How to Reduce a Gender Gap in Entrepreneurship and Investment Industries

Supporting women and ensuring they have the same opportunities to succeed as men, is key to building a successful and sustainable world. Women, who make up half the population of the planet, offer a tremendous amount of leadership abilities, talents, ideas, innovative solutions, creativity and expertise; all of which can contribute towards building a better future for the human race. According to Margaret Ann Neale, a distinguished professor at Stanford University (who also just published an incredible book on successful negotiations), we cannot ignore a population of women who are valuable for building prosperous societies and successful companies. We can no longer be confined to the limited choice to only look deeper into the ranks of male population for qualified candidates.

Undoubtedly, we have come a long way. Today, women thrive in male-dominated industries, start and run their own companies and have opportunities to influence the workings of the world at a level never before seen in human history. However, we are still far from the world where men and women have equal opportunities to succeed.

It is important to note that when it comes to equal opportunities, we speak about opportunities, and not being equal human beings. Men and women have behavioral and emotional differences, however, they should not be factors that limit opportunities for one group while offering opportunities for the other. Women should have a chance to enter and succeed in any area of their choosing, including the industries of entrepreneurship and Venture Capital. Allow me to share why.

Investing in Women is Beneficial

1. Female representation drives higher financial returns. Research shows that companies whose top management was comprised of 15% of women had a return on equity (ROE) 14.7% in 2013. In comparison, those companies with 10% of women on a top leadership had a ROE of 9.7%. Quantopian’s study indicates that women CEOs in Fortune 1000 companies drive three times the returns compared to S&P entreprises run mainly by men.
2. First Round’s study shows that companies with female founders perform 63% better than companies with all-male founders. Another study confirms that women-led technology startups are more capital-efficient, and bring in 12% higher revenue.
3. According to Lindred Greer, a Professor at Stanford GSB, whose research focuses on the impact of the startup teams’ structure and the power of team dynamics on performance, says that diversity in teams, including gender diversity, can benefit creativity and performance, provided the team’s culture embraces the benefits of diversity.
4. While attending a luncheon held by SoGal Ventures in New York City last April, I had the opportunity to listen to the distinguished investor Tim Draper. Tim believes that investing in enterprises owned by female entrepreneurs is important. Indeed, female entrepreneurs have higher chances to better understand the needs and preferences of female consumers. This is crucial, as today women represent the world’s largest market opportunity, and are expected to control nearly $30 trillion in annual consumer spending in the upcoming years. Today, 70–80% of all purchasing decisions are made by women, either for performing a purchase or by influencing the decision making process of the purchaser.
5. Female entrepreneurs have tremendous power to positively impact the development of economies by creating more jobs. As of 2015, women-owned businesses employ 7.9 million workers, which is one seventh of all jobs created by privately owned companies. Female entrepreneurs are outpacing men in job creation with an average expected growth rate of 10.9 percent in comparison to 8.3 percent among male entrepreneurs, according to EY Global Job Creation Survey 2016. These are fairly high numbers considering that on a grand scale, few women own businesses; however, female-led companies do not perform to the highest level of their potential. If the number of female entrepreneurs increases, it will likely result in a higher number of jobs created in the market.

Still, the number of female entrepreneurs is not as high

Today, female entrepreneurs make up only 37% of entrepreneurs in the United States. Regardless, Kat Mañalac of Y Combinator believes female entrepreneurs are just starting their strong entrepreneurial journey and doesn’t doubt there will be a unicorn startup built by a woman in the near future.

Venture capital and female entrepreneurs

Sufficient amounts of external capital are vital for developing high-growth companies. A recent TechCrunch study shows that between 2010 and 2015, startups that had at least one female founder received only 10% of all venture capital funds — $31.5B globally — and received only 17% of all seed/angel investments — $2.35B globally. In addition, the percentage of businesses that have women in their executive team receive only 15% of the total venture capital investment today. Although this number has nearly tripled during the past 15 years from fewer than 5% in 1999 to 15% today, the gap is still big.

These numbers show that female entrepreneurs don’t receive substantial amounts of funding, which is vital for building a successful company. This could serve as a disincentive for women to join the entrepreneurship world. There is a need to support female entrepreneurs in building high-growth companies by easing access to venture capital and angel investors financing.

Venture Capital — as a way for bringing more female entrepreneurs

Gender Gap Among Investors

One way to increase the amount of capital invested in female entrepreneurs might be having a better representation of women in venture capital and angel investment fields. Studies show that female representation in VC firms is directly correlated to the number of investments in companies with women on a leadership level, and VC firms with higher female representation are more likely to invest in female entrepreneurs. CrunchBase research shows that venture firms with female founders or a high number of female partners are more likely to invest in female entrepreneurs. This could be due to the existing and new networks of female colleagues and friends, which allow female investors to meet female entrepreneurs.

Although only 7% of investing partners at the top 100 VC firms are women, the situation is improving. Today, new VC firms have 12% of women in their ranks. In addition, the percentage of female-founded VC firms increased by 16% from 2013 to 2016, which resulted in firms hiring more female partners.

For example, out of 30 firms founded by at least one female founder during the past five years, at least half of the partners’ seats belong to women. Among such companies is SoGal Ventures — the first female-led VC firm, which is focused on how millennials work, consume and stay healthy.

Benefits of the higher representation of female investors

Women-led investment funds continue to outperform in the industry. For the 6-year period, the Rothstein Kass Women in Alternative Investments Hedge Fund Index returned 6%, while the S&P 500 returned 4.2% and the HFRX Global Hedge Fund Index was -1.1%. Another study found that funds managed by females demonstrate higher performances than those managed by males. What can be the reasons for such high performances?

Women have a different way of making investment decisions. As described by Nelli Oster, director and investment strategist at BlackRock, women are more likely to ask for direction on investments. Men, however, usually make investment decisions on their own, which may result in missing a critical piece of information. Also, women take a more thoughtful approach in analyzing investments, and are more organized and diligent. These approaches demonstrate the potential for monetary benefits.

For example, a seven-year study conducted by professors at UC Berkeley, Brad Barber and Terrance Odean, found that female investors outperformed male investors, who traded 45% more than women. As a result, men’s net returns were reduced by 2.65 percentage points per year in comparison to a 1.72 percentage point decline for women.

Diversity in institutional investors ranks

The primary source of investments for venture capitalists is institutional investors, and having access to institutional investment funds is crucial for the success of venture capital firms. However, today 67 percent of institutional investors allocate only one-tenth of investments to women-led funds. To understand the possible reason behind these numbers, we could consider a gender structure in institutional funds, which shows that currently, women represent only 10% of traditional mutual fund managers, and only 3% of women have leading positions in approximately 9000 hedge funds. If we improve these numbers, we have a good chance of creating a diversity of thought, fostering better investment decisions, and bringing more excellence and creativity to the fund’s operations.

More women in the institutional investors’ cabinets could give more opportunities for female-led venture capital funds, and, as a result, female entrepreneurs. As Carolyn Rodz, CEO and founder of Circular Board points out, “Women are incredibly collaborative. When we bring all of these resources together to push each other forward and challenge each other at a very high level there is amazing potential. Women are so special and unique in that we pull together and we do incredible things when we come together.”

What is next?

The benefits for bringing more women into entrepreneurship and investment industries are great. We need to not only attract more women to these industries, but build an environment where women feel belong. What can we do to address this?

Inspire. One way of doing it is to empower and inspire women by publicizing success stories of other women. As Ellen Levy, a Managing Director of Silicon Valley Connect says, it is important for women to take credit for their achievements and share them with the world, and for others to publicly give credit to accomplished women, to avoid creating an image of self-promotion, which is often not perceived very positively when done by women.

Build a tribe. We can inspire more women to join these industries by bringing entrepreneurs and investors of both genders together to conferences and events, organized both by and for both genders. For example, in 2016 SoGal Ventures has hosted SoGal Summit which brought together 350+ entrepreneurs and investors. 16 winning teams led by female entrepreneurs were selected out of 600 teams from the US, China and Southeast Asia.

Break the stereotype. There are many stereotypes built around investment or entrepreneurship industries, which discourage many people from entering them — especially women. Having a fancy degree from a Harvard or having an experience working at a famous software company are just few of them. This makes the idea of being a part of these cultures too unrealistic and unachievable. Having women who succeed in these industries as role models, and being mentored by them are powerful factors for encouraging women into VC and entrepreneurship.

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By supporting women in joining the ranks of entrepreneurs and investors, we will help people in these industries unleash their full potential, regardless of their gender. Not only do women offer a tremendous amount of thought leadership, innovation and expertise, they also positively influence the success of their companies, understand the needs of the customers and foster economic growth.

The unique abilities and skills of both men and women are what make us strong as a society, and increase our chances for building a better future for current and future generations.

By Elvina Kamalova