Friday Letter: Three steps to reducing VC’s gender funding gap

New research finds that more comprehensive and data-driven decision-making materially reduces the gender fundraising gap.

Implementing a simple three-step process during start-up valuation due diligence can increase VC funding opportunities for women-led start-ups by up to 5x, according to new research by Village Capital and its partners.

In 2021, 85 percent of global VC funding went to start-ups with only men on the founding team. “We see this persistent gender financing gap in the VC industry and it really hasn’t shifted much over the past decade,” said Heather Strachan Matranga, vice-president and managing director of impact investments at Village Capital.

“In fact, accelerators are unintentionally exacerbating the gap specifically when it comes to equity fundraising,” Matranga continued. “They are really effective at helping men-led start-ups raise funding, but they don’t appear to have any impact on the ability for women-led start-ups to raise funding.”

Village Capital conducted a controlled experiment involving 69 start-ups that scored each other to decide who would receive investment. A control group assessed the start-ups using their own evaluation methodology, while a separate group introduced three additional steps into their evaluation frameworks.

The scores of women-led start-ups saw a large improvement when the new steps were added, increasing 5x more than in the control group, where investors only used a standard evaluation framework. The steps were as follows:

  1. Determine your investment priorities upfront by predefining what criteria will most heavily determine the assessment of a company;
  2. Add more structure to your assessment of the start-up by incorporating a tool to better consider and evaluate risks and growth opportunities;
  3. Use more data in your assessment of the founding team’s potential based on their past performance.

The steps make no reference to gender. Village Capital innovations manager Nathaly Botero explained that “we designed the study in a way that didn’t specifically look at the gender composition of the team. The toolkit was only designed to make evaluations more consistent, comprehensive and data driven.

“Often a lot of the messaging around investing in more women tends to be misinterpreted as, ‘We should invest in more women because it’s the right thing to do,’ but when really it’s just smart business. It’s not just because it’s a good thing to do.”

Village Capital, based in Washington, DC, seeks to “drive more investment to entrepreneurs from diverse backgrounds.” The firm collaborated with the International Finance Corporation and the Women Entrepreneurs Finance Initiative on the research.

Fund-level diversity

Elsewhere, social impact investor Pivotal Ventures and women-owned VC platform Recast Capital unveiled a catalytic program designed to stimulate women-led US VC funds.

The program will “support women-led emerging venture funds by providing access to Recast’s established enablement program,” according to a press release. The enablement program includes educational content, professional development resources and executive coaching, as well as capital “to be leveraged in support of each fund’s back-end operations.”

“A huge issue that still remains is the fact that it takes women and underrepresented GPs twice as long to raise their venture funds, and building the back-office infrastructure to run a fund is highly time and resource-intensive,” said Sara Zulkosky, co-founder and managing partner of Recast Capital. “We saw an opportunity to launch a program that would leverage catalytic capital to help accelerate this progress, providing education and financial support to new female-led funds.”