Companies with female executives in decision-making roles generate stronger market returns and superior profits, according to “CS Gender 3000: Progress in the Boardroom,” a report from the Credit Suisse Research Institute (to which I contributed). The report also proves a thesis of my book, Stiletto Network, demonstrating that when women are in true positions of power, they hire and promote other women, as opposed to excluding them.
Contrary to the “Queen Bee” stereotype, new evidence shows that female CEOs are much more likely to surround themselves with female leaders. Women CEOs are 50% more likely than male CEOs to have a female CFO and 55% more likely to have women running business units. This holds true in venture capital, start-ups, and microfinance, as well as in the corporate world. While female representation in in venture capital partnerships remains low, VCs co-founded by women have a much higher percentage of female partners than the industry average (43% vs. 7-8%). Additionally, female-founded VCs invest more in women entrepreneurs, with 17.4% of funding rounds going to female-owned startups versus the industry average of 12%.
Similar to venture capital, female-led microfinance institutions attract more females in management and more female clients. Credit Suisse reports that 25-30% of microfinance CEOs are women and around 50% of the lending officers are women. Female-led microfinance institutions focus more on female clients (59% openly target women vs. 43% for male CEOs), have a greater share of female board members (44% vs. 23%), are more likely to have a female chair of the board (43% vs. 16%), and have more female clients (76% vs. 60%).
SHIFTING VALUES, SHIFTING WORKFORCE
Many believe that for women, the fastest route to wealth and power is via entrepreneurship, and more than one-tenth of the American female working population are entrepreneurs (1). Kay Koplovitz, the founder of USA Network and Springboard, an international accelerator of women’s high-growth businesses, sees women stepping out of the corporate world when they hit a glass ceiling or have passions they cannot pursue internally. “Many more women are willing to take a risk if they can afford to step aside for a period of time,” she said. “Big companies are struggling to figure out how to keep them in-house.”
According to the 2015 “State of Women-Owned Business” Report commissioned by American Express Open, between 1997 and 2015 the number of women-owned businesses in the U.S. increased by 74%, 1.5 times the national average, while attributed revenues and employment grew 79% and 12%, respectively. More than 9.4 million women-owned businesses now generate nearly $1.5 trillion in revenues and employ more than 7.9 million people. Since 2007, women’s businesses have added 340,000 jobs, while employment at male- and equally-owned firms has declined.
Women-owned businesses remain smaller than their male-owned counterparts. While these companies represent 30% of total enterprises, they employ 6% of the country’s workforce and contribute 4% of business revenues. However, these numbers jump significantly to 12% of revenues and 14% of employment when publicly-traded companies are excluded and when combined with equally-owned (male and female) firms. The nation’s women- and equally-owned companies together total 14.7 million (47% of total), generate nearly $3 trillion in revenues (18%), and employ nearly 16 million people (13%).
A variety of factors conspire to create a world with more female founders. As opposed to twenty years ago, when firms like Microsoft, IBM, Oracle, and Cisco received highest valuations, venture capitalists now see large returns on companies the average person understands – such as Google, Amazon, and Facebook, or more recently Uber. In many cases, women are these companies’ primary users, well positioned to grasp their value proposition and launch similar businesses themselves. Additionally, entrepreneurs no longer need computer science degrees – where women have historically lagged – to launch viable concerns, though many investors say they are meeting more women graduates of top engineering programs who have deep technical knowledge or significant domain expertise in areas such as financial services and insurance.
FUNDING GAP FOR FEMALE FOUNDERS
However, a funding bottleneck exists for female entrepreneurs, as data suggest they lack access to capital needed to grow. “Women raise 40% less funding and over-perform on revenues by 12%,” said Koplovitz, who also led the National Women’s Business Council and has served on many public company boards. “How would we over-perform if we were on par with investment?”
“Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital,” a study by The Diana Project at Babson College, found that more than 97% of venture-funded businesses have male CEOs and 85% have no women in management, despite that female entrepreneurs perform as well or better than male peers. Companies with women on the executive team have higher valuations at both first (64% higher) and last (49% higher) funding, a discovery consistent with a 2012 Dow Jones “Women At The Wheel” study that found the overall median proportion of female executives at successful companies (i.e., with IPOs or exits at valuations greater than investment dollars) to be higher (7%) than of unsuccessful companies (3%).
Silicon Valley Bank (SVB) found similar results when they filtered a proprietary data set of about 500 private, venture-backed global technology companies. Of these, which had minimum revenue of $10 million and median valuation of $322 million, 90% were U.S.-based, 10% had at least one female founder, and 6% had a female CEO. Of 168 current “unicorns,” or companies with valuation of $1 billion or more, only nine have female co-founders – 23andMe, CloudFlare, Eventbrite, Houzz, Kabam, Medallia, Mogujie, Nextdoor.com, and The Honest Company. Eight of these were inducted in 2014 and 2015. Women’s low participation could be attributed to the fact that female founders have only recently become more prevalent, and therefore their companies have not yet had the runway to achieve high revenues and valuation; and to the fact that, once companies reach a certain size, investors often replace founding CEOs with more experienced candidates in anticipation of a liquidity event. The pool of experienced female CEOs is smaller and investors tend to be men drawing from primarily male networks.
Of SVB’s companies, those with a female co-founder had 13% higher median valuation and 12% higher valuation growth than male-founded firms. Median 2015 revenue and year-over-year revenue growth for female co-founded companies were 51% and 28% higher, respectively, than solely male-founded counterparts. Despite these results, firms with all-male founding teams tend to raise 43% more than female co-founded teams, based on median raised across sectors.
As the CS Gender 3000 report says, the number of venture-backed startups and the percentage of global venture capital allocated to companies with at least one woman on the founding team are increasing. Since 2014, 16% of global venture deals involved companies with a female founder, having climbed steadily from 5% in 2005. In the first half of 2016, 17% of global venture dollars went to female co-founded companies, up from 15% in 2015 after hovering at 6% for the better part of a decade (2). SVB also found that their tech companies are more likely to have female founders now than in the past; for companies founded in 2011-2015, 17% of companies included at least one female founder, up from 12% for firms founded in 2006-2010, and 5% for firms founded in 2001-2005. However, the Center for Venture Research at the University of New Hampshire reports that in 2015, 29.2% of total entrepreneurs who sought angel investments were women, and only14.4% of these received funding. This yield rate has declined over the past four years (3).
Female founders tend to be clustered in certain sectors. The Diana Project report revealed that venture-backed companies with women entrepreneurs, including CEOs, are most common in software, biotech, and business products. However, the proportion of total investment dollars to women in these sectors remains low, at about 7 % in software and 3% in biotech. Of SVB’s companies, 32% of all female founders were in “commerce,” which includes marketplaces, e-commerce, flash sales, local/on-demand services, and subscription-model companies. Within commerce, 25% of all founding teams include at least one woman, and commerce also showed the highest concentration of female founders, with 46% of these companies founded in 2011-2015 having been launched by women. Still, even in this sector, male founding teams raise on a median basis twice the funding of their female counterparts.
Companies with women on the executive team that receive venture capital tend to be older and have 89% higher headcount and 44% higher sales than their male-led peers (4). Kay Koplovitz says that the female entrepreneurs she sees generally have a track record in corporate and start-up environments. This could indicate either that women seek skills and experience in established organizations before gaining the confidence to start their own businesses, or that venture capitalists are hesitant to fund women who aren’t “proven.”
DEARTH OF FEMALE INVESTORS
Many attribute the funding gap for women to a dearth of female investors. “You have an industry that’s homophilous, homogenous, and very tightly connected investing in only 50% of the population,” said Dr. Candida Brush, Babson College Vice Provost of Global Entrepreneurial Leadership, co-founder of The Diana Project, and leading author of the report. “How do you know you’re getting and commercializing the best innovations?”
Venture firms with women investing partners are more than twice as likely to invest in companies with a woman on the executive team, and three times more likely to invest in companies with women CEOs (5). Yet only 7% of investing partners at the top 100 venture capital firms are women. This number rises to 8% when corporate, micro-venture firms, and accelerators are included, as corporates and accelerators have 12% female investing partners (6). While women represent 25.3% of angel investors and are more prevalent in lower-level investment roles at venture firms (e.g., associates, vice president, principal), partnerships are slow to welcome new members (7). Therefore, it remains difficult to assess how quickly this pipeline will demonstrably affect investments in female entrepreneurs.
“There’s a trickle-down, where inclusiveness begets inclusiveness,” said Maha Ibrahim, a partner who invests in cloud and digital media companies at Canaan Partners, which is known for its diversity. “30% of our general partners are female and, while it wasn’t planned, it’s probably no coincidence that 25% of companies in our last fund were founded or co-founded by women. As I look across their executive teams, they also have women and minorities.”
Scientific studies demonstrate that, as Katherine W. Phillips writes in her 2014 Scientific American article, “Why Diversity Makes Us Smarter,” “simply interacting with individuals who are different forces group members to prepare better, to anticipate alternative viewpoints and to expect that reaching consensus will take effort.” In the venture capital world, “women bring diverse perspectives to a team that is typically male. The inclusion of different points of view results in better decision-making on all types of deals, not just the ones led by or targeted at women,” said Amanda Reed, an experienced General Partner who recently founded Authentic Partners with two male partners from other venture capital firms.
The CS Gender 3000 report and other sources maintain that unconscious bias is often at the root of exclusion, as people tend to hire, promote, and invest in people similar to themselves. Female investors report that they generally see more deal flow from women entrepreneurs, while women entrepreneurs in turn say female investors are drawn to their business concepts. “There’s this emotional piece, a human element, around what gets me excited as an investor,” said Wende Hutton, a Canaan partner who invests in life sciences. “If I’m a guy, what gets me excited may not be a female-oriented consumer tech deal. This is where the decisions on who gets funded go beyond the merits of the business proposition.”
For example, Annie Kadavy, the only female partner – and, at age 30, one of the youngest – at Charles River Ventures, invested in ClassPass, a fitness company with two female founders, after securing a grasp on the market – in part because of her gender. “In consumer-facing businesses, I’m very unassuming. I just wore workout gear and walked into six studios that were using ClassPass. I asked them about it and no one ever said, ‘Why do you want to know? Are you an investor?’ I gained a huge amount of altitude on the product because I look like a user,” Kadavy said. “$50 billion is spent on fitness every year, and I brought a different perspective.” CRV is an advocacy-based partnership and Kadavy said she “fought hard for these companies.”
SOLUTIONS
Disrupting and Democratizing Venture Capital
Women’s accelerators and angel groups (e.g., Golden Seeds, Astia, Broadway Angels, 37 Angels) continue to proliferate, and some investors are creating novel funding models tailored to women’s needs and preferences. For instance, Trish Costello – an industry veteran who was the founding CEO of the Center for Venture Education, on the start-up team of the Kauffman Foundation’s entrepreneurship center, and for a decade led the Kauffman Fellows Program – established Portfolia, a collaborative equity investing platform to introduce savvy, affluent female executives to the venture funding space.
However, as the CS Gender 3000 report highlights, the most promising news for women entrepreneurs may be the increase in female (co)-founded venture firms. During recent years, experienced female venture capitalists like Reed have begun echoing the trend of senior executive women across other industries and leaving large, male-dominated companies to start their own. “Women are hacking the VC world and recreating it in the model they want,” said Costello. “If the VC Golden Rule says, ‘He who has the gold makes the rules,’ then we can now say, ‘She who has the gold is changing the rules.’”
In the last three years, 16% of new venture and micro-venture firms (20 total) had at least one female founder. Data suggest this number is accelerating and that these firms are more likely to hire female partners. In the last five years at the 29 firms founded by at least one woman, half of investing partners are women (8). These include Aspect Ventures, co-founded by Theresia Gouw and Jennifer Fonstad, former partners at Accel Partners and Draper Fisher Jurvetson, respectively; Cowboy Ventures, co-founded by Aileen Lee, a former partner at Kleiner Perkins; and Floodgate, co-founded by Ann Miura-Ko, a former analyst at CRV.
At the Global Entrepreneurship Summit in Stanford, CA in June, Aileen Lee responded in jest on “Bloomberg Markets” when asked about controversial comments by famed Sequoia Capital partner Sir Michael Moritz that his firm was open to hiring female investing partners, provided they meet performance standards, but couldn’t find any. “We’re an all female firm… We’re very open to hiring a guy,” she said. “We’re not going to lower our bar, but it takes effort.”
Maria Cirino, a serial entrepreneur who a decade ago co-founded Boston-based .406 Ventures, which has $700 million under management, sees this new crop of female-founded funds as part of a larger industry overhaul. “There’s been a sea change in how [limited partners] approach venture,” said Cirino, whose firm invests in cybersecurity, healthcare IT, data/analytics, and cloud infrastructure. “For a while LPs were looking past returns and re-upping at these big, old VCs because there were afraid if they skipped a fund, they wouldn’t get back in. [Older firms] could rest on their laurels and reputations, have a couple of crappy funds in a row, and LPs would turn a blind eye.”
Cirino – who has been named "Massachusetts CEO of the Year" and "Ernst & Young Entrepreneur of the Year," and who helped lead two companies that received “Massachusetts IPO of the Year” – says the industry is now being democratized, as LPs allocate higher sums to newer firms, many of which have former entrepreneurs and operators as partners. “The new firms are more founder-friendly, much less arrogant and entitled. Entrepreneurship is in their DNA,” she said. “It’s a positive flushing taking place, and the Old Guard is not that relevant anymore.”
Perhaps not coincidentally, a greater number of LPs are female, as well. This may affect allocations to venture capital firms, which may in turn influence the diversity of entrepreneurs who receive funding. “50% of our LPs are women and they are very interested in diversity. Some have to track the diversity of firms they’re investing in,” said Wende Hutton. “They don’t want to look at a GP group that’s all male. They want GPs sourcing deals from the broadest networks.”
One such LP, Lisa Edgar, a founding managing director at Top Tier Capital Partners, a venture capital specialist managing niche-focused fund of funds, echoes both Cirino and Hutton. “These new, emerging funds are much more diverse – more in line with the overall tech world and with society, in general,” said Edgar, who helped build TTCP, which is about 50% female. “Because I’m an allocator of capital, I’m trying to find the best people with the most interesting networks. No one’s going to lower the bar, but if these women have a track record and can point to unique networks to source deal flow, they’re going to get traction.”
Still, this trend is very new. Money remains concentrated among male-founded and -led firms, and because venture is a long-term business, it will be at least ten years before the performance of new female-founded firms can be assessed. Yet an increase in both women investors and entrepreneurs could be the start of a virtuous circle. “More women entrepreneurs will lead to more women executives,” said Theresia Gouw, who invests primarily in security, data analytics, and consumer opportunities and who has appeared five times on the Forbes Midas List of Top Tech Investors. “Women who create their own companies are more likely to rise more quickly in the world, and they set the tone for their companies’ cultures and promotion systems.”
In short, as Credit Suisse data show, once women control their own companies, they hire and promote more women. More women at the top lead to more women rising in the ranks. Joanna Riley, the founder and CEO of 1-Page, a recruiting platform that sources talent for large enterprises, said increasing female representation at all levels has become a core business strategy. “Our goal is to help eliminate bias in hiring for other companies, so we do that internally too. How do you get people contributing ideas who might otherwise be silent?” said Riley, who before securing funding was rejected by more than 200 investors and advised by a top venture capitalist to find a “geeky-looking man” to accompany her to pitch meetings. 1-Page, the first Silicon Valley-based technology startup to list on the Australian Stock Exchange, is now 50% female. “Our diversity has put us so far ahead in business, in the perspectives we consider and the decisions we make. Men in my company also see the value of the sexes working together.”
Transparency
Many insiders campaign for greater transparency within venture firms and venture-backed companies. Kate Mitchell, a co-founder and managing partner of Scale Ventures who is also former head of the National Venture Capital Association and current leader of its diversity task force, is studying grassroots efforts to increase diversity and collaborating with groups like Project Include, a movement launched in 2013 to encourage technology companies to publish diversity statistics. Firms such as Microsoft, Facebook, Google, Apple, Yahoo, and Oracle have complied, some after years of resistance. “If you simply ask the question about how diverse your teams are, that sends a message to GPs,” said Mitchell, whose firm has three male and two female investing partners.
Some venture firms are collecting and disseminating data in an effort to nudge their industry toward equality. Last year, Social + Capital, run by Chamath Palihapitiya, released gender, age, and ethnic data of investment leadership at 71 venture firms, which have a combined $160 billion in assets under management. He found that women comprise 8% of senior investment teams, consistent with other studies, and that 44 of these 71 funds have no female senior investing team members. Social + Capital also noted that senior investment teams are 78% white and 20% Asian, while other minority representation is negligible. “The venture capital industry is stuck in yesteryear,” Palihapitiya wrote in his op-ed, Bros Funding Bros, which appeared on the technology news website The Information. “The VC community is an increasingly predictable and lookalike bunch.”
Earlier this year, First Round Capital examined a decade’s worth of performance data for its 300 portfolio companies and almost 600 founders. The firm revealed that founding teams with at least one female performed 63% better than their all-male peers in terms of valuation. Three of First Round’s top 10 best-performing investments have a female founder.
Venture capital is about pattern recognition. As more female-founded companies become successful, we will likely see a greater number of female executives at their helm. Women leaders then become legitimate horses to bet on for both male and female investors. “I don’t care how sexist you are,” said Maria Cirino. “If you’re an investor being measured on results, you’ll do whatever it takes to make your company successful.”
SOURCES
1) “Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital,” The Diana Project, Arthur M. Blank Center for Entrepreneurship, Babson College. September, 2014
2) Pitchbook
3) Jeffrey Sohl, “The Angel Investor Market in 2015: A Buyer’s Market.” Center for Venture Research, University of New Hampshire. May 25, 2015
4) “Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital,” The Diana Project, Arthur M. Blank Center for Entrepreneurship, Babson College. September, 2014
5) “Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital,” The Diana Project, Arthur M. Blank Center for Entrepreneurship, Babson College. September, 2014
6) “The first comprehensive study on women in venture capital and their impact on female founders.” By Gene Teare, head of the venture program and content for CrunchBase, and Ned Desmond, COO of TechCrunch and CrunchBase. April 19, 2016
7) Jeffrey Sohl, “The Angel Investor Market in 2015: A Buyer’s Market.” Center for Venture Research, University of New Hampshire. May 25, 2015
8) “The first comprehensive study on women in venture capital and their impact on female founders.” By Gene Teare, head of the venture program and content for CrunchBase, and Ned Desmond, COO of TechCrunch and CrunchBase. April 19, 2016