With the colossal amount of venture capital floating around in 1999 – a year in which you needed little more than a business plan and a pulse to get funded – you would think that since women make up half the population and account for approximately 40% of all businesses in the U.S., they would have no problem securing their share of the VC jackpot. That thought would make even more sense after you took a look at the statistics.
According to the National Foundation for Women Business Owners, at the end of 1999, there were approximately 9.1 million women-owned businesses, representing an increase of more than 103% since 1987. Those 9.1 million businesses generate more than $3.6 trillion in revenue and employ nearly 28 million people.
Here’s one more statistic, the amount of venture capital received by women doubled from 1998 to 1999. Sounds impressive – except the amount of venture capital received only grew to a mere 4% from a 2% pittance.
So why is it that in 1999, a record shattering year, when the VC industry invested more than $50 billion, according to Venture Economics, women only received 4% of all venture funding doled out.
The Diana Project, a recent study conducted by Boston University, came up with possible factors that help to explain why women receive such a small percentage of total VC funding. The study cites the types of businesses women start – typically in the services and retail sectors – their management style and the existence of an “Old Boys” network as factors in the relative pittance venture capitalists commit to women-owned businesses.
However, women entrepreneurs need not feel discouraged. There is an increasing number of women-owned or focused venture capital firms cropping up, and they are working hard to ensure that women entrepreneurs find a pot of financing gold at the end of the Silicon rainbow.
One of the newest entrants is Boston-based Axxon Capital LP. Founded last August by Sheryl Marshall, a former stockbroker and vice president at Donaldson, Lufkin & Jenrette, and Paula Groves, a former partner with Triumph Capital Group, Axxon recently held a first close on $12 million for its premier fund targeted to cap around $50 million, and foresees a second closing by the end of the year. Axxon is also seeking to be licensed as a Small Business Investment Company (SBIC), which would make the firm eligible to leverage up to twice its private capital through the U.S. Small Business Administration.
Some other women-focused firms that have been around for a few years include Women’s Capital Growth Fund (WCGF), based in Washington D.C., and Inroads Capital Partners, based in Evanston, Illinois.
WCGF, a $30 million venture fund created in 1997, focuses on early- and expansion-stage companies owned or led by women, as well as those making products aimed at women. In addition, more than 70% of the fund’s 70 investors are women. The firm has plans to raise a second fund, targeted at $70 million in the fall, said Patty Abramson, a co-founder of Women’s Capital Growth Fund.
“We started our fund because we recognized that there was an untapped market niche. We saw that women ran 40% of the businesses and they were only getting 3% to 4% of VC funding,” Abramson said.
Inroads Capital Partners, founded in 1995, is credited as being the first women-focused fund. The firm manages a $50 million fund, making investments ranging from $1 million to $4 million. Sona Wang, one of Inroads’ co-founders and a 15-year veteran of the venture business says she knew first-hand that women entrepreneurs were not finding their way to venture capitalists, let alone successfully getting funding from them and that was nearly six years ago. “Things have gotten better, but not significantly, it was pretty stark back in ’94 and ’95,” said Wang. “What really compelled us in forming Inroads is that the miniscule level of funding women were receiving could not be justified at a time when 30% of all businesses in the country were women-owned and growing at twice the rate of all businesses,” added Wang.
Overcoming the Hurdles
Most agreed that women’s biggest obstacle is really lack of access to capital. The “Old Boys” network is extremely prevalent in the VC arena, where who you know is literally everything. One would think that – whether a man or a woman – if you have a solid business plan and a proven, experienced management team you should be able to secure funding. That is, so long as you are somehow plugged into the VC network.
“If you are not part of that network, you are not going to get through the door, firms like Draper Fisher [Jurvetson] or Kleiner Perkins [Caulfield & Byers] aren’t going to let you in, unless your part of that “Old Boys” network and someone they know, knows you,” adds Marshall.
“Access to capital is one of the biggest hurdles,” said WGCF’s Abramson. She says women didn’t have access into the network which was male-dominated. “It wasn’t about discrimination, it was about it being an “Old Boys” network, there are very few women in venture funds and even fewer women who run venture firms,” she added. Historically, women have not run venture-backed businesses. It has only been during the last five to 10 years that women have started running technology businesses and the types of businesses that VCs prefer to back.
While access to capital is the biggest hurdle to overcome, the difficulty in obtaining VC funding also has to do with the types of businesses women tend to start. “There are a bunch of businesses that most men don’t get, such as online wedding registries and beauty sites,” said Abramson. Axxon’s Marshall concurs, “I remember a story of a woman entrepreneur going into see a bunch of male VCs to get funding for a wedding registry Web site, now it would only take me about three seconds to understand the need for such a site.” The same could probably be said if a male VC came in to pitch an online golf site to a group of female VCs. “People just do business with people that they know and invest in businesses they understand,” said Marshall.
Although a tad biased in its name, Sona Wang referred to the “Beer Test”. “Male VCs will admit to you that entrepreneurs have to pass their “beer test.” In other words, they have to feel comfortable enough to go and get a beer afterwards, and talk in a less threatening environment – I think a lot of VCs feel that way,” she said. Abramson also said she thinks comfort level with the entrepreneur(s) is absolutely a huge part of doing a deal. “When you think about it logically, who would you invite to a party, who do you want to play golf with. You tend to gravitate to people who look like you, talk like you and act like you.” Wang said, “There’s a greater comfort level in backing entrepreneurs who share more in common with you. These are marriages of sort, it’s a long-term partnership – a highly illiquid situation that sees many bumps in the road during the life of the investment, and you want to back people whose behavior you feel is predictable. It’s a way to mitigate some of the risk.”
The Playing Field is Leveling Out
While women may not be receiving their fair share of venture capital, the New Economy, especially the Internet, has helped to level out the playing field. “In the New Economy, people are able to start companies in ways they never could have years ago,” said Paula Groves, co-founder of Axxon Capital. “And it turns out that many of the women in the New Economy are as equally, if not better, trained than the men. That was not the case years ago,” she added.
In fact women from all stages of life are jumping into the dotcom arena. “We are seeing a whole bunch of older women who have bumped up against the glass ceiling, as well as younger women who have been trained on Wall Street. It’s very exciting and people come to see us with some fabulous ideas,” says Axxon’s Marshall. Abramson noted, that more and more young women are coming out of business schools and colleges that never had any intentions of working in Corporate America’, who say that’s not the game I want to play. I want to run my own company. “We jokingly say that these were the girls that ran the best lemonade stands on the block,” she added.
Providing a Springboard
In addition to the Women’s Growth Capital Fund, Patty Abramson is also involved as one of the organizers of Springboard 2000, a women-only venture fair hosted by the National Women’s Business Council, the Forum for Women Entrepreneurs and the Center for Women and Enterprise.
The national venture fairs were designed to help broaden the investment channels for women entrepreneurs and to facilitate investments in their firms by all venture investors. At the July event, – the second in a series of five events to be held this year – held in Dulles, Va. at America Online’s headquarters, 45 women-led companies seeking seed-, early- and later-stage funding presented their business plans.
The 45 presenting companies were chosen from a field of 300 applicants by a committee of the region’s leading venture capitalists and service providers, and are based throughout the Mid-Atlantic region, from New York down to Atlanta, Ga.
At the previous Springboard 2000 event held at the Oracle Conference Center, 26 female entrepreneurs were selected to present – out of a field of 350 – their present their businesses to about 150 venture capitalists and investors.
Springboard’s third event will be held in November at the Harvard Business School in Cambridge, Mass.