The Illusion Of Venture Capital For Female Founders

Camille Kapaun

As a female founder with an early stage e-commerce business, I often answer questions about my fundraising plans and goals. Once a week I am told, “You’re a woman, so you’ll have such an easier time raising from VCs” and am asked questions like, “There is so much money out there right now for female founders, why would you not raise Venture Capital?”

The Reality of the Current Landscape for Female Founders

Based on the frequency and pervasiveness of these comments, one might assume there is a huge boom in Venture Capital being invested in female-founded companies. Yet, when you look at statistics, this does not seem to be the case. Since 2011, the amount of VC dollars granted to teams of only women has ranged from 1.8% to 2.7%; it currently sits at 2.0%.

While the gender gap is slowly moving in the right direction in some sectors, the disparity in funding seems to remain stagnant. What is creating this illusion of ‘easy’ fundraising as a female founder?

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Since 2011, the amount of VC dollars granted to teams of only women has ranged from 1.8% to 2.7%; it currently sits at 2.0%.

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Year after year roughly 2% of Venture Capital investments go to companies solely founded by women, and yet people are under the misconception that raising as a female founder might impart some advantage. Given these dismal statistics, why is there a prevailing illusion that it will be easier for a company with a female founder to fundraise? There are four reasons that may explain this phenomenon:

1) A Record Breaking Year for Venture Capital

Venture capital investment in the United States has spiked since the mid-2000s. This astonishing fundraising has led to larger investment amounts and increased valuations, evidenced by the number of unicorns established in the market year over year. 500 venture capital-backed unicorns reached valuations over $1 billion in 2021. If the first few months of 2022 are any indication of what the rest of the year has in store, the amount of capital at play hasn’t slowed down.

Yet there has been a disproportionate blow to the women entrepreneurs raising venture capital—this percentage is not increasing. VC Funding for women actually dipped from 2.2% in 2020 to 2.0% in 2021, the lowest since 2016. So, perhaps this flood of capital to the startup ecosystem has made some believe that access to this capital has increased for women as well, when in reality women are receiving a shrinking slice of the pie.

2) ESG and the Tokenization of Female Decision Makers

In the business world, ESG (Environmental, Social, and Governance criteria for investing) has become increasingly mainstream, but some firms are still playing catch-up. To meet growing expectations around Diversity and Inclusion, VCs are rushing to release ESG reports about their initiatives to increase female representation on boards and in C-suites. Announcing these promotions are great for firm reputations and make people feel good, but the facts on the ground tell a different story of the true progress being made.

Newly appointed women in C-Suites do not constitute a big enough step towards progress. Only about 12% of decision makers at VC firms are women, and 65% of firms still do not have a single female partner according to an analysis last year. If there is to be an increase in the success of diverse founders, there must first be a much larger increase in diversity at the capital allocator and partner level.

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This flood of capital to the startup ecosystem has made some believe that access to this capital has increased for women as well, when in reality women are receiving a shrinking slice of the pie.

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3) Headlines are Creating a Facade of Progress

Headlines of women-led IPOs and unicorns receive a lot of media attention, which makes these success stories easier to recall and more vivid in our minds. For example, seeing Whitney Wolfe Heard in the news for the IPO of her company, Bumble, allows people to visualize what a success story looks like. Whitney, with her son resting on her hip at the Nasdaq opening, becomes a vividly available data point supporting the idea that women everywhere are finally having their moment. However, these one-off success stories do not change the numbers; in reality there have only been ~20 female founders to take companies public.

Availability bias tricks our brain into thinking there must be more than a single example because we can readily picture it in our heads. Allowing ourselves to fall victim to this bias means that people are more likely to ignore real statistics. This creates the dangerous illusion that great progress has been made for women founders across the spectrum when this is not the case.

Further, these headlines and readily available press releases can lead many to believe that, because there is so much attention on this issue, the problem must already be solved. This phenomenon is known as the bystander effect. The downstream effect of the bystander effect is that those with access to capital will then feel less urgency to put their money to work for female founders. At the end of the day, women are still not receiving a fair share of the opportunities despite what headlines may make people believe.

4) Female Focused Funds Aren’t Yet Equipped to be the Final Solution

There are an increasing number of funds and incubators that specifically aim to support female founders. While these initiatives are a fantastic first step, they are not yet at a scale that would solve the funding disparity. These funds get a disproportionate amount of media attention, but they are new and underfunded compared to their large, legacy counterparts. This means that these female-focused funds do not have the resources to make ‘big bets’ on female founders in a way that could meaningfully close the investment gap.

How Can Investments be Directed to Women Entrepreneurs?

The economic benefits of investing in women are well documented. By some estimates, equal entrepreneurial participation by men and women could add $5 trillion to the global economy. Other studies show that businesses founded by women ultimately deliver higher revenue—more than twice as much per dollar invested—than those founded by men. While research shows that investing in women is good for business, VC dollars have not been directed accordingly. So, what steps should be taken to help the venture capital ecosystem finally catch up?

Becoming Aware of the Bias During VC Pitches

Male entrepreneurs are known to raise higher levels of funding than their female counterparts (for every $1 men raise in early stage venture capital, women raise an average of $0.38). There are many theories that exist explaining why this may be. One potential answer may lie within the questions that investors ask entrepreneurs when they pitch. Male founders are more often asked “promotion” focused questions (ex: why they will succeed) compared to female founders who are asked prevention-focused questions (ex: why they will not fail). When men are asked questions about their potential for gains and women are asked about their potential for losses, a substantial funding differential occurs. Examining comparable companies, one study observed that entrepreneurs who were asked primarily “prevention” questions only raised an average $2.3 million for their companies, roughly seven times less than the $16.8 million raised by founders who were mostly asked “promotion” questions.

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By some estimates, equal entrepreneurial participation by men and women could add $5 trillion to the global economy.

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The more VCs become cognizant of this kind of bias currently integrated into the fundraising ecosystem, the more evenhandedly these Q&A sessions can be conducted. Being aware of this phenomenon can help investors approach interactions more consciously. If investors pose a balance of promotion and prevention questions to both men and women, they will improve the diligence of their decision-making process and give startups a fair playing field.

Debunking the Belief that Investing in Male Founders is Less Risky

Some speculate that the pandemic made investors more likely to stick to their existing networks in an attempt to de-risk their investments. This meant that investors were leaning on their existing networks, which often leads to pattern-matching habits. Seeking the same kinds of companies that they’ve supported in the past means investing in more companies led by men.

The solution to this bias is not for VCs to start supporting startups simply because they’re founded by women. Instead, there needs to be progress toward weeding out the institutional patterns and thinking that prevent VC firms from recognizing the great potential of ideas presented to them.

If the past two years have taught the business world anything, it is that dramatic change is needed. It is unlikely that I am the only one constantly facing misconceptions about the perceived advantages of being a female founder. Should I choose to raise capital from venture capital firms in my future, it will likely be an uphill battle. Until then, my hope is that VCs will increase their advocacy and play a larger role in changing the balance of power and funds.

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Camille Kapaun (‘22) is co-founder and CEO of Nightingale, a DTC e-commerce platform focused on bringing moments of joy, through gifting, to loved ones battling cancer or long-term illness. She is responsible for the company’s operations, branding, marketing and fundraising.

Prior to founding Nightingale, Camille worked at Dig (formerly Dig Inn) and Mondelez International where she held various roles in Innovation, Strategy, and Growth. She will be bringing her entrepreneurial skills to the Global Innovation team at Anheuser Busch this summer.

Camille holds a BS in Food Science and Business from Cornell University, a Culinary Degree from The Institute of Culinary Education, and an MBA from Columbia University.