May 3, 2021
Recently the FD headlined that the government no longer has a role to invest in start-ups, there is enough money for all young companies. In this speech, the investment gap was briefly forgotten ...
Indeed, over the past decade, venture capital investments have quadrupled and the number of businesses started by women grew to 35% of the total. However, the percentage of venture capital that goes to companies founded by women has barely changed since 2012. At the moment, less than 2% of the Dutch VC capital goes to female entrepreneurs. So little investment money goes to multicultural founders that these hardly exist in the statistics. Why is this so skewed? The easy answer is: because we choose what we know and what we are used to. There are a number of reasons why this inequality continues, but there are also solutions. Inspired by an article from Harvard Business Review, I try to translate solutions into the Dutch context here. And I hope that several investors will climb into the pen with me.
Who is at the decision-making table?
Diversity affects how companies find and identify entrepreneurial talent, evaluate opportunities and allocate capital. On the investor side, only 6% of venture capital (VC) fund partners are female. In addition, 87% of the VC funds have no female investors on the team at all. Of the informal investors, 95% is male. And let these informal investors and VC funds precisely determine in which innovations are invested. For example in scooters and in 2e hands watches and not fem-tech.
In the Netherlands, an important part of the capital invested in VC funds comes from the government through RvO, the 'Regional Development Companies', the European Investment Fund and Invest-NL. Private money often comes from family offices and tech entrepreneurs who have successfully sold their business. Here too, diversity at the decision-making table is still a major point of attention.
Consequence of this investment gap is not just one power gap, but also one innovation gap. The solution is that the entire chain of investment can use its position to tackle the above-mentioned gaps.
Despite results, venture capital does not go for diversity
Research repeatedly shows that companies led by a diverse team perform significantly better. Diverse leadership improves financial performance and women with each other and women and men together develop different and sometimes even stronger innovations than teams with only men. Furthermore, these innovations are often also sustainable. However, despite the convincing performance data, venture capital is not seizing this opportunity. The cause lies in a number of well-documented reasons: gender stereotypes, unconscious bias, systemic economic barriers, and investor preference for serial entrepreneurs.
Government lags behind in support for initiatives that tackle the status quo
We focus with TheNextWomenCrowd Fund and Borski Fund as venture capital funds specifically on technology and diversity. This is how we tackle the status quo. Yet we also encounter barriers in this respect. At Borski Fund, private investors have committed to 80% of the fund size, including all major banks, as well as some family offices and informal investors, of which 70% are female. A very nice achievement. However, the government has only joined via RvO, LIOF and NOM. If another large party such as Invest-NL or the European Investment Fund were to invest, Borski Fund could make even more impact. The #fundright initiative, backed by Techleap, has brought more commitment from fund managers, but initial results are limited. The government does not (yet) know 'gender lens investing ' policy.
Government and private parties in the US, England and Canada lead by example
In the United States, there are numerous networks and really large funds that specifically provide venture capital to female entrepreneurs and female founders with high potential. Examples include Female Founders Fund, Astia and AmplifyHer. There, banks like Morgan Stanley, Bank of America Goldman Sachs and well-known investors like Andreesen Horowitz and the SoftBank funds have joined to address the gap. And there exists a super angel investor like Melinda Gates, who has committed $ 1 billion to invest in female fund managers and female entrepreneurs. In England and Canada, the government has a major role in making businesses and investments more diverse. They do have a specific gender lens investing policies and invest in specific venture capital funds for this purpose.
Institutional investors can create urgency and momentum
Institutional investors - universities, pension funds and insurance companies - are the lifeblood of venture capital in the USA, but are not (yet) participating in the Netherlands. Nevertheless, board members and managers of pension funds in the Netherlands also indicate that diversity and inclusion are important. It is precisely from their position that they can make a meaningful difference by financing specific venture capital funds and calling other funds to account. In addition, they can adopt new guidelines that promote investment in venture capital funds that are committed to gender diversity.
This has already been done for the climate
Institutional investors, whether working individually or collectively to enforce systemic change, have done this before. By mid-2020, nearly 450 institutional investors representing more than $ 41 trillion in assets will have joined the Climate Action 100+. They set specific goals for board representation and emission reduction and put pressure on companies to make more climate-friendly choices. The positive result is more transparency about a company's carbon footprint and better data on the flow of capital to companies based on climate-relevant activities. In a short space of time, institutional investors created an urgency and momentum for climate action that did not previously exist on a large scale.
From the exception to the norm
When large amounts of venture capital are provided to diversity, its economic impact will reach far-reaching and women entrepreneurs will use their talent, experiences and insights to grow start-ups into large profitable ones. And there will be more innovations that will improve society as a whole. But… this will only happen if we create a new capital paradigm and shift funding for promising women and multicultural founders from the exception to the norm.
So we are not there yet, but we remain optimistic that the government will still take up its role, just as the pension funds can do. Thank you for reading to the end, that's a start.
In the photo founders Simone Brummelhuis and Laura Rooseboom during the launch of the Borski Fund in Amsterdam. Photo by Desiree Engelage.