We Need a New Approach for Women (+All) Entrepreneurs
A few weeks ago I attended the Montgomery Summit for the first time. The event kicked off with an afternoon track on The Rise of the Female Entrepreneur. It was open to everyone and I was excited to join since my company has many female leaders. A recurring theme of the sessions was that women are having a hard time raising money from investors. Sadly, the main solution seemed to be that “women need to act more like men to win investments.” I think that’s the last thing we need.
I realize that I might be an odd voice to lend to this topic. After all, I’m a white, male, 40-something, repeat entrepreneur who has raised millions of dollars from top-tier VCs. But I have spent years in the start-up trenches outside of conference stages, and I am convinced we need new approaches to bring more entrepreneurs of all kinds into our economy.
It’s Getting Even Harder for Female Founders
Whatever we’re doing now certainly isn’t working. Companies with female founders represented only 2% of VC investment dollars in 2016, a declining trend since 2012. The average investment size in female-founded startups was $4.5 million, a decline from 2015 and 2014.
The venture capital business — and investing in general — revolves around “pattern matching.” Pattern matching is the art and science of understanding what successful businesses have in common and making smart bets when those success patterns are visible. But if there are few female success stories, there is less opportunity to see a pattern.
Part of pattern matching means that we tend to be unconsciously biased towards people who look, act, and share the same background as ourselves. And in VC most investors will freely admit that they are betting on the people who founded a company, not the idea. This assessment of people mainly comes down to a gut feel. So it doesn’t help that only 7% of partners at the top 100 investment firms are women.
But let’s look deeper for a minute: No matter what their race or gender, investors’ education and work backgrounds are not that diverse. The vast majority of VCs have spent their careers since college in financial services companies — itself another extreme pattern-matching industry that hires mainly similar kinds of people from a handful of top schools. Most investors (but thankfully not ours!) have little career diversity to draw on, and only a relative handful have real-world experience running the kinds of businesses they are investing in.
Investors Need Women to Learn “The Game”
The female investors at both the Montgomery Summit and on a panel at SXSW a week later agreed that one of the biggest reasons men raise more money is that they tend to be better at pitching a “grand vision” that gets VCs excited. Or, as one female investor said: “Men pitch unicorns and women pitch businesses.”
That may sound like something out of an episode of Silicon Valley, but it has a core truth: VCs are in the business of taking bets on companies that shoot for the moon or die trying. As seen in the graph below, the vast majority of investments return zero or only the money that was put into them. That means for VCs to get the kind of market-beating returns that their investors demand, they need a small handful to reach enormous payouts. Each investment they make has to seem like it has the potential to be the single, massive success they need to deliver the fund.
All entrepreneurs need to know the VC business model and its built-in, economically-rational biases before deciding to enter this game. They need us founders to swing for a homerun and hit it, or strike out and try again. They know that the majority of you in the conference audience will fail…repeatedly. Remember, VC money is aimed at very high-growth, fast-scaling businesses that payout in just 5 to 10 years. Their entire business model revolves around encouraging this model. Are you sure you want to take that path?
New Cities, New Approaches
Maybe I’m extra-sensitive to VCs who force a certain pattern because I’m a startup founder sitting in Cincinnati, Ohio. We don’t have many 18-year-old Stanford drop-outs or 4-time-repeat unicorn founders here. But we do have a lot of ambition, and the brains to see that we need to try a different model that taps into our strengths.
Here in Cincinnati our challenges have led to a new model of amazing public and private support. The state, city, and large local companies such as Procter & Gamble, Children’s Hospital and Kroger have chipped in with money and time to create and support several institutions. For example: The Brandery is a world-class startup accelerator. CincyTech is a leading seed-stage investor. JobsOhio has created a debt product that allows companies to grow without dilution. And it is all brought together by Cintrifuse, which provides a physical hub, supportive programming, and a fund-of-funds that is drawing the top investors in the world to our flyover city.
Our company, Ahalogy, has benefitted from all of these programs and more. And our employees and I give back by choosing to stay here, hire here, and volunteer to staff Startup Weekends, open our office to visitors, and take hundreds of coffee breaks with other aspiring entrepreneurs.
“Diversity” Also Means Alternative Paths to Success
Right after women at the Montgomery Summit were coached on how to pitch bigger ideas to VCs, we were treated to a conversation with Lynda Weinman, the founder of Lynda.com, the leading online education company. She told her story of spending more than 20 years building the company and migrating it from in-person classrooms to mailed VHS tapes to digital video on demand.
Weinman built a profitable business from day one and only took investor money near the end of the journey in order to allow her family and employees to take out some cash. Lynda.com was eventually purchased by LinkedIn for $1.5 billion dollars. Not all unicorns are created the same way!
Katrina Lake, founder and CEO of Stich Fix, suggests that the challenge of finding fewer investors and less money ended up being more of a blessing than a curse. According to Lake: “In many ways, I’m grateful that we were in a cash-constrained environment…[We had to figure out] how the business is going to be healthy and how the business is going to be sustainable.”
It’s interesting that today’s pattern-matching investors are starting to pay a lot more attention to whether startups are on the “path to profit.” This is in stark contrast to the attitude just a few years ago when being profitable was a sign that you weren’t growing fast enough or thinking big. It seems that patterns can change…for the better.
Let’s stop trying to “fix” diversity in startups — and in the wider economy — by forcing women and other under-represented groups to conform to a model that a handful of people created. If anything, we should spend more time questioning whether betting money on Bro-CEOs who wow investors with a unicorn pitch are actually building great businesses. We don’t need women — or anyone — to model bad behavior.
Quite frankly, it’s a drain on our economy to have so many brilliant leaders crash and burn because of a “unicorn or bust” mentality. And let’s remember that the entire VC industry routinely under-performs the major stock indices. The system that we’re coached to fit into has mainly failed. Women and others can win by taking a longer-term approach, and creating revenue and profit growth early-on.
My best advice is to skip the conference auditoriums and spend more time speaking one-on-one with founders who have been down the path before. We love to share the unbiased pros and cons, and we always want to improve the process for the next cohort of founders. Please ping me if I can help!
Update since original publication:
- This study shows that just 1% of female entrepreneurs have raised VC money…maybe because it’s better for them — 4/28/17
Bob Gilbreath is co-founder and CEO of Ahalogy, the Passion to Purchase Platform, and author of The Next Evolution of Marketing: Connect with your Customers by Marketing with Meaning. Follow him on Twitter.