Australia’s sophisticated investor rules are hurting female founders 

Angel investing in Australia is currently a boys club. 

A LinkedIn search for Angel Investor, location Australia, results in page after page of a 9:1 male to female ratio.

It’s not something they (the boys) did maliciously, but something that absolutely needs to be fixed.

The data is all too real and familiar, we’ve all heard the recent stat: “Female founders secured only 2% of venture capital in the U.S. in 2021”. When it comes to raising capital, males consistently outperform females, while women-led businesses face a more challenging journey to secure funding. 

According to a 2020 report from Women in VC, only 4.9% of Venture Capital partners in the U.S. are female. When there is a lack of diversity among investment decision-makers, they tend to invest in only a small portion of opportunities that exist, based on their experiences and networks.

One way to influence the ratio of women writing checks, would be to increase the number of female angel investors. Many VCs start out as angels before they move into venture capital.

Why are we seeing such a huge gender gap in the people who fund startups?

I believe it’s a cycle, the ‘cycle of funding’ if you will:

• Founders have traditionally been and are currently skewed towards being more male than female. 
• A founder’s first funding round is often friends & family. 
• Men tend to have more male friends than female friends. When they raise a friends & family round, they naturally go to their group of [mostly male] friends, because that’s who they know.
• So their first cap table is skewed male, if not entirely male.
• Then when the founders go to raise the next round, those male angel investors then go out to their networks sharing the startup with their, you guessed it, mostly male friends. 
• When the founder goes to raise from VCs, they are more likely to be funded, because they already have early validation from angels. Further, startups with a warm introduction to a VC were 13 times more likely to get funding than those without, one study from British Business Bank found.
• When the startup has a successful exit, the founder and all of the early investors make bank. With an exit and money in their pockets, they are more likely to start a new company or reinvest that cash into the next startup, thus, the cycle starts over again.

It’s a cycle that simply needs to be broken.

While I’m meeting more and more female angel investors in recent times, most female founders I talk to still say they aren’t yet seeing a difference in the investor mix they’re pitching to.

What needs to be done to break it? Here’s four things I believe are needed as a starting point:

First, founders need to think purposefully about their cap table from day one. All founders should be purposely making room for diversity (not just gender by the way) and putting in the work to create diversity in their shareholders.

Second, the wholesale investor status rules NEED to be updated. Specifically, we need to create a path to wholesale status through education and experience. The sophisticated investor tests favour men for two reasons, first because we still have a gender pay gap in Australia. Second, because the age at which professionals might naturally reach the income required to meet the income test, is also the age at which women tend to bear children.

If we don’t have enough women participating in the pre-seed and seed investment landscape, we’ll continue to struggle to bridge the gap of female founders. Lauren Capelin, Principal at Startmate, recently put forward proposed policy changes in this space. 

Third, let’s get more women around the Investment Committee (IC) table. Promisingly, it looks like the ratio is changing and more funds are bringing on women partners (recently we celebrated Jackie & Elicia at AirTree, Jessy at Afterwork Ventures, and several others), however we would be well-served to see this accelerated. When there are women in the room at IC, the ratio of male to female founders who get funded will start to even out.

Fourth and finally, those writing checks need to look at the data and prioritise investing in female founders. Data collected by First Round Capital, for example, found that the female-founder companies it had funded performed 63% better than the all-male founding teams it had funded. Adding further credence, research from the Kauffman Foundation found that women-led teams generate a 35% higher return on investment than all-male teams.

It’s time we finally break new ground in terms of closing the gender gap that exists between female and male founders seeking funding. Founders along with VCs and angel investors have the greatest power to fuel the change.

I believe that as a greater pool of investors comes into the angel investing space, it will bring more diversity and less bias.

More women investors leads to more female founders funded, which will lead to more exits for women-led businesses. More successful female founders means more women who will have the ability to reinvest back into the ecosystem later, either as second time founders or as angel investors. 

It’s critical for women to step up and get involved. There has never been a more important, or exciting  time for women to take the step into angel investing. 

To help in this, I am opening up my calendar to any women who would like to chat or learn about angel investing.