolio due to an explicit investment philosophy focused on inclusion. Vikram Gandhi, the founder of Asha Impact and senior lecturer at Harvard Business School, has written about the “SHE Index” of State Street, which selects stocks weighted on both financial parameters and gender diversity metrics in executive and board positions. According to him, investors have traditionally used “negative screens,” whereby they consciously decide not to invest in enterprises such as tobacco or weapons companies or environmentally harmful firms. Similarly, investors can adopt “positive screens” to make more room for environmentally friendly practices, or indeed, gender-representative teams.

Accelerator programs that focus on building representative pipelines

Recent GALI research on accelerator design provides evidence that accelerator programs with a focus on women and other minority groups may improve their ability to drive funding into the participating ventures. High-performing accelerators—defined as those with higher net flow of funds, which is the average change in financial resources for ventures participating in accelerators compared to their rejected counterparts—were more likely to prioritize women (64 percent compared to 47 percent) and minority entrepreneurs (52 percent compared to 32 percent). There is power in numbers, and accelerators that emphasize participation from female entrepreneurs can help build a robust pipeline of entrepreneurs to bridge the gender gap in investment by improving access to underrepresented entrepreneurs for investors.

Investor diversity and an awareness of personal bias

Asha Impact is not a women-empowerment fund; its team does not have the mandate to support only female founders. And while women-focused programs have an important role in elevating the playing field for women, female entrepreneurs should not be constrained to working with just women-focused investors either. If that happened, the investment landscape would continue to be trapped in a circle devoid of diversity and equal access. Investing and due diligence are one of the few primarily qualitative decision-making processes that remain in an increasingly algorithm-driven world. Consequently, investors face a difficult challenge while assessing an early-stage startup where there is lack of sufficient metrics that later-stage companies possess. This makes their decisions more prone to biases and “gut feelings,” which leads to a looping pattern of investing in the same types of founders.

Therefore, hiring more women in investment firms cannot be the one-step fix for lagging support for women-led ventures. Female investors tend to express the same gender biases demonstrated by their male counterparts due to deep-seated misconceptions about women in business. If all investors were more conscious of their gendered approach to investing and how these biases affect funding tendencies, then they could be more objective about measuring a startup’s maturity. And they could be more objective about adopting investment strategies that utilize gender-inclusion as one criteria for determining a startup’s health and viability.

Inclusion as a strategic opportunity

Investment firms can create systems that broaden the lens of future investments by establishing targets for their portfolio and by spearheading inclusion as a strategic opportunity. Like Asha Impact, setting clearly defined and intentional targets around gender representation in the investment portfolio—tailored to the needs and realities of the firm, and not arbitrary, externally imposed quotas—ensures that firms factor in gender as part of their strategy. In addition, senior management should front this inclusion criteria and frame it as an explicit, strategic opportunity. After all, organizations with diverse leadership are likely to succeed across multiple dimensions, since they tend to have more creative problem-solving approaches and mirror the market more accurately. Through bias training and transparent conversation, investment decisions can eventually shift away from biases that perceive “male” versus “female” qualities, and instead focus on characteristics that constitute effective leadership in general.

Some of our biggest missteps when it comes to interacting with each other result from invisible biases. But how do we have conversations about our biases if we’re all acting like we don’t have any? To have a real chance at equity, investors need to acknowledge that biases exist, understand how these biases might lead to pitfalls, and consciously work to overcome them by making an explicit call for representation in their investment philosophy.

Devyani Singh is the senior program coordinator in India with the Aspen Network of Development Entrepreneurs (ANDE), a program of the Aspen Institute. She has previously worked on entrepreneurship and education-related studies with Ennovent and J-PAL South Asia.