This is an excerpt from the first chapter of the best selling book, Changing Tides: Powerful Strategies for Female Founders.
THE STATISTICS ARE COMPELLING. Female founders receive little support from venture capitalists (only 2.2 percent of funding in 2017 according to PitchBook). And, when female founders do get funding for their companies, they receive much smaller checks. The average deal for a female founder is a little over $5 million. For a man, it’s a little under $12 million.
Why are these statistics so low? One major reason is that there are so few female venture capitalists. In 2017, women represented only eight percent of investors in the top 100 VC firms.
The data for female founders and female funders are inextricably linked, as having more women in both positions would provide more opportunities to change a way of thinking with deeply embedded unconscious bias. Today’s culture excludes the thinking and experiences of half the population. As a biologist, I cannot believe that all the best ideas, all the grit, and all the best products and services will come from white guys who have dropped out of Ivy League schools. The odds of that being true are ridiculous. Yet this is the model many VCs use for making funding decisions.
Why does this matter? The most basic answer is that the decisions VCs make affect the technologies we and our kids will use. And, as we all know, those technologies can impact almost every aspect of our lives. So what happens in those closed-door funding sessions matters to each and every one of us. If we want products and services that meet our needs, support our priorities and make a difference in the world, those products and services have to get off the drawing board and into the real world. And that takes money.
THE BUSINESS CASE FOR GENDER DIVERSITY
What makes the funding disparity so compelling (and puzzling) is that female-led companies are, by and large, more successful than male-dominated ones. A growing body of evidence suggests that companies run by female founders are more likely to be profitable investments. For example, in June 2018, Boston Consulting Group released a report about the gender investment gap. The numbers are astonishing: “According to our research, when women business owners pitch their ideas to investors for early-stage capital, they receive significantly less — a disparity that averages more than $1 million — than men. Yet businesses founded by women ultimately deliver higher revenue — more than twice as much per dollar invested — than those founded by men, making women-owned companies better investments for financial backers.”
This research was conducted in partnership with MassChallenge, a U.S.-based global network of accelerators. MassChallenge has backed more than 1,500 businesses, which have raised more than $3 billion in funding and created more than 80,000 jobs. The report shared several other interesting findings:
- Women receive less funding.
“Investments in companies founded or co-founded by women averaged $935,000, which is less than half the average $2.1 million invested in companies founded by male entrepreneurs.”
- Female-founded companies perform better.
“Despite this disparity, startups founded and co-founded by women actually performed better over time, generating 10 percent more in cumulative revenue over a five-year period: $730,000 compared with $662,000.“
- Investing in female-founded companies leads to higher revenues.
“In terms of how effectively companies turn a dollar of investment into a dollar of revenue, startups founded and cofounded by women are significantly better financial investments. For every dollar of funding, these startups generated 78 cents, while male-founded startups generated less than half that — just 31 cents.”
Boston Consulting Group is not the only organization finding results like this. Kevin O’Leary, an investor from the TV series “Shark Tank,” has invested in more than 40 companies across the show’s nine seasons. Fully 95 percent of the female-founded companies he invested in reached their financial targets, while only 65 percent of their male-founded counterparts did so.
A 2018 report from McKinsey reported that companies that are in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians. It follows that having a more diverse set of viewpoints makes it more likely that an organization will be more flexible, more responsive, and more likely to reflect the needs and values of its customers. All that leads to stronger performance.
The research continues to pile up, yet it seems that the data are consistently swept under the rug. It’s hard to understand why, in an industry plagued with poor returns (VC funds typically perform worse than the S&P), the money is not following the money. Female-led companies perform better and return more money to their investors. So why don’t women get more funding?
HOW FEMALE FOUNDERS ARE QUESTIONED VERSUS MEN
One possible reason is the type of questions women are asked. (Yes, you read that right.)
Recently a group of social science researchers analyzed the Question and Answer period following a well-known pitch competition, TechCrunch Disrupt New York City, from 2010 through 2016 to understand the female founder experience better. According to their study, published in the Harvard Business Review, 66 percent of the time female founders were asked what the researchers called “prevention-oriented” questions, which focused on “safety, responsibility, security and vigilance.” Male founders, on the other hand, were asked “promotion-oriented” questions 67 percent of the time. These questions focused on “hopes, achievement, advancement and ideals.”
The authors reported, “The financiers rhetorically produce stereotypical images of women as having qualities opposite to those considered important to being an entrepreneur, with VCs questioning their credibility, trustworthiness, experience, and knowledge.”
After this pitch contest, women received 25 percent of the funding they had requested, while men received more than half of the funding they had requested.
I thought two other findings in this study were particularly interesting. The first was sobering. For every prevention-oriented question, founders raised $3.8 million LESS in funding. This is after the researchers corrected for every other possible variable, including the age of the company, the experience of the founder, and the like. The only difference was the type of question asked. Since women received more prevention-type questions, it follows that they raised less money than their male counterparts. The second interesting finding was that there are ways around prevention-oriented questions.
Some background: it is human nature to answer a question in a similar manner to the way the question is asked. This means that founders tend to give promotion-oriented answers to promotion-oriented questions, and to give prevention-oriented answers to prevention-oriented questions. However, some founders did not respond to the prevention questions in kind. They turned the answers around to make them promotion-oriented. Those founders who gave mostly promotion-oriented answers to prevention-oriented questions raised an average of $7.9 million in total funding. This is compared to those who responded more typically to prevention-oriented questions with prevention-oriented answers. They raised an average of just $563,000. That translates to a more than 14x increase in funding simply by turning the questions around. That’s an astounding finding and an empowering piece of data.
Here’s an example of how this might work in practice. Let’s say an investor asks you, “So how are you going to protect your market share in a crowded space?” The founder can answer, “That’s a good question and it’s important to be concerned with market share. However, our focus is primarily on growing our market share. Let me tell you about the three ways we plan to do that.” And then the founder can talk about plans and aspiration (performance-oriented topics). A prevention-oriented question, respectfully converted into a promotion-oriented answer, will gain you, on average, 14x more funding. Knowledge is power.
FEMALE FOUNDERS ARE SUCCEEDING DESPITE THE ODDS
That skill in turning around negative questions may be part of the reason that, despite the odds stacked against them, many female founders are succeeding, and even running multi-million- and multi-billion-dollar startups. For example, Adi Tatarko leads Houzz, a home-remodeling marketplace company valued at $4 billion. TaskRabbit, a marketplace for personal-support services led by Stacy Philpot-Brown, was valued at $38 million just before its sale to IKEA. Katrina Lake leads StitchFix, a subscription clothing business valued at $2 billion. Jennifer Hyman runs Rent the Runway, a clothing rental company valued at $800 million.
Also, there is a lot of chatter in the Valley about several up-and-coming female-founded firms expected to break the unicorn (a term coined by Aileen Lee) barrier in the next few years. The tide is changing.
THINGS ARE GETTING BETTER
Fortunately, there have been some important positive changes. There are now numerous initiatives across the VC and founder communities to ensure that there is better representation in the female VC community and that female founders will receive better support and mentorship.
For example, Emily Chang released her book Brotopia: Breaking Up the Boys’ Club of Silicon Valley in February 2018. That book examined the area’s toxic masculinity and its impact on all of us.
In March 2018, Alpha Edison issued a challenge to VCs in honor of International Women’s Day: meet with eight women in March whom you haven’t met with before. The idea is that funding is a relationship business and you will not fund someone you don’t know. So widen your circle. Many VCs firms pledged to do that in March. I hope that they continue that every month. It’s not a lot but every change begins with a crack in the rock.
In 2017, 34 senior female VCs founded All Raise (www.AllRaise.org)with the goal to turn around the numbers for female founders and funders. One of their key initiatives is gathering the data around these issues, which is the first step to understanding the problem. All Raise formalized cells of activity including Female Founders Office Hours, a program to introduce more female founders to VCs across the U.S.; and #FoundersforChange, a group of founders who refuse to take money from VCs who refuse to be inclusive. All Raise was started by Aileen Lee. Maha Ibrahim, a contributor to Changing Tides, is a member. (Note: A portion of the proceeds of Changing Tides will be donated to All Raise.)
And increasingly we have places where we find like-minded investors who openly and expressly support female founders so that we can bring more ideas, products, services and companies conceived and built by women into the world, such as:
- Google Launchpad Female Founders Summit
- Female Founders Community on Facebook
- Women’s Startup Lab
- Watermark (San Francisco Bay Area)
- Lean In Circles
- Women in Technology International (WITI)
- UPWARD chapters across the U.S.
- Forbes’ Midas List
- Female Founder Office Hours
WHERE DO WE GO FROM HERE?
So there is hope. What happens next?
The first step to making a change is to understand the problem. The second step is to examine ways the problem can be solved, or at least mediated.
That’s where this book comes in. I knew this book had to happen, and I asked every female VC, every female founder, and every ecosystem partner I knew to be a part of it. This book represents a spectrum of important voices as we change the tides. I wanted to bring together these points of light that were happening in isolation and throw a big spotlight on these voices.
In Changing Tides: Powerful Strategies for Female Founders you’ll find a description of the problem, with lots of personal stories, statistics, and other compelling information. You’ll also find suggestions on how to tackle the problem — practical and tactical tips that female founders can use to ensure smooth (or at least smoother) sailing when looking for funding for the next generation of companies.
- Maha Ibrahim (Canaan Partners) shares her experience and insights as an immigrant woman investor.
- Gillian Muessig (Sybilla Masters Fund) advises us how to find unicorns in uncrowded fields.
- Terri (Hanson) Mead (Class Bravo Ventures) advocates creating a mesh network to connect female founders and like-minded investors to invest in female founders.
- Xandra Laskowski (OSEA Angel Investors) gives advice on how to be a successful angel investor.
- Suzanne Fletcher (Stanford StartX Fund) explains how joining a community can dramatically improve your chances of success.
- Amy Belt Raimundo (Kaiser Permanente Ventures) advises how to turn the fact that you will often be the only woman in the room into your advantage.
- Mukund Mohan (BuildDirect Technologies) points out that women have a distinct advantage — higher user (customer) empathy — that can translate into better startup outcomes.
- Deb Kilpatrick (Evidation Health) gives tips on how to be tenacious and gracious when raising capital.
- Dorin Rosenshine (Outleads) discusses the joys and pitfalls of being a solo female founder.
- Tammy Bowers (Lionheart Innovations) examines 10 rules for living life both as a founder and a mother.
- Robyn Ward (FounderForward) examines the relationship of selfcare to success, and gives tips on how to get your life back on track, especially after you get funded.
- Jessica Livingston (Y Combinator) examines what it takes to be a massively successful unicorn.
- Kate Purmal (Georgetown University Women’s Leadership Institute) examines the importance of vision in transitioning from entrepreneur to executive leader.
- Debra Vernon (VLP Law Group) further develops the business case for investing in women-lead startups.
My goal and the goal of the contributors in the book is to raise awareness of the problem and to examine possible solutions. Yes, we want to help right the wrongs. However, we want to do more than that.
We want to change the tide to build a more inclusive and profitable future for all of us. Together we can change the tide.