Mimi Aboubaker Contributor
Mimi Aboubaker is an entrepreneur and writer.
In 2021, $330 billion in venture capital was deployed, and only 2% of that number went to women-only companies and 15.6% to teams with both women and men on their founding teams, according to PitchBook data.
In my opinion, the correct statistic is about 18%, not 2% – as we have to factor in deals with mixed gender founding teams. Eighteen percent of $330 billion translates to $59 billion, or 25% of all venture transactions (e.g. number of deals), and these three numbers are the numbers to report.
It’s disrespectful to exclude founding teams with both women and men from fundraising statistics for companies founded by women, period. By doing this, all the success of the fundraising and leadership work that underpins it is attributed to the founders being men, effectively promoting gender bias.
Aside from the layoffs of companies with mixed-gender founding teams that had huge successes in 2021 – think Alloy (which reached unicorn status), Cityblock Health (which raised $600 million) and Nubank (which ended the year with a record-breaking IPO) – the right statistic reflects a dramatic change in gender inequality.
At 2%, only one in every 50 venture dollars is allocated to women-founded companies, while 18% put it on the margins of one in five venture dollars. Both indicate that there is more to do in this area, but they illustrate different starting points and, by extension, the area to be covered.
We still have work to do, but we’re not pushing a boulder up a hill – we’re already halfway there.
If our ultimate goal is to understand the current state of opportunity and its expansion over time, we need, in the words of John Doerr, to measure what matters: representation in early stage financing.
In concrete terms, we must follow the following measures: (i) the number of first institutional round venture deals, (ii) the demographics of the founders of those companies and (iii) the composition of the financiers on an annual cohort basis. The rest is noise.
I’ve gathered the most recent numbers, and PitchBook-NVCA data shows that in 2021, female founders (defined here to include mixed-gender teams) secured 24% of the first funding deals that revealed the founders’ identities. (Of the 4,375 deals, 3,659 revealed the identities of the founders, and 895 were female-led or led by individuals of either gender.)
From this perspective, one in four first-time financing deals involves a company with a female founder — a dramatically different picture than the outrageous 2% story circulating in the industry. Again, we still have work to do, but we’re not pushing a boulder up a hill – we’re halfway there.
To put the number into context, women-founded companies account for about 24% of annual first-time financing transactions that we know have had mixed teams since 2017. From 2012-2016, this number hovered around 20%, and by mid-to-late 2010, the number was in the mid-teens. This means that the first financing transactions to companies with female founders have grown faster than the general first financing transactions.
The data backs this up, as the number of female founders and aggregate first-time funding growth is 1.6x compared to 1.4x from 2016 to 2021, 1.4x to 1.1x from 2011 to 2016, and 3.8x to 2, 2x from 2006 to 2011, respectively.¹ Based on a five-year compound annual growth rate (CAGR), the numbers are 6.2% and 2.5%, respectively, for female founders and the overall market for first-time funding for 2015-2020. ²
The slower growth in first-time venture deal financing over the past 15 years is perhaps most surprising given the significant rise in the number of emerging fund managers, particularly those with investment mandates for female founders, female venture capitalists and pledges. from well-known companies to support for underrepresented founders in recent years.
This raises questions about the effectiveness of reporting and related advocacy initiatives.
We need better reporting to the financier
How did all the top funds score in 2021 across different founder backgrounds? Unclear. How do emerging fund managers compare to established companies? Unclear.
If I’m a new high net worth individual interested in becoming a limited partner (LP) in funds with the best first-money-in track record on female founders, black founders, immigrant founders, or other affinity areas…how does everyone rank on deal count base? Unclear.
Is it really true that female investors are leading more first-time financing transactions in companies founded by women? Unclear. What percent of emerging fund managers are raising and investing in pre-seed or seed – which is the bottleneck of opportunity – versus Series A and B? Unclear.
Without funding-side reporting to match the rigor of founder-side analysis, coverage falls short to provide true accountability. Distinguish between those in charge and those who lag behind, as well as first check writers — the ones who really sponsor opportunities — from others who support women by different definitions. It’s worth it, because benchmarking funds and investors on deal count allows all participants in the ecosystem to trade more efficiently based on their priorities.
In addition, capital allocations to female founders should be segmented into racial, socioeconomic, and academic subgroups, as women also have prejudices. Homosexuality, which supports the thesis that more female investors will produce more female founders, doesn’t just cut through gender lines — it cuts through pedigree, sociodemographic, behavioral and intrapersonal characteristics.
The homogeneous selection of female founders, the challenges and personal development discussed, and the proposed solutions to problems of inequality so far show that this is true. Furthermore, trickle-down representation just feels inadequate for many individuals.
While there are limits to how detailed we can be with firm-reported data, the point remains: you can’t hold responsible individuals whose records are unclear, and accountability brings out the best in people.
The problem with aggregate deal value numbers
Aggregated numbers contain many confounding factors that make them meaningless statistics.
I’ll illustrate it using edtech, which had another blockbuster. However, the fact that Guild Education (founded by women) raised a $150 million Series E, Handshake (founded by men) raised an $80 million Series E, and Outschool (founded by men) raised $185 million over a Series C and Series D in 2021 tells us nothing about current access to capital for underrepresented founders or gender disparities in capital allocations.
That’s because, while these three companies brought in $415 million in 2021, their fundraising successes today are a result of being given an opportunity six or seven years ago and consistently delivering results.
In short, annual deal value is a lagging indicator, skewed by late-stage funding in companies founded five to ten years ago, and it suffers from survivability bias, as funding after the first round of funding is dependent on performance.
Furthermore, deal value is not a comparable metric for numerous reasons. The concentration of founders in different industries, the capital intensity of these industries, the phase distribution of companies, and management’s business planning (e.g. how much runway to pick up, whether to optimize for growth or profitability, etc.) fundraising statistics.
All of this makes the number less meaningful than it appears at first glance, and ineffective for gender-level comparison.
As an illustrative example, Cruise, a male-founded autonomous vehicle (AV) company, raised $3 billion in 2021, accounting for nearly 1% of the year’s venture capital dollars. This transaction alone was more than the $2.6 billion female founders who signed more than 135 deals in the digital health sector, an industry that had a historic year.
There is work to be done, but pretending that the total value of a deal is the measure that matters is malpractice. If real accountability is the goal, the ecosystem would be better served with a more rigorous progress scorecard — one that focuses on first-financing deals based on the number of deals, splits female founders into subgroups, and benchmarks fund participation.
1: The numbers for the first funding of growth by female founders are derived from the change in growth in the total number of deals with female founders (including mixed-gender teams) in the years mentioned. For 2016-2021 it is 895/570 for 1.6x. For 2011 to 2016 it is 570/395 for 1.4x. For 2006-2011 this is 579/151 for 3.8x. Total initial funding growth rates are derived using the change in growth in the total number of deals where founder gender was reported – total number of deals (total) minus the number of deals with undisclosed gender composition of the founding team (not disclosed) – in the years referenced. For 2016-2021 this is 3,659/2,662 for 1.4x. For 2011 to 2016 this is 2,662/2,433 for 1.1x. For 2006-2011 this is 2,917/1,325 for 2.2x.
2: These figures were derived using the CAGR formula using the total number of deals for female founders (including mixed-gender teams) and the total number of deals (Total) minus the number of deals with the undisclosed gender composition of the founding team (Undisclosed). For 2015-2020, the inputs for the female founders calculation are 771 and 570, and the inputs for the total founders calculation are 3,017 and 2,662.
This post Data obscures positive trends in VC dollars reaching female-founded startups – TechCrunch
was original published at “https://techcrunch.com/2022/03/24/data-obscures-positive-trends-in-vc-dollars-reaching-women-founded-startups/”
