Where are the women? Explaining the VC gender gap

March 8, 2024
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In 2023, venture capital funding for women-only startup teams plummeted to its lowest level since 2016, comprising a mere 1.8% of all startup funding, as recently reported by PitchBook.1 This downturn underscores the persistent challenge of gender disparity within venture capital, contrasting with strides made in gender equality related to education, employment, and decision-making roles over the past decade.2

data source: PitchBook

The perplexing nature of this low share becomes more pronounced considering evidence suggesting that women-led startups demonstrate long-term success resulting in 10% more in cumulative revenue over 5 years3 and that women are initiating entrepreneurial ventures at rates comparable to men. In the United States, 49% of new entrepreneurs were women in 20214 and the Global Entrepreneurship Monitor finds that in 2023 one in 10 women globally were in the early stages of an entrepreneurial venture compared to 1 in 8 men.5

Several factors contribute to this gender gap.

The insular and homogenous nature of the VC industry. The VC industry is dominated by male investors with a fairly similar profile who primarily operate through networks6 – only 16% of partners in European VC firms and only 30% of investment committee members are female.7 Funding decisions are often based on repeating patterns that worked in the past, so it is easy to imagine how founders who do not fit past experience or do not come through networks (women, people of colour, etc), are more likely to be rejected. There are numerous anecdotal reports of women who experienced sexist behaviours from VCs and some studies suggest that VC who heard the same pitch in a different language.

Differences in sector focus. Founders often develop solutions based on their own experience and women’s professional experience is concentrated in sectors the male VC decision makers may insufficiently understand, such as care or fashion. Female founders may not be in the same networks, which are an important channel of identifying investment targets.

Smaller pool of pitches from women. There is scarce data about how many women apply and are hence if women are more likely to be rejected by VC firms. Data from the UK VC firms suggests however that the pool of women pitching to obtain VC funding is very limited: 75% of pitches are received are from all male teams, 20% from mixed teams and only 5% from all female teams.8

Different motivations and expectations. Women may pursue less VC because their main motivation for creating a company is the wish to create a job for themselves. Either because the job does not exist or because the available jobs do not suit them.9 They are also relatively more interested in making a difference in their environment whereas male founders are more driven by the desire to accumulate wealth.10 This different motivation may make women less ambitious in terms of financial success and approaches aimed at making a difference in society are often less scalable. lead women not to pitch for VC, although it will unlikely explain the full difference.

Confidence and perceptions. There is also evidence that women tend to ask when they expect a higher chance of approval.11 While men are confident about their ability at 60% of the required criteria met, women need this share to be higher. These differences in perceptions may deter women from entering the highly selective and onerous process of start up funding. They also lead them to express the potential of their start up in amore conservative fashion, underestimating maturity of technological solutions, the potential and hence expected growth and returns in comparison to men. Women’s own expressed confidence in financial literacy may also play a role.12

To address this issue, more efforts are needed. Closing the gender gap in entrepreneurship is not only a matter of justice but also holds economic potential, with estimates suggesting a 3-6% increase in GDP by bringing women's entrepreneurship to parity with men.13 Some practical measures include promoting diverse entrepreneurship ecosystems to increase the number of pitches from women to address the demand challenge and on the supply side of VC utilising "blind" pitch decks for unbiased initial selections, and diversifying decision-making groups within the investor community. These steps can foster an inclusive environment that encourages women to confidently pitch their innovative initiatives, ultimately benefiting society as a whole.

References

[1] https://pitchbook.com/media/press-releases/pitchbook-reports-show-female-founded-companies-secured-record-high-proportion-of-deal-value-in-2023

[2] https://www.weforum.org/publications/global-gender-gap-report-2023/in-full/benchmarking-gender-gaps-2023/

[3]https://www.natwestgroup.com/news-and-insights/latest-stories/enterprise/2023/feb/the-alison-rose-review-of-female-entrepreneurship.html

[4]https://www.bloomberg.com/news/articles/2022-06-23/half-of-new-us-entrepreneurs-are-women-leading-a-creation-boom?embedded-checkout=true

[5]https://www.gemconsortium.org/reports/womens-entrepreneurship

[6]https://www.hks.harvard.edu/sites/default/files/2023-09/gender_and_culture_in_vc_literature_review_final.pdf

[7]https://drive.google.com/file/d/10K7BRz7DWKAFZ-hzK2XvudE70X3RfEG5/view

[8]https://www.british-business-bank.co.uk/wp-content/uploads/2019/01/UK_VC_and_Female_Founders_Report_British_Business_Bank.pdf

[9] Regional differences are likely to play an important role in the motivations.

[10] https://www.gemconsortium.org/reports/womens-entrepreneurship

[11] https://www.tandfonline.com/doi/full/10.1080/13691066.2018.1418624

[12]https://institute.eib.org/wp-content/uploads/2016/10/women-conf-lit.pdf

[13]https://www.bcg.com/publications/2019/boost-global-economy-5-trillion-dollar-support-women-entrepreneurs#:~:text=Such%20a%20catalyst%20does%20exist,%242.5%20trillion%20to%20%245%20trillion.

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