Women-led VCs hit milestone but still face significant fundraising challenges

Three firms led by women have grabbed the VC industry’s attention in recent months by closing funds of more than $1 billion each. In February, veteran venture capitalist Kirsten Green announced that Forerunner Ventures had closed on $1 billion for its sixth fund. The following month, Mary Meeker closed on $2.5 billion for Bond’s third fund (just a year after raising $2 billion for its sophomore vehicle), and Katie Haun raised a combined $1.5 billion for two funds for Haun Ventures.

“It’s definitely unusual to see that and it’s really positive for the industry,” says Christine Tsai, CEO and founding partner of 500 Global, an early-stage venture fund that runs growth and accelerator programs that have supported more than 2,600 companies in 81 countries. In some ways the new billion-dollar funds signal progress, but “it also shows we still have a long way to go because of the sheer fact that it is huge news,” Tsai says.

Raising such large amounts of capital is so common among male-led firms that nobody thinks much of it. Until women are able to routinely raise large funds and more female-led funds have emerged, the glass ceiling will remain largely in place, Tsai says. “There’s maybe a few more cracks happening, but it’s still there.”

A better metric by which to gauge advances by female VCs may be dollars raised by female managers as a percentage of total fundraising, says Nisha Dua, managing partner and co-founder of BBG Ventures, which closed its third fund for $50 million in March 2021. Based on that metric, not much progress has been made.

Venture capital raised by female-led funds as a proportion of total capital raised inched up from 1.8 percent to 2.1 percent between 2008 and 2022, while capital raised by funds co-founded by women and men climbed more dramatically from 6.6 to 13.6 percent over the same period, although that was down from a peak of 15.9 percent in 2017, according to Pitchbook.

“The big challenge I would expect there is as a percentage of total,” Dua says. “That probably hasn’t changed because so many new funds have been raised, and my guess is the majority of those funds have been raised by men.”

Sailing in choppy waters

One thing that makes fundraising difficult for female VC managers is navigating “a complex sea of so many different kinds of LPs, from high-net-worth individuals, family offices and fund of funds, to endowments, pensions and foundations,” Joanna Drake, founder and managing partner of Magnify Ventures, writes in an email. That’s very different from the “pretty clear playbook” that enables start-up founders to “run a timed process with venture firms.” Magnify announced yesterday that it had closed on $52 million for a debut fund anchored by Pivotal Ventures, a Melinda French Gates company.

Although most LPs seem willing to take introductory meetings to learn about and start tracking new GPs, few give clear and timely “nos,” without which a newer fund manager could spend years fundraising without reaching her target, Drake says. That was one reason she co-founded Raise Global, which brings together veteran fundraisers and more communicative LPs to share insights on successful fundraising with promising early managers and introduce them to receptive potential investors, she said.

Emerging GPs should understand that LPs want to build a relationship over time in many cases, which allows them to resolve doubts as to whether the founding GPs’ partnership will last and whether their investing instincts will prove out, says Dua.

A key challenge in VC is that it can take five to seven years to see whether a bet on a fund’s strategy is good or not, Dua adds. In raising BBG’s first fund, Dua and her partners spent nearly two years getting to know their LPs. BBG had closed half of its third fund when Covid hit, spurring LPs to shut down for several months to assess where the market was headed.

“That was a great opportunity to put our heads down, start investing and show evidence of what we said we were going to do,” Dua says. BBG’s third fund closed in March 2021 for $50 million, a big leap forward from the $10 million raised for its first two funds.

Dua agrees that a major obstacle right now is that many existing funds are coming back more quickly for re-ups from LPs, who do not have enough capacity to back new VC funds while nurturing the longer-standing relationships they have.

Another hurdle for emerging GPs is coming from the pressure that valuations in the public markets have been under this year. While institutional investors are still waiting to see first-quarter valuations, many LPs are overweight in their VC allocations versus what they were at the end of 2021.

Trying to manage the percentage of dollars they have exposed to venture will make it hard for LPs to activate new relationships in the current market environment, says Addie Lerner, founder and managing partner of Avid Ventures, which closed its most recent fund for $72 million in February 2021.

Confronting bias

Investors feel more comfortable betting early on men than on women, though nobody will admit it, says Tsai. For her part, Lerner sees biases against backing female-led funds as more unconscious than intentional. From a higher-pitched voice to other characteristics, including a younger age, women often do not fit the image that LPs have for a general partner, which is an older white male, says Lerner.

“It all comes down to confidence and trust,” Lerner states. “LPs are trusting venture managers with significant amounts of capital, and often very important capital [from foundations, pensions and endowments]. So, these LPs want to make sure they’re picking managers who will safeguard that capital and inspire confidence.”

That unconscious bias also applies to solo GPs. When she was fundraising as a solo GP, Lerner heard repeatedly from LPs and friends who are fund managers that certain LPs prefer not to back solo managers.

“I understand the logic for that,” she said. “There’s theoretically much better decision-making that happens in partnerships and teams. There’s key man risk – if someone gets hit by a bus. It’s much nicer to have someone to share the burden of the stress with.”

Lerner sees bias in certain LPs’ preference for teams that have worked together before. “By definition, that tends to exclude diverse managers – both female managers, as well as managers from untraditional backgrounds.”

Since there is little diversity among managers at existing firms, when LPs seek spinout partners who have already worked together, “they’re going to be looking at a subset of potential partnerships that will look far less diverse,” she says.

Fostering more diversity in VC fund management will require examining how to address the reservations some LPs have about solo GPs and new teams of women who have not worked together before, and help them become more comfortable with taking those risks,” Lerner adds.

Reliance on track records itself is problematic due to gender disparities in firms granting departing managers attribution for the deals they have closed, says Lerner. “A lot of women, especially if they were more junior at their prior firm, might not be able to negotiate leaving with that track record.”

One structural change LPs could make to support managers who cannot get legal rights to their track record is to be willing to talk to the prior firm’s founders, former colleagues and co-investors to try to confirm that the track record exists, Lerner suggests. Plenty of LPs will do that, but others will not, she adds.

Sisterly advice

Tsai recommends that women seeking to start a fund get on investors’ radars early and develop relationships with them. For women who believe their superpower is the ability to connect with people, “that’s a huge advantage in terms of getting in front of LPs that don’t necessarily invest in first-time managers,” but prefer to track how they perform over time, she says.

Lerner suggests women who are new managers should not wait to start investing until their full fundraising target has been reached. In raising her early funds, she learned “when you can make some initial investments while fundraising and actually be able to show investors the kinds of investments you make, the kind of access they’ll get,” it helps to create momentum in fundraising.

Tsai believes many women do not appreciate how much time they need to spend networking. “It’s very much a people business at the end of the day,” she says. Tsai also recommends thinking about raising funds in the long term, rather than aiming to raise just one fund and be done with it.

Maryam Haque, executive director of the nonprofit Venture Forward, suggests female emerging managers focus on family offices and high-net-worth individuals, which are showing increasing interest in venture. “They don’t have the same large-scale investment requirements as pension funds and other leading institutional investors” and are a better fit for GPs raising smaller amounts, she says.