Despite growing awareness in recent years of the powerful economic and social contributions women entrepreneurs offer and a rising chorus of support for women-led businesses, venture funding for female founders has hit its lowest point in more than 10 years. According to Pitchbook, the percentage of VC capital invested in female-only founded companies so far in 2021 fell to 1.5% -- down from a high of 2.6% in 2017. Companies founded by a team of females and males fared only slightly better – capturing 11.7% of VC capital so far in 2021 compared to a high in 2017 of 15.3%.
For Allie Burns, the CEO of Village Capital, these numbers are discouraging but not surprising given the systemic structural gender biases she says she sees at almost every level in traditional venture capital and fundraising models. Which is why she explains in this episode of FoodNaviagtor-USA’s Soup-To-Nuts podcast Village Capital has developed – and tested – a unique investment method it calls peer-selection. This model not only answers the International Women’s Day call to “choose to challenge” bias and inequality, it offers a new lens through which to view the entire conversation and, as Burns put it, “create FOMO among investors in a more meaningful way” so that they want to invest in female-founded companies not to “support women” but to seize the huge financial opportunity they offer.
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Awareness of bias is up, but movement to overcome it is not
The social justice movement, led by the Black Lives Matter Movement, last spring and summer shined a much-need light on many of the biases and inequalities that are engrained in daily life in America.
Within the fundraising world, Burns explains, these biases surface as misconceptions that women-founded and led businesses are “riskier,” as seen, for example, in the types of questions posed to women at pitch competitions.
For example, she explains, at pitch competitions men often are asked about the opportunities they are pursuing and women often receive questions “from a place of pessimism,” such as how they will address risks.
Burns adds that awareness about this level of bias is rising, “but not necessarily the movement yet to try and find more ways to overcome that bias.”
She explains that recent research and experiments show that when founders are de-identified more women founders make it to the final diligence round, but this isn’t a common practice by investors.
Burns says she also worries that the perception of women as riskier investment bets was compounded by the pandemic’s unique impact them. In 2020 when more than 2 million women left the labor force, bringing their workforce participation levels to their lowest point since 1988. Much of this was related to lockdowns that hit female-dominated industries hard and the closures of schools and daycares, which forced families to make difficult decisions around balancing child care with paid work.
Burns notes this could explain partially the dip in the already low VC investments in female-founded companies.
According to Burns, the lack of diversity among VC investment decision makers also could be a significant factor holding back women entrepreneurs.
“There aren’t enough decision-makers that look different from the sort of typical venture capital partner. … I do think we need to change who is making decisions in order to change the outcomes,” she said.
Village Capital tests a peer-selection model
To address these and other roadblocks holding back early-stage entrepreneurs trapped in “innovation blind spots,” Burns says, Village Capital has spent the last 10 years developing, testing, and fine-tuning its peer-selection model.
“Since our founding 10 years ago, we’ve cared very much about supporting entrepreneurs who have traditionally be in what our co-founder Ross Baird calls the innovation blind spots, and that includes a lot of different factors, whether it’s geography, whether it’s the type of problems entrepreneurs are solving,” and demographic factors, Burns said.
To address this, Village Capital uses a model of peer investment in which cohorts who go through a three month accelerator program to learn to think like investors decide who in the cohort should receive funding from Village Capital.
As a result, Village Capital’s portfolio is significantly more diverse than most investors’ portfolios, Burns said.
“Accelerators actually are exacerbating the gender gap when it comes to equity”
Village Capital’s observation that its unique investment model led to a more diverse portfolio prompted it to take a closer look through an academic review at how its peer-selection process might mitigate gender bias and the potential role of accelerators on women founders’ ability to raise capital.
As Burns explains, the insights revealed by the research were unexpected and, frankly, upsetting.
“We were curious to know what more could we do to support women entrepreneurs,” and so Village Capital decided to test the impact of accelerators on women’s ability to raise equity and funds, Burns said.
“We expected to get insights around how much the gender gap was closing post-accelerator,” or see that the numbers weren’t moving, but “we did not expect what we found, which is that accelerators actually are exacerbating the gender gap when it comes to equity,” Burns said. “So, some women were raising less equity, essentially, when they come through accelerators,” while men were raising more.
A closer look at this surprising finding revealed there are no clear “design elements” of accelerators on which to pin the gender financing gap and no clear differences between the quality of the startups – leading the researchers to conclude that investor bias and risk perception may be the culprits.
“We are running a couple of tests with investors to better understand where bias play a role … and then we are going to be publishing a toolkit to help accelerators better understand how to address investor bias in their processes,” Burns said, noting she expects this to be released this year.
Accelerators help women raise debt
The insights revealed by the research weren’t all bad. Burns notes it found accelerators appear to remove roadblocks female-led startups face when raising debt.
“We did find that acceleration does seem to reduce the gaps for women-led startups that are raising debt capital, finding that these startups … raise nearly 2.5 times as much debt as those that don’t, whereas male startups see less of a debt boost,” Burns said.
She hypothesized that the difference is in how women portray their business when raising debt versus equity.
As Village Capital continues to test systemic changes and develop a toolkit for entrepreneurs and investors to help reduce the gender financing gap, Burns recommends stakeholders reach out for support from Gender Smart, The Sasakawa Peace Foundation and Pivotal Ventures.
Answering the call to “choose to challenge”
In addition to these resources, and in the spirit of the International Women’s Day call to “choose to challenge,” Burns also encourages investors, accelerators, incubators and other stakeholders to re-think the misconception that investment in female and BIPOC founders is low because there isn’t a pipeline. She also calls on men to stand beside women and call for change.
“One of the things we hear often as a blank cover for why more investment capital isn’t going into women led ventures or ventures led by people of color is that the pipeline doesn’t exist. I would very much challenge that to say: get out of your old network and create a new one, because the pipeline absolutely exists. The opportunity absolutely exists, and in fact, it is a missed opportunity to not proactively seek out companies that are not in most investors’ typical network,” Burns said.
She also challenges men to stand by women founders and challenge the status quo, explaining: “We need 100% of the population to be advocating for women’s equality, whether it’s an entrepreneurship or more broadly if we are going to make some real change.”