There are many reasons why this happens, but unconscious bias among investors is almost certainly a major factor. This is how to fix it.
“Research shows that men sell themselves better than women do in situations such as pitches, appraisals, and application processes. But thankfully, more research is showing female-led businesses and more gender-balanced teams outperform male-dominated companies.”
These are the words of Andreata Muforo, a partner at TLcom Capital. The research she cites is by the Boston Consulting Group, which shows clearly that female-led startups deliver significantly higher returns compared to businesses begun by their male counterparts. So are investors avoiding women-led startups when they make deals?
The investment numbers say, absolutely, yes. Africa’s startup ecosystem is presently on track to raise more than $3 billion in 2021, double what it raised last year. However, in Africa, startups by women – whether founded alone or in like-sex teams – account for less than 1% or $21 million of funding. Something is seriously wrong with this picture.
The irony is that Africa is a world leader in female entrepreneurship. Women make up more than 58% of all entrepreneurs in Africa. Women are also more likely than men to be entrepreneurial.
Despite this, since 2013, only 3% of private equity capital raised in Africa went to all-female founding teams, compared to the 76% that went to all-male teams. And as more capital is being raised, women are getting less and less.
Women make up more than 58% of all entrepreneurs in Africa
These figures are far from being unique to Africa, however. In the U.S., for example, the amount of venture capital funding to female entrepreneurs in 2021 is at a five-year low at 2.2%. The all-time high in 2019 was 2.8%
So why are investors passing up women-led startups?
VC deal flow does not discount for gender bias
One of the biggest reasons investors pass up brilliant businesses led by women is that they have a deal-flow problem. Venture capital is a very relational affair, and it is still a very “male-dominated industry that relies on network effect and warm introductions for deal sourcing,” says Muforo.
Even without meaning to, this unbalanced composition and the fact that investors usually rely on external due diligence helps to create a bandwagon effect that effectively keeps women out.
Modern private equity in Africa is relatively new. In Africa, women are still battling the effects of being sidelined for decades. When venture capitalists do not take this into account, traditional gender biases in African society will seep into the decision making on who is to receive funding and who is not.
Muforo says that this “creates two hindrances for female entrepreneurs. First, there is a lack of understanding amongst investors of female entrepreneurs building ‘female perspective’ businesses. And second, a large majority of investor deal pipelines [tap into] male-heavy investor networks.”
These are fatal flaws: traditional venture capital creates and reinforces a cognitive bias in how investors evaluate women-led startups.
Investors simply trust women less
Recent research published by the International Finance Corporation in 2020 suggests that investors may hesitate to invest in women-led companies because they believe it is riskier despite the lack of evidence.
In 2018, Harvard researchers similarly observed that investors tend to ask men about their startup’s potential gains but women about their potential losses.
Muforo says that there is both unconscious and conscious “bias among investors on what makes a ‘strong entrepreneur’.” These biases impact their decision-making. There are certain “alpha male” traits that investors have identified as signs of strong leadership, including the ability to be very dominant and oversell yourself.”
Suppose stakeholders are serious about closing the gender investment gap. In that case, they must first admit that the way startups are evaluated is flawed. It may be unintended, but traditional ways of discovering investor-worthy ideas keep women out and perpetuate the gender investment gap.
Many complain that there are not enough women-led startups in the first place, but if they have been shut out, why should there be more?
Funding female-led business is good business
One of the ways investors can help close the gap is to acknowledge the data. As the research cited above shows, without doubt, giving more women more money to grow their business is good business. It’s not charity, and the investors are not doing women a favour.
Women-led teams produce higher returns, which means that the current funding disparities are an opportunity for bold investors to discover diamonds in this massive untapped community of entrepreneurial talent, especially in earlier stages.
“At TLcom Capital, we have been especially deliberate about female representation, and our senior investment team and committees” are equally represented between men and women, says Muforo. She adds that TLcom Capital has “proactively built robust networks of female founders in our deal-flow pipeline.”
Muforo wants more women to become investors. “For investors, we must place [an] emphasis on building gender-balanced VC teams, even before we include female-led startups in our portfolios. This representation broadens the investor’s network to include more women and provides access to more female-led businesses.”
Muforo also has some words of advice for female founders and teams.
“It’s important to bring your best self when approaching investors. You should be an expert on all matters related to your business, i.e., the market, competition, business economics, et cetera.
“Additionally, before approaching investors, learn about them and spend time researching their strategies as this enables you to curate accurately the type of investors you’re speaking with. Lastly, secure warm introductions, if possible, and pitch with boldness when given the opportunity,” she advises.
EDITOR’S UPDATE: Between the time that this article was written and it was published, new data has emerged. But the data from different sources appear inconclusive and contradictory.
On the one hand, Partech Partners reports that total funding announced by African startups in 2021 hit an all-time high of $5.2 billion, of which female-led startups raised 16%. On the other hand, Africa: The Big Deal reports a total African funding pool of $4.33 billion in 2021 with only 1% of that going to all-female founders.
Observant readers may notice that the categorisations of the two organisations differ and that “all-female founders” may be a subset of “female-led startups”, which might account for the differential. Either way, the figures suggest that startups with women in senior management find it more difficult to get funding. This is an issue on which we will continue to monitor and report – Ed.
Source: incafrica.com