Can a $3 million investment help fix sexism in tech?

Not entirely. But some venture capitalists are hoping it will start to reverse the trend.

Female entrepreneurs are all too familiar with sexism when it comes to raising cash for their startups.

There was the time when an investor asked if Jennifer Hyman, CEO of the apparel startup Rent the Runway, was having “fun” playing with clothes. At a startup competition, Anita Darden Gardyne, cofounder of caregiver service Oneva, overheard a potential backer ask her husband, the chief technologist at her company, “You’re going to let the black girl pitch?” And fashion entrepreneur Anna Palmer recalls that in her first meeting at a venture firm, a male partner told her, “You don’t have an M.B.A, you aren’t a finance person. What are you — just pretty to look at?”

This summer, issues of sexism, harassment, and gender equity in Silicon Valley, the epicenter for venture capital, have been on full display. Investors have resigned from prominent firms after admitting to allegations of misconduct. An internal investigation at Uber — which has raised more than $8 billion from investors, who have praised its aggressiveness and rule-breaking ethos — revealed a culture of sexism that spanned engineers and executives. As a result, the company fired more than 20 employees and ousted chief executive Travis Kalanick. And now, Google is wrestling with its stated commitment to foster “an environment where every Googler can thrive,” after an employee penned a memo arguing that women are underrepresented in tech because of genetics.

One of the fundamental problems — and, some say, solutions — can be found in how startups get off the ground in the first place. It’s well-documented that women are wholly underrepresented in both tech and venture capital. In 2016, women made up just 26 percent of the computer industry, and they make up a mere 7 percent of venture capital firm partners. When male entrepreneurs routinely get funded, and eventually become investors themselves, they turn around and fund other men, creating a vicious cycle of gender imbalance. But some tech entrepreneurs such as Palmer, CEO of the online shopping startup WonderMile, are looking to disrupt that pattern — one check at a time.

Earlier this year, she became one of eight investment partners in a new fund solely focused on backing female-led startups. Launched by Palmer and Kate Castle and Chip Hazard of Flybridge Capital Partners, XFactor Ventures plans to make $100,000 seed investments in companies with at least one woman founder. It plans to spend $3 million on 30 companies. “When we set out to build XFactor, we set out to fix the problem of how do you put women on both sides of the table: Empower them to write checks, and also fund more women who will create billion-dollar companies,” says Palmer.

The lack of gender diversity in the investment industry appears to be directly tied to the lack of funding for female-led startups, according to experts. Data analysis from venture capital database PitchBook shows that in 2016, venture capitalists invested $58.2 billion in companies with all-male founders, yet teams with all women received just $1.46 billion. And while women gained a small bit of ground in the percentage of deals overall, the disparity in average deal sizes is stark: $4.5 million for all-women teams compared to $10.9 million for all-men. And among women, the average deal size decreased over the last two years while men’s rose.

XFactor joins several other existing funds dedicated to investing in female-led startups. But the problem for many women entrepreneurs is that male investors might not get their product, or simply dislike their approach, says Lakshmi Balachandra, an assistant professor at Babson College and a former entrepreneur and venture capital investor.

“If male investors don’t see value in solving women’s problems and needs, there’s an inherent problem in getting funding,” she says, describing male investors’ tendency to fund male-oriented businesses. Also compounding that problem: “They’re also more likely to see value in a woman-oriented business if it’s led by a man.”

Balachandra is one of the contributors to a Babson study released in July that updates pioneering research from the university’s Diana Project about venture capital funding for women. Looking at statistics since 1999, as well as data on deals between 2011 and 2013, researchers found that there was zero representation of women in management at 86 percent of all venture capital-funded businesses, and exclusively male teams were four times more likely to receive funding than companies with even one woman.

Balachandra points to entrenched factors that contribute to women’s lack of access to capital. They include the tightly networked nature of the venture capital world, where the same firms routinely partner on deals; connections to Ivy League business schools or country clubs also create pervasive barriers to entry.

“VCs don’t have to share how they find deals or who they decide to invest in, and so much of the process is secretive and opaque. It’s a huge hurdle for anyone, but particularly for women if you’re not embedded in those networks already,” Balachandra says.

But it may take more than having a lone female investor at the table in venture firms. In separate analyses by TechCrunch’s Crunchbase and Bloomberg, each found little evidence that having a one female partner at a firm increased investment in women-founded startups. In Bloomberg’s report, female investors expressed hesitation to fund women entrepreneurs at the risk of calling “outsized attention to gender.” But according to Crunchbase, when the number of female partners increased, so did VC investments in women-led companies.

There’s a strong business case for greater equity, too. A 2015 McKinsey report showed that top companies for gender diversity were 15 percent more likely to have financial returns above respective industry averages, and a study from the Peterson Institute for International Economics found that firms moving from no female leaders to 30 percent representation could expect a 15 percent boost in profitability. According to data from a 2017 survey from employee research firm TinyPulse, startups with women founders grow faster. And venture capital firms have found similar results in their portfolios; over a 10-year period, First Round Capital saw that companies with a female founder performed 63 percent better than those with all-male teams.

Since it launched, XFactor has received funding inquiries from more than 200 companies. The fund has already closed five deals, including with two artificial intelligence companies. Flybridge Capital Partners’ Kate Castle, who helped launch the XFactor fund, realizes change won’t happen quickly. But increasing the gender diversity of who receives funding and who could make investments is a step in the right direction. She says, “Our hope is that by being able to help female founders at their early stages and throughout the life cycle, we can start to put a dent in what’s out there.”

What do you think? Will more investment in female-led companies help change a culture of sexism in tech? Email us here.

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