Pension funds, pay attention to your constituents

Expert blog - 18 April 2024

The gender investment gap is as yawning as it was a decade ago. Simone Brummelhuis, partner and fund director of Borski Fund, believes pension funds and government have a role to play in closing the innovation gap.

Recently, it emerged that some Dutch pension funds have invested in deep tech venture funds. It is a nice step, which I too advocated earlier. It would be nice if pension funds have inclusive innovation in mind when determining their investment strategy.

Over the past decade, venture capital investment quadrupled and the number of companies started by women continued to grow to 35 per cent of the total. However, the percentage of venture capital going to companies founded by women has hardly changed since 2012. Currently, less than 2 per cent of Dutch VC capital goes to female entrepreneurs. So little investment money goes to multicultural founders that they 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 persists, but there are also solutions. Inspired by an article from Harvard Business Review, here I make an attempt to translate solutions to the Dutch context.

Who sits at the decision-making table?

Diversity affects the way companies find and identify entrepreneurial talent, evaluate opportunities and allocate capital. On the investor side, only 6 per cent of partners at venture capital (VC) funds are women. Adding to this, 87 per cent of VC funds have no female investors in the team at all. Of informal investors, 95 per cent are men. And let these informal investors and VC funds decide which innovations to invest in. For example, in scooters and second-hand watches and not in fem-tech.

In the Netherlands, a significant part of the capital invested in VC funds comes from the government via RvO, the Regional Development Companies, the European Investment Fund and Invest-NL. Private money comes mostly from family offices and from tech entrepreneurs who have successfully sold their businesses. Again, diversity at the decision-making table is still a major concern.

The consequence of this investment gap is not only an equity gap, but therefore, above all, an innovation gap. The solution lies with the entire investment chain: it can use its position to close the above gaps.

Venture capital is needed for inclusive innovation

Women together and women and men together develop different and sometimes even stronger innovations than male-only teams. Furthermore, these innovations are often also sustainable venture capital does not yet sufficiently seize this opportunity. The cause lies in a number of well-documented reasons: gender stereotypes, unconscious bias, systemic economic barriers and investors' preference for serial entrepreneurs.

Government actually lags behind in support for initiatives addressing status quo

We focus specifically on technology and diversity with Borski Fund as a venture capital fund. This is how we address the status quo. Yet we too run into barriers in this regard. At Borski Fund, private investors have committed to 80 per cent of the fund size, including all major banks, as well as some family offices and informal investors, 70 per cent of whom are women. A very nice achievement.

However, the government has only signed up through RvO, LIOF and NOM. Should another major party like Invest-NL or the European Investment Fund invest, Borski Fund could make an even greater impact for inclusive innovation. The Dutch government does not (yet) have a 'gender lens investing' policy, while the EIF has already taken steps in this direction.

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 now joining in for the first time in the Netherlands. Let them apply a gender lens to their venture capital policies from the start. Especially now that pension fund board members and managers are indicating that diversity and inclusion is important.

Especially those pension funds whose constituency consists of very many female employees have a leading role to play in investing in inclusive innovation. Precisely from their position, they can make a meaningful difference by funding specific venture capital funds and holding other funds accountable. In addition, they can adopt new guidelines to promote investment in venture capital funds that are committed to gender diversity.

Before climate, this was done

Institutional investors, whether working individually or collectively to force systemic change, have done so before. By mid-2020, nearly 450 institutional investors representing more than $ 41 trillion in assets joined the Climate Action 100+. They set specific targets for board representation and emissions reductions and put pressure on companies to make more climate-friendly choices.

The positive result is more transparency on a company's carbon footprint and better data on the flow of capital to companies based on climate-relevant activities. In a short time, institutional investors created an urgency and momentum for climate action that previously did not exist on a large scale.

From the exception to the norm

If large amounts of venture capital are provided to diversity, its economic impact will reach far and wide, and women entrepreneurs will use their talent, experiences and insights to build start-ups into large profitable companies. And there will be more innovations that will make the whole society better. But this will only happen if we make a systemic change and shift funding for promising women and multicultural founders from the exception to the norm.

We continue to argue that the government should explicitly take its role in inclusive innovation, just as pension funds can.