Investing in Female Founders — Lessons from Behavioral Finance, Gender Research and Real Life Experiences
A story of a conversation between an academic researcher, VC investor, CVC investor and an entrepreneur
2019 brought more female-founded unicorns than ever before, and more new female partners at VC firms. Despite this progress, VC remains one of the most gender-skewed industries in the US. Last year, approx. 87.8% of the VC funding was raised by all male founder teams. We also see an emerging evidence that the disruption caused by COVID-19 is bound to disproportionately affect women. As reported by Pitchbook, Q1 2020 already showed a decline in share of deals with startups founded by women.
Wait… but why?
I am a nerd. I studied Finance & Accounting, I studied Psychology, and then I got an MBA. I have always been fascinated by behavioral economics and academic research proving that we are irrational in a systematic way when making decisions under uncertainty. If you haven’t read yet — Thinking, Fast and Slow by Daniel Kahneman is a good place to start. Yes, he is that psychologist who was awarded the Nobel Memorial Prize in Economic Sciences.
Now, why it matters in VC. Mixed gender or women-led startups are not performing worse than male-led — actually it’s quite the opposite. So isn’t it rational to invest in them? From behavioral economics, we know that decisions under uncertainty are influenced by the actual framing and context. Biases and heuristics come into play when it comes to VC investing — it is no different than thinking about weighing potential gains and losses under uncertainty. So what can we actually do to help scale investments in female founders if we can’t change how we’re all wired? Let’s look at it from three different perspectives represented by (#1) a researcher, (#2) two investors, and (#3) an entrepeneur.
Lens #1: Academic research
My paths crossed with Siri Chilazi, Gender and Organizational Researcher at Harvard Kennedy School. At one of 2019 tech events, I saw Siri present the checker shadow illusion (by Edward H. Adelson). I have seen it before but she used it to make a very relevant point. Looking at the picture below — A appears to be darker than B. But it’s not. And even if you have seen the proof, you will still continue to experience the illusion. Being aware of biases (in this case optical illusion), does not make you immune to them.
In her recent work, Siri studied culture, organizational practices, policies, and patterns of interpersonal interaction affecting full gender inclusion in venture capital as well as gender equity in venture funding. Her work is pointing to tangible ways to address the bias. Here are some actions that Siri suggested.
If you are an investor..
At a fund level:
1.Standardize questions asked of founders
2.Pre-determine evaluation criteria
3.Assess independently first, then discuss as a team
4.Evaluate pitches and ventures in bundles (joint evaluation)
5.Consider blind evaluations of pitch decks
At an individual level: keep track of and set targets for diversifying your network around number of meetings attended, pitches heard, founders funded, founders mentored
If you are an entrepreneur..
Notice bias in questions — based on research, male founders are more likely to be asked promotion questions (focusing on gains) vs female founders are more likely to get prevention questions (focusing on potential losses). React to it by answering investors’ questions (even if they appear to be prevention questions) using promotion framing. Emphasize gains, opportunities, advancement, potential.
When Siri and I got (virtually) together and talked about applying this research to current circumstances, we wanted to bring the conversation to life by contrasting the findings with real life experiences of 2020. This is how the idea of bringing together a group representing different participants of the VC ecosystem came to life: academic researcher, VC investor, entrepeneur.
Lens #2: The VC investor’s point of view
As I looked for recent surveys conducted during COVID-19 to better understand the challenges female founders have been facing, I came across one shared by 500 startups. Christine Tsai, the CEO and Founding Partner of 500 startups shared some of their findings:
- The majority of female founders stated they were still fundraising (56%), and two-thirds believe they will be disproportionately affected by the COVID-19 crisis, receiving less funding as a result.
- One-third indicated that running a company while having to take care of family members at home has been very difficult or impossible to manage.
- The majority of female founder respondents (69%) stated they have six months or less of runway
Even though the data can be daunting, it is possible to find VCs that are actively building an inclusive tech ecosystem. If you are a woman entrepreneur, I highly recommend starting with those investors. 500 startups took the initiative to reaffirm their commitment to supporting women entrepreneurs. Christine’s recent post explains 500’s point of view — “Why Investing in Female Founders Matters Now More Than Ever”:
Unfortunately, we may be in danger of losing the little progress we’ve accomplished on diversity and the small gains female-led startups have made over the last three years in raising money. The economic fallout of COVID-19 could prove harder on women than men, especially if investors retreat into what they might perceive as safer and more familiar investments.
Should you look at CVCs now? From my own perspective in a corporate venture capital setting, there is a lot of value to be co-created and shared with startups. In particular now. Corporates who continue expanding their business and maintain their VC activity, offer an access to a relatively stable ecosystem of products, customers, partners. Startups can benefit from being part of it — in particular from the trust-based relationships. Our customers know that they can turn to SAP when looking for reliable, integrated solutions to solve pressing challenges — and this promise extends to partners and startups within our ecosystem.
Where to begin your relationship with a CVC if you are running a startup? When it comes to selecting the right CVCs to partner with — I would suggest looking not just for alignment with the core business but also for a commitment to building an inclusive tech ecosystem. Ideally with tangible targets and actions towards them. At SAP.iO, we established the No Boundaries initiative — we committed up to 40 percent of the investable capital in the SAP.iO Fund and we are scaling our SAP.iO Foundries with a focus on inclusive entrepreneurship. The goal is to help at least 200 startups around the world by 2023.
After that — it’s all about an open conversation. And here is what I look for when engaging with founders in these unpredictable times:
- Transparency on the state of business — key customer and financial metrics in the last quarter, how it compares to pre-COVID19 time, and the future outlook
- Openness about pivots or business model adjustments needed to build sustainable and scalable business
- Establishing trust from the very beginning — we look to build long-term relationships with founders, and having candid dialogue about the past, present, future, and teams’ motivations helps evaluate whether the there’s good potential for a founder — investor relationship
Lens #3: The woman founder who did it
The last element — the first hand experience of fundraising during the COVID-19 time. SAP.iO Foundry New York was a great source to turn to. I personally knew one of our NYC portfolio founder who just completed a fundraise. Stephanie Benedetto, the co-founder of Queen of Raw achieved a great success closing the round during the COVID-19 time. Our findings resonated with her — but Stephanie also offered additional ideas on how to take advantage of the virtual world. She was extremely effective in using a number of startup initiatives, competitions, and SAP.iO Foundry to accelerate her path towards funding. Some of those include: Launch Innovator by NASA, NIKE, IKEA, and DELL, co-hosting a podcast “Material Is Your Business.”, Techstars Anywhere, WeWork Creator Awards, MIT Solve.
She embodies “what’s the worst that could happen” attitude and never loses her positive energy. When asked whether sending cold emails to potential investors outside of one’s network makes sense— she said a definite YES. The worst case — no one reads it.
New normal = New opportunity
I am truly thankful to Siri, Christine and Stephanie for taking part in our conversation about scaling investments in women founders. While acknowledging the massive challenges, all of us remained optimistic about the future — the ways of working are changing, more diverse voices are being heard. The ‘new normal’ offers an opportunity to establish a more inclusive ecosystem. Together.
I look forward to continuing the dialogue and driving actions to help level the playing field for underrepresented founders of all backgrounds.
Some additional ideas on actions you can take can be found in the paper I co-authored and published jointly with the World Economic Forum — Unleashing the power of Europe’s women entrepreneurs: Six ideas to drive big change.
And of course — if you are founder of a B2B enterprise software startup and you think what you’re doing is aligned with SAP’s strategy, please get in touch.
Siri Chilazi
Gender and Organizations Researcher, HARVARD KENNEDY SCHOOL
Siri Chilazi is a gender and organizations researcher at the Women and Public Policy Program at Harvard Kennedy School. She is a recognized expert in advancing women and promoting gender equality within organizations. Siri specializes in translating academic research into practical approaches and tools to design more inclusive workplaces. As an advisor and speaker, she frequently collaborates with organizations ranging from start-ups to Fortune 500 companies and leading professional service firms in order to close gender gaps. Siri’s work is frequently featured in media outlets including Harvard Business Review, Behavioral Scientist, Forbes, New York Times and BBC. She has an MBA from Harvard Business School, a Master in Public Policy from the Harvard Kennedy School, and a B.A. in Chemistry and Physics from Harvard College.
CEO and Founding Partner, 500 STARTUPS
Christine is the CEO and Founding Partner of 500 Startups. Since the firm’s inception in 2010, she grew 500 to over $580M in committed capital, 2,200+ portfolio companies, 5,000 founders, 120+ team members, and a vibrant community of founders spanning more than 75 countries around the world. Christine has spent her entire professional career in Silicon Valley, building tech products and investing in early-stage startups.
From 2003 to 2010, Christine held product marketing and technical operating roles at Google, focusing primarily on monetization and developer products. Early on at Google, she was part of the team that launched Google AdSense and Google Analytics. Christine also drove marketing for YouTube’s syndication products, including strategic partnerships with major consumer electronics and gaming partners like Sony, Panasonic, Vizio, Electronic Arts, and Ubisoft. She also worked on Google’s Developer Tools including App Engine, Google Web Toolkit (GWT), Android, and Google APIs, and led planning for Google I/O, Google’s flagship developer conference.
Christine holds a B.A. in Cognitive Science from the University of California at Berkeley and was a National Merit Scholar. Christine also served as a research apprentice through the Undergraduate Research Apprentice Program in the Department of Psychology.
Co-founder, QUEEN OF RAW
Attorney turned fashion tech and sustainability entrepreneur, Stephanie is the Co-Founder of Queen of Raw, a marketplace to buy and sell unused textiles, keeping them out of landfills and turning pollution into profit. Prior to starting Queen of Raw, Stephanie worked as a lawyer in the fashion, media/entertainment, start-up, and technology industries and co-founded a sustainable textile manufacturing facility. An advocate for women in business and sustainability, her companies have been featured in NPR, Good Morning America, NYTimes, Vogue, WWD, ELLE, Cheddar, Parade, WCBS, United Nations, Fortune, Entrepreneur, WIRED, Ellen MacArthur Foundation, and Fast Company. Stephanie is a NASA/NIKE/IKEA/DELL LAUNCH.org Innovator, a Grand Prize WeWork Creator Awards Winner presented by Ashton Kutcher, a Cartier Women’s Initiative Finalist, an MIT — Solve Global Challenge Winner, a thredUP Circular Fashion Fund Recipient, was nominated as a Founder to Watch by Women 2.0, and was a Finalist for the WGSN Global Fashion Awards, Rent the Runway/UBS Project Entrepreneur, and the $1M Verizon Powerful Answers Award. She is a Member of Pledge 1% and Founding Member of Wildlife Friendly Enterprise Network, along with Aveda, Kering, and Stella McCartney.
Investment Principal, SAP.IO FUND
Joanna Maryewska is an Investment Principal at SAP.iO Fund, a corporate venture arm of SAP that invests in external, early-stage enterprise software startups that enable SAP customers to realize new, highly incremental value to investments in SAP solutions.
Previously, she was the Chief of Staff to the Chief Strategy Officer & Transformation of SAP, responsible for leading SAP’s strategic growth via innovation ecosystem under the Office of the CEO. Before joining SAP, Joanna worked with B2B startups at various stages in the Silicon Valley and spent 5 years at McKinsey & Co., where she advised customers in consumer, retail and fashion on topics ranging from strategy through transformation & profitability improvement, growth and innovation spanning across the U.S., Europe and Asia. She also led development of an analytics product as a New Ventures Solution Manager.
Joanna is an active Board Member of Stanford Women’s Network NY and Stanford New York Alumni, and holds an MBA from Stanford GSB. Joanna also holds MA in Psychology and MA in Finance and Accounting.
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