Why Venture Capitalists Want to Fund Women-Led Startups

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July 23 2014 11:48 AM

Why Venture Capitalists Want to Fund Women-Led Startups

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More women welcomed

Photo by David Paul Morris/Getty Images

This article first appeared in Business Insider.

As we all know by now, the tech industry is overwhelmingly male. And when it comes to women entrepreneurs running VC-backed startups, the numbers are even more abysmal. While about half the small businesses in the U.S. are founded by women, in the tech industry women founders represent less than 7 percent of startups that get VC funding, according to research from MIT.

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Business Insider recently looked at 26 of the top venture capital funds in Silicon Valley and found that the percentage of female-founded startups in their portfolios ranged from 19 percent to a paltry 4 percent.

That creates a spiral effect. With so few women-led startups, that means fewer women-led companies exit with a big acquisition or have a big IPO. VCs like to bet on experience and success. And that leaves fewer women with that kind of background ... and so the wheel turns.

But, just like we're seeing signs that more women are entering college to study computer science, math, and engineering, we could be on the cusp of a new age in VC funding of women-led startups.

So says early-stage tech investor Boris Wertz, a founding partner of Canadian Version One Ventures (Flurry, Indiegogo), board partner of powerhouse Valley venture firm, Andreessen Horowitz, and founders of startup accelerator GrowLab.

Wertz says he's seeing a "drastic increase" in women-led startups, with half the companies he's invested in in 2014 led by women. To be fair, that big 50 percent number is a bit misleading. It's not a high absolute number: three out of six companies. Overall 25 percent of Version One's portfolio has a woman founder, which adds up to a mere five companies.

But he's convinced we're on the tip of a much bigger iceberg because of a couple of factors:

  • More women are pitching a broader range of startup ideas.
  • The costs of creating a startup are lower for everyone, giving women a better shot of getting their startups off the ground before they ask for investment.
  • Women are proving to be better at managing their investment money once they get it.
  •  

Business Insider: What are you seeing in the U.S. with female founders?

Boris Wertz: We, at Version One Ventures, have seen a pretty drastic increase in the number of female founders. Over seven years of investing in 50+ start-ups, the share of female founders in our portfolio has risen from 5-10% in the early years to 50% in 2014.

BI: What kinds of startups are women pitching and are they different then all-male founded startups?

BW: In the past, female CEOs were largely limited to those areas where they have a distinct advantage over their male counterparts, i.e. selling primarily to a female audience. But today we’re seeing women building companies across all sectors and areas. Some of this trend might be due to the favorable environment for first-time entrepreneurs. The rise of the cloud computing and software-as-a-service has eliminated many of the upfront expenditures needed for a tech start-up, creating opportunities for a more diverse range of entrepreneurs, including women, to bring their ideas to market.

BI: Do the women tend to be coders/programmers/engineers ... the ones developing the products?

BW: We see an increasing amount of female founders that are engineers by background. Probably still fewer compared to their male counterparts but an encouraging trend. Having said that, you don't need to be an engineer to develop a good product  and/or be a successful founder.

BI: Do you think we'll soon be at 50 percent women-led tech startups ... or what's the indication of how long this might take?

BW: I think it will take some time to get there (despite the encouraging data point of the Version One portfolio in 2014 with 50 percent female founders). This is a very positive development, as the broader the entrepreneurial base the better.

Gender diversity, as with diversity of any kind, results in a fuller range of ideas, perspectives, and approaches to problems. And an interesting study found that women-run private tech companies are more capital-efficient and bring in a 35 percent higher return on investment (and 12 percent higher when venture backed)

Julie Bort is the enterprise computing editor at Business Insider. Follow her on Twitter.

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