The Venture Capital Gender Divide

According to the Small Business Administration, an estimated 10 million companies within the United States have majority owners who are women, totaling nearly 36% of all businesses. This figured has steadily increased during the last decade, leading to one in every 10 women deciding to take the leap into business ownership. In a perfect world, it may be easy to assume the consistent increase in women-led businesses would create a level playing field between men and women entrepreneurs. But nothing in business is that simple. Multiple research reports published over the course of the last year highlight the stark reality that still exists for women entrepreneurs—funding through private equity, arguably one of the most important elements related to sustaining long-term growth and profitability, is going to the boys. And then there’s the recent New York Times article that cites more men named John run big companies than all women.

In the 2014 Diana Project published with the help of Babson College, researchers sought to better understand the world of women entrepreneurism, specifically in the realm of equity financing sources. A sample set of 6,793 businesses within the United States that received venture capital between 2011 and 2013 was gathered and analyzed to determine if a woman held a position on the executive team or was listed as the CEO. The report found that nearly 15% of all funded businesses within the sample set had a woman on the executive team—a notable increase from the last comprehensive research report compiled in 1999 on the same topic that resulted in a mere 5%. Less impressive changes were noted with companies that had a women at the helm. Of the companies analyzed, only 2.7% of companies that received venture capital during that time frame had a woman CEO. It was also found that most of the women-led businesses that received venture capital did so in later-stage funding and were less likely to receive seed financing through private equity.

Although the 10% increase in funding to companies with women holding an executive position shows overall progress in the business universe, a gender gap still exists. Women-led businesses are struggling to obtain private equity funding at the same rate as companies owned and run by men. But why?

Over the last two decades, programs specifically dedicated to helping women entrepreneurs have become more available, including the Small Business Administration’s Women-Owned Businesses portal and the endless resources available through the National Women’s Business Council. Information on everything from successful networking strategies to financing sources like government grants, loans and private equity are easily accessible not only on these sites but on thousands of others, and women are encouraged to take on the risk of owning and running their own company in the 21st century. Even more interesting is the transfer of wealth in the United States; women have steadily increased their level of affluence over men, and as of 2012, women held more than 60% of all personal wealth and more than half of all stock ownership according to a report published by Virginia Tech. It seems the gender disparity in venture capital has less to do with these telling statistics, however, and is more connected with who is leading the charge in the private equity universe.

Despite the increase in the number of women-led businesses since the original Diana Report was released in 1999, the number of women leading the charge in venture capital firms has steadily declined, from 10% down to 6%. With the vast majority of venture capitalists men, it is not surprising that women-led businesses seeking financing through these private equity mediums are at a disadvantage. Obtaining venture capital is not as simple as completing an application and presenting a compelling pitch; it takes strategic networking with firms and, at times, years of relationship building before the opportunity to pitch presents itself. Even if a chance to present to a venture capital firm is given, deals are not only made on the merits of the business owner and his or her pitch, but rely more heavily on the immediate connection between the venture capitalists and the entrepreneur. It has been found that when a woman business owner pitches the same proposal as a male entrepreneur to a group of venture capitalists who are all men, the male business owner is much more likely to receive a deal, even when the pitch is identical. There is an instant commonality that allows for a greater connection between the one seeking financing and the one providing, giving men an advantage in the male-dominated private equity space.

Not everything in venture capital spells bad news for women entrepreneurs, however. The increase in financing from private equity to women-led businesses shows promise, and new outlets to funding are quickly leveling out the funding playing field. In venture capital, firms are responding to calls for an increase in the presence and impact of women by creating recruiting and training teams tasked with casting a wider net for new female associates and partners in private equity. Additionally, seasoned women venture capitalists are starting to move away from the traditional male-dominated firm atmosphere and begin their own financing operations that are focused solely on women-led businesses. Venture capital firms like Belle Capital and Aspect Ventures were specifically created to invest in companies owned and operated by women, with women as the investing venture capitalists themselves. This creates an environment where commonality is no longer the main hurdle standing in the way of entrepreneurs needing funding for growth. It also lays the foundation for a shift in private equity firm leadership, providing potential for a greater number of women-led businesses in coming years.

Venture capital is not the most common method of financing for businesses in a growth phase, but it is often integral in providing the combination of high-dollar investment and business prowess necessary to fuel successful growth. Without the ability to pitch for it, and the eventual opportunity to enter into a financing agreement with a private equity firm, women entrepreneurs are not afforded the same potential for success as their male counterparts. In 2015, the addition of more women leading in the venture capital space in combination with a focus on funding women-led businesses may be the mechanism that prompts a tightening of the gap between men and women in receiving private equity investment.

Additional information about the financing disparity between men and women in business can be found in the summary of the 2014 Diana Report.

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