Uncover the trillion-dollar gender blind spot in venture capitalism

By Rachel Williamson

Venture capital (VC) investors are increasingly showing their support for gender diversity. It is not unusual for VC investors to discuss their woman‑friendly credentials on conference panels or promote the number of minority-led start-ups they have in their portfolios.

Despite the overt signs of support, the figures reveal a different picture.

In the 2021‑2022 financial year, venture investment in Australia more than doubled to A$10 billion, compared to the previous year.

Just A$70 million of that went to start‑ups run by women only, and A$1.4 billion went to mixed founding teams.

The remaining VC funding went to start‑ups with male founders only – a colossal A$8.5 billion.

Unconscious bias

Entrepreneur and author Lacey Filipich says the claims of supporting targets for women have not been translating into actual funding for entrepreneurs, due to unconscious bias.

“VCs make a lot of money doing business in a certain way,” Filipich says.

“They have a model in their mind of what they see as success, and they want to replicate that. They implicitly look for a specific type of male-led company, even if they’re not consciously doing that.”

In the US, start-ups funded by the top VCs are nearly 90 per cent male.

According to a 2021 report by Diversity VC and RateMyInvestor, 72 per cent of the founders are white, and 35 per cent are based in Silicon Valley.

 

"What if the reason the eight out of ten start-ups tank is because venture capital investors aren’t good at picking diverse teams? What if the bias is the root cause, and you could double your success rate by adding more diverse founders?"

 

Data from the 2022 VC Diversity Index, from publication The Information, shows that more than half of US “check writers” are white men.

Unconscious bias may also reduce funding opportunities for diverse founders.

A 2023 Harvard Business Review study asked 200 MBA students to watch identical fictional start-up pitches presented by “Laura” and “David”.

The results of the study showed that “Laura” was deemed competent by the students if she received funding from a man, but less competent if her funding came from a woman.

“When people see that a female founder has a male investor, they assume she must have received his investment because she is competent, and her start-up is strong. When people see that a female founder has a female investor, they attribute her investment success to her gender rather than her competence,” the study has found.

In the US, where start-up success stories look like Facebook, Google and Amazon, venture capital investment happens on an entirely different scale. Unfortunately, the lack of interest in ensuring diversity also seems to be proportionately large.

In 2019, investment bank Morgan Stanley surveyed 200 US venture capital firms. The data reveals that, for three in five investors, diversity is not a priority for their firm. The situation is similar in Australia.

The State of Australian Startup Funding report for 2022 shows that, while deal participation of women founders hit record levels in 2022, their share of total dollars dropped.

At the same time, of about 150 venture capital funds operating in Australia, one in three did not invest in a single woman founder at all in 2022. Only six of the 50 most active VC funds put more than half of their investment dollars into start-ups founded by women.

Missed opportunities

The likes of Atlassian and Afterpay have made their investors wealthy and are prime examples of success stories in Australian start-up investing.

Much of the data into the benefits of investing in diversity looks at women founders. Boston Consulting Group analysis from 2018 reveals that, on average, women entrepreneurs raised less than half the sums their male peers did. Yet they delivered higher revenue, earning 78 cents in the dollar compared with 31 cents in the dollar earned by men.

Morgan Stanley refers to this as the “trillion-dollar blind spot”, especially in light of the fact that women control 83 per cent of consumption “through buying power and influence”.

Venture capital is an inherently risky business, with a 75 per cent chance of zero returns and a 30-40 per cent chance of complete failure. 

For Filipich, these figures beg the question – what if the bias towards a traditional recipe for investing success contributes to that failure rate?

 

"It surprises me that people can see the statistics on diverse teams outperforming and still invest in non-diverse teams."

 

“What if the reason the eight out of ten start-ups tank is because venture capital investors aren’t good at picking diverse teams?

“What if the bias is the root cause, and you could double your success rate by adding more diverse founders?” Filipich asks.

Rachel Yang, a partner at venture capital firm Giant Leap, agrees. Yang says her firm generally takes the view that women are more efficient with capital.

“I wouldn’t be surprised if that was the case, where there is something around burning through capital at a higher rate that leads to a greater number of failures,” Yang says.

Filipich says the increasingly deep network of women and diverse entrepreneurs in Australia share notes about potential venture capital investors. This could mean that an investor who, for example, tells a woman she cannot run a company or have a baby will slowly and surely get squeezed out of that trillion-dollar opportunity.

While Yang is disappointed by the continued lack of progress in funding for diverse founders, she is hopeful that the pressure is building for venture capital to change its ways. This is particularly so when combined with the rise of more VCs with different backgrounds and genders.

Improving the pipeline of diverse start‑ups coming before investors is critical. One firm showing how that can be done is Ada Ventures in London. According to the company website, its scout community has about 100 investment scouts, “all of whom are involved in an underrepresented community”, which helps the company access diverse founders.

In Australia, Yang says Giant Leap is using radical transparency to allow the industry to hold it to account against public targets for gender and ethnic diversity.

The firm has the expectation that this will pressure other leading funds to do the same.

“Putting targets in and ensuring  transparency leads to accountability and approaches that lead to more inclusion,” she explains.

“The still-low levels of funding for diverse teams create endless amounts of frustration. That’s why we released our diversity, equity and inclusion policy publicly.

“It was our way of saying, ‘If you are genuinely supportive of women-led businesses and diverse teams then why isn’t the capital flowing there?’.

“There are tangible things you can do to change the statistics on that, and there are no excuses left anymore. It’s been decades since this conversation has been happening, yet the quantum of funding has gone down in recent years,” Yang says.

Of course, funds are not the sole harbingers of change. Limited partners – investors with restricted voting power and no day-to-day involvement in the company – and their financial advisers have a role to play as well, adds Filipich.

Yang suggests that investors in venture capital funds should push for greater transparency around statistics, such as the proportion of capital invested into businesses with women-led teams. “It can be as easy as just a couple of stats,” she says.

“The other way is for the financial advisers of these investors to think about the returns that diverse teams generate. This is not charity. This is good financial management when you’re thinking about investments,” Yang says.

“It surprises me that people can see the statistics on diverse teams outperforming and still invest in non-diverse teams.”