How female founders and investors are shaking up venture capital

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Sarah Chen, Co Founder & Managing Partner, Beyond The Billion & The Billion Dollar Fund for Women

  • Majority of venture capital investment goes to all-male teams, but investors are recognizing the opportunity of investing into gender diverse teams.
  • Bold systemic change is needed to create an equitable playing field for female founders founders and the funds that invest in them.
  • DecaBillion+, a joint initiative by Beyond the Billion and High Water Women recognizes this untapped potential and plans to mobilize beyond $10 billion to invest in female founders.

This is one of a series of articles written by Young Global Leaders with action-oriented ideas to improve the state of the world by 2030.

In an unexpected turn of events, the Global Venture Capital (VC) industry reached an all-time high of $300 billion. Despite this historic growth, 2020 ended with a worrying trend: a drastic decline in VC financing for female founders.

I’m often asked “why?” – why the disconnect when the rate of women starting businesses continues to grow rapidly and consistently outperforms? Beyond the often cited numbers of 63% higher performance, female founders are exiting quicker and at higher valuations – a key metric for private investors.

Image: Pitchbook.

The answer is a combination of well-documented issues, from unconscious bias and stereotyping parading as pattern-matching, lack of diversity in venture capital itself and structural barriers. And let’s not forget what the #MeToo movement revealed: the hostility women have to deal with in homogeneous spaces.

There is another piece of the puzzle that doesn’t often make the main headlines: the role Limited Partners (LPs) invested into these VC funds can and should play in holding VCs/General Partners (GPs) accountable for practices that widen both the gender and racial gap. This realization inspired the joint proposal of DecaBillion+, an initiative by Beyond The Billion (BTB) – a global consortium of over 90 investors pledged to invest and actively deploy over $1 billion to female founders – and High Water Women, a network of 1,500 women investment professionals working across asset classes and industries, whose member firms represent over $1 trillion of assets under management.

What is DecaBillion+?:

A Manhattan Project for women in innovation, DecaBillion+ is a systemic game-changer that addresses the lack of capital flows to women by:

A national capital commitment campaign: In an otherwise opaque landscape, highlighting leaders in the LP community who are investing into diverse funds – fueling women-led innovation – will serve as a call to action, to effect change by putting their dollars where their values are. LPs are encouraged to pledge dollar amounts to be deployed in the next five years (minimum) as internal targets.

Cracking the institutional investor code: To enable execution on pledges, DecaBillion+ will leverage platforms to easily source, carry out due diligence and aggregate investments across smaller funds. Thus, addressing structural and scale issues which LPs struggle with.

Incentivizing accountability: What gets measured gets done. But diversity reporting has never been truly incentivized, until now. Enhanced visibility with diversity data, as an assessment criteria, will make it no longer acceptable for fund managers not to invest into women-founded companies.

What’s the World Economic Forum doing about the gender gap?

The World Economic Forum has been measuring gender gaps since 2006 in the annual Global Gender Gap Report.

The Global Gender Gap Report tracks progress towards closing gender gaps on a national level. To turn these insights into concrete action and national progress, we have developed the Closing the Gender Gap Accelerators model for public private collaboration.

These accelerators have been convened in Argentina, Chile, Colombia, Costa Rica, Dominican Republic, Panama and Peru in partnership with the InterAmerican Development Bank.

In 2019 Egypt became the first country in the Middle East and Africa to launch a Closing the Gender Gap Accelerator. While more women than men are now enrolled in university, women represent only a little over a third of professional and technical workers in Egypt. Women who are in the workforce are also less likely to be paid the same as their male colleagues for equivalent work or to reach senior management roles.

In these countries CEOs and ministers are working together in a three-year time frame on policies that help to further close the economic gender gaps in their countries. This includes extended parental leave, subsidized childcare and removing unconscious bias in recruitment, retention and promotion practices.

If you are a business in one of the Closing the Gender Gap Accelerator countries you can join the local membership base.

If you are a business or government in a country where we currently do not have a Closing the Gender Gap Accelerator you can reach out to us to explore opportunities for setting one up.

Collective power of capital

In the wake of the racial reckoning, we saw the power of collective action in influencing change. Applying this notion to the investment landscape has been the basis of BTB’s work in mobilizing $1 billion towards female founders and extends to different applications: Racial Justice Investing coalition, which has pledged to dismantle systemic racism, and Climate Action 100+.

DecaBillion+ takes inspiration from these initiatives and takes it up a notch with a capital campaign paired with an incentivized mechanism for reporting. While pledged amounts will not be revealed at the outset, a leaderboard of the top three investors will be trackable.

Mismatch of legacy LP structures and diversity

The pledge initiative has proven effective in securing fund manager commitments, however scaling remains challenging due to:

1) LP investment profile constraints: most institutions (75% of VC investors) can’t write a cheque for less than $100 million, or own more than 30% of a fund to avoid controlling interests. While fund-of-funds exist, double fees are one many shy away from.

2) A misaligned incentive system inhibits change, despite a growing supply of more diverse firms and a lot of talk about proxy indicators; LPs still require an “attributable track record” which favours GPs who have already been decision makers at more established firms. With 65% of all VC firms still without female decision makers, what do we think the result would be? Let’s also not forget that only 1.3% of all US financial assets are managed by women and people of colour.

DecaBillion+ will work to overcome these challenges by building awareness and engagement of early adopters to influence others. This will require engaging influential investors to commit, deploy, be successful and be heard.

What gets measured, and rewarded, gets done

Beyond that, we must create new baseline practices that determine how funds get funnelled. DecaBillion+ will work with LPs to:

1) Integrate racial and gender diversity reporting: ensure it’s part of the investment process. At a minimum, measuring diverse leadership of portfolio companies and capital committed at the GP level. While 65% of LPs have said that diversity is important, only 25% raise the question in diligence. Beyond a diversity audit, tie this data to performance and payouts for investment managers.

2) Extend assessment criteria: track record should be redefined to include GPs past performance as startup operators, executives and ecosystem players which reflect their ability to source, pick and manage investments.

3) Apply term-limits to GP selections: Use the Rooney rule to avoid automatic reups into the same managers without considering other applicants, including other platforms which include emerging managers.

4) Build public data on diversity metrics at LP and GP level: Building on the work that Crunchbase has started at founder level, to examine LPs and GPs. Crunchbase has proven the possibility of expanding data sets in a manner that upholds integrity, and similarly, this exercise must be applied to originate data from trusted sources.

The risk here – given our approach not to “blame and shame” – is selection bias will favour those already doing well in diversity, creating fragmented groups. However, we believe that this will exert necessary pressure with capital at stake. For VCs to truly shift there needs to be enough LP investor momentum and external public pressure. By measuring the positive trend and holding investors accountable, we believe we can shift the culture and create a knock-on effect in other markets for much needed, urgent change – so, are you in, or out?

This decade the world will likely witness more social, economic and environmental changes than over the last century. While the COVID-19 pandemic called for immediate reforms, the mainstreaming of stakeholder capitalism, the impacts of climate change, the escalation of next-generation technologies, and the empowerment of citizenship will pave the way for a ‘resetting’ of the global economy and social practices.

This article series presents pioneering, forward-looking, and action-oriented ideas that should be adopted up to 2030 to improve the state of the world. The WEF invited a group of individuals who have been selected as Young Global Leaders (YGLs) in the course of their careers. Authors include heads of government, business leaders and scientists, prominent intellectuals or civil society leaders.

On an annual basis and since 2004, the World Economic Forum identifies the world’s most promising leaders under the age of 40 — people driving innovation for positive change across civil society, arts, culture, government and business. This series, an initiative of the Forum of Young Global Leaders of the World Economic Forum, harnesses the expertise and experience of this group of leaders.

For additional information on the article series, please contact Rodrigo Tavares (curator).

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

International community agrees on a road map for resolving the tax challenges arising from digitalisation of the economy

‘Crimes against humanity,’ ‘war crimes’ and risk of new ethnic violence in DR Congo, warn UN experts

Statement by OECD Secretary-General Angel Gurría on the outcome of COP 25

‘Maintain calm’ and ‘exercise patience’ UN envoy urges, as Nigeria heads to polls

The refugee crisis seen through the eyes of a young doctor from Turkey

Cleantech innovation is being stifled. Here’s how to unlock it

Basel III rules relaxed: Banks got it all but become more prone to crisis

These are the world’s 10 most innovative economies

4 myths about corruption

How to reimagine our cities as hubs for biodiversity, conservation and climate resilience

OECD and European Commission join forces to further support structural reforms in European countries

3 ways to protect LGBTI rights across the world

Commission disburses €14 billion under SURE to nine Member States

Protecting refugees in Europe: UNHCR calls for a ‘year of change’

‘Bicycle Kingdom’ makes a comeback, as China seeks solutions to tackle air pollution crisis

GSMA Announces First Keynote Speakers for 2019 “MWC Los Angeles, in Partnership with CTIA”

Palliative Care: A Gap to fill in healthcare service

5G will redefine entire business models. Here’s how

‘Catastrophic’ healthcare costs put mothers and newborns at risk

The Eurogroup protects Germany and blames others

How to talk about climate change: 5 tips from the front lines

Global Cooperation for Local Action: Fighting antimicrobial resistance

The future of crypto-assets, from opportunities to policy implications

This is what different countries are doing to stop coronavirus from spreading

Future-proofing the European banking market – removing the obstacles to exit

Why trade wars have no winners

Ηealth’s foundation is falling apart: what can we do about it?

European Commission and European Investment Fund launch €75 million BlueInvest Fund

Trade war or not New York bankers will have it their way

How building renovations can speed up the electric vehicle revolution

European Youth Capital 2018 : Cascais

Central African Republic: Guterres says UN mission committed to protecting civilians, helping stabilize country, as violence flares

Turkey needs to step up investment in renewables to curb emissions

Commissioner for Crisis Management in Kabul: EU steps up humanitarian assistance with €32 million

Senior UN children’s advocate says they ‘should never be targeted by violence’

A Sting Exclusive, the European Commissioner for Energy Günther Oettinger writes for the Sting on “EU Industry: a major energizer”

Chart of the day: These are the cities where the World Cup threatens productivity the most

Wash your hands, but keep your mind clean

Human rights breaches in Bangladesh, Cuba and Vietnam

New UN-supported farming app is cream of crop in tackling Sahel pest

Privatisation and public health: a question of Human Rights

Can this billion-dollar initiative save the world’s tropical forests?

European Investment Bank to borrow €70 billion in 2013

‘These are very dark times for Yemen’: senior UN official on air strike mass casualties

Why and how did ISIS and Muslim fundamentalism gain momentum this year?

Brexit: when the hubris of one man can set the UK, the EU and the entire world on fire

Warmongers ready to chew what is left of social protection spending

State aid: Commission refers United Kingdom to European Court for failure to fully recover illegal tax exemption aid of up to around €100 million in Gibraltar

Youth Forum calls on Parliament to ease entry into Europe for young people

Better sanitation for India is in the pipeline

Why transparency in drug pricing is more complicated than it seems

COVID-19: faster authorisation for vaccines adapted to variants

As inequality grows, the UN fights for a fairer world

DiscoverEU: 20,000 more young people will explore Europe in 2020

‘Undersea gardeners’ are restoring Jamaica’s lost coral reefs

The global response to the coronavirus pandemic must not be undermined by bribery

Banks must take bold action to fight climate change. This is how they can do it

COVID-19 threatens the developing world’s small businesses. This is how to save them

Chronic illnesses: UN stands up to stop 41 million avoidable deaths per year

Mediterranean migrant drownings should spur greater action by European countries, urge UN agencies

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s