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Women-Led Startups Aren’t Getting Funded, and There’s a Very Simple Reason Why

Investors need to stop blaming the lack of diversity in their portfolios on a “pipeline problem.”

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BY Sheila Herrling - 16 Jun 2018

Women-Led Startups Aren't Getting Funded, and There's a Very Simple Reason Why

PHOTO CREDIT: Getty Images

If I had a dollar for every time an investor told me they'd "love to invest in a female founder or a founder of color but they just can't find them," I'd be, well, a well-resourced investor of diverse entrepreneurs. Why? Because diversity is the investment alpha.

Women are the fastest growing group of entrepreneurs, particularly black women; women-led businesses are outperforming their male peers in many VC portfolios, and; racially-diverse companies outperform industry norms by 35 percent. So, with all the hype around data-driven investment decision-making and pattern-matching algorithms that find successful founders, investors must be seizing this incredible opportunity, right?

Nope. Less than 10 percent (and that's the generous end of the scale) of venture-backed companies have a female founder. Less than 1 percent have a black founder; same for Latinx. A mere 0.2 percent of venture deals go to black female founders; in fact, only 26 black female founders have raised over $1 million in outside capital...ever. The average amount of venture capital to black female founders is only $36,000 compared to the overall average of $1.3 million invested.

Stunning, right? And the top reason given by investors? "It's a pipeline problem" (back to the lead-off quote of this article). My response? "That. Is. Just. False." It's not a pipeline problem, it's a power problem.

When it comes to inclusion, our high-growth entrepreneurial ecosystem is in desperate need of disruption. Its problems are systemic, embedded deeply in the way our culture thinks about entrepreneurship. The people we prop up, the ideas we invest in, the decision making structures we use, and the concepts that we employ are built upon a long history of institutional bias. Bias that quite intentionally created structures concentrating power largely in the hands of white men.

Now, the same degree of intentionality that created these structures all those years ago needs to go into disrupting them to seize the enormous opportunity of talent, innovation and profit-making potential that's being under-leveraged.

Let's start with these three disruptions we could do right now for immediate impact:

1. Diversify the decision-makers.

He who makes the rules, well, rules. 92 percent of investment partners in the top 100 VCs are men, typically highly educated, wealthy and white. Given how bias works and network sourcing investment opportunities work, it shouldn't be surprising that a similarly large majority of startup funding goes to the same demographic.

With increasing data pointing to the profit and performance dividends from diverse companies, investors should be incentivized to: 1. disrupt the inside game by adding more diversity to the investment decision maker pool -- women and investors of color will see markets and profit streams currently unseen; and 2. disrupt the outside game by adding more diversity to their sourcing spaces -- search outside the three VC hotspots and Ivy League schools; there's exciting opportunities brewing all over this country.

2. Disrupt the rules.

Bringing intentionality to changing the culture of and sourcing standards for entrepreneurship to level the playing field for all entrepreneurs could go a long way in diversifying the space.

First, a culture reset. The bro-ish, sexist culture that permeates the entrepreneurship ecosystem is toxic, stacking the odds against women. Without an intense focus on setting and maintaining the right culture, the toxic one thrives and drives. 2018 is proving to be the year where women's stories of discrimination, harassment and assault are actually disrupting the system. While Ellen Pao may have lost her lawsuit, her story paved the way for others to speak out -- Susan Fowler, Elizabeth Scott, Amlie Lamont. And the #MeToo campaign provided the power of numbers cover for victims that exposed what we can no longer pretend is an isolated problem.

Diversity at the investment decision making level will help reset the culture, as will heightened intentionality around ways in which to create an inclusive environment on-site (think: bean bags, kegs, and ping pong aren't everyone's ideal accelerator or office furnishings); introduce more options for networking and ideation (think: open office hours as alternatives to drinks and dinners); and let's remember, most guys are good guys -- let's not assume bad intent on the whole lot.

Second, a pitch competition rethink. The pitch competition has become the ubiquitous vehicle for proving your company's worth. But bias enters the space in ways that disadvantage founders who are not male. Turns out, venture investors prefer pitches by attractive men, and male founders tend to be asked "promotion-oriented questions" while female founders are asked "prevention-oriented" questions, skewing funding male. Recent innovations are having interesting results in terms of diversifying the space. Village Capital deploys a peer selection model and Springboard Enterprises has a "Dolphin Tank" which is less about a competition than a channeling of expertise to help entrepreneurs take the next step.

Third, a pattern recognition wake-up call. Many investors use pattern recognition to source deals. With bias quite literally baked into the code, as Doug Speight puts it in his brilliant Medium piece, "pattern recognition is bias turned practice." It's time to upgrade the code to reflect diversity dividends in the data and expand investor networks to intentionally hit more inclusive markets.

3. Create a new power base.

Assimilation has been very practical advice for those wishing to break into the entrepreneurship space -- an effort to "level the playing field" by essentially playing by the rules and within the structures built by the current power base. That tactic has delivered the woeful stats above. See, the problem with power is that those who have it, even if unconsciously, resist ceding or sharing it. Underrepresented groups can continue to "lean in" and overrepresented groups can make room. But in the choice between continuing to try to level the current playing field, hoping it will seize the opportunities the data presents, or creating a new playing field, I'm increasingly tipping to the latter.

Perhaps it's time for a revolution. A time where we very intentionally encourage and then scale new power coalitions. Like the surge of new investment funds by women for women (like All Raise, Ellevest's Impact Portfolios, Golden Seeds, Rethink Impact, Brava Investments, Female Founders Fund, The Helm, and WE Capital) and by funders of color for entrepreneurs of color (Backstage Capital, Impact America Fund, Catalyst Fund, Cross Culture Ventures, and Black Angel Tech Fund). Or financing platforms like crowdfunding which offer greater opportunities to redistribute entrepreneurship dividends and democratize the space (iFundWomen, Seed Invest, Kickstarter). Founders themselves are recognizing their own power to disrupt by joining forces in the #FoundersForChange coalition, committing to factoring in the race and gender composition of potential investor firms into their decision making.

And let's keep our eye on one very important ball -- women are expected to hold half of the private wealth in the United States by 2020, to the tune of $11 trillion. This may be the biggest disruptor of all in terms of supporting diverse start-ups, driving social enterprises and the impact investing movement, and redistributing power and wealth in the country.

Remember that old saying, "if you can't beat 'em, join 'em"? When the benefits of diversifying entrepreneurship continue to be under-recognized, under-leveraged and under-seized, it may well be time for a strategy of "if you can't join 'em, beat 'em."

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