Picture a classroom-style conference room with 50 angel and venture capital investors. A young woman of color pitches her startup: a promising team with great traction in a sector that’s poised to explode. When she’s done, hands shoot up into the air for questions. She points to the first one she sees. And this is what he asks:
“Are you married?”
As absurd as it might sound, this is a true story. I was there. In fact it was at our own demo day years back, the conclusion of the Female Founders Alliance accelerator for women and nonbinary founders. The investors in the audience were mostly men. In fact they were mostly good men.
Every day, women and nonbinary founders raising capital for their startups have to pitch rooms just like this. Rooms where, at best, they are lonely and uncomfortable, and at worst, they’re judged, belittled, and dismissed. Tess Gadwa, the founder of data visualization startup Lotus.fm, shared a far more common but also more insidious story. “I had a VC pitch meeting arranged that a mentor has set up for me. At the end of the pitch, this VC thanked me for my time and then followed up by saying, ‘No one is doubting your technical abilities.’ Why would he even feel the need to say that?” Two years after this meeting, Gadwa successfully sold her startup.
By and large, the rooms where we pitch are still full of mostly men. A new study released today by Women in VC, the largest global community of its kind, finds that of all U.S.-based VC partners, only 4.9% are women, with 33% of them being women of color. Less than half (2.4% of the total) are founding partners, who control an outsize proportion of a firm’s investment decisions.
“We don’t think it is a pipeline problem, but the data speaks for itself: Women are tremendously underrepresented at the General Partner level in venture,” says Sutian Dong, a venture investor and cofounder of Women in VC. “We believe that historically, it’s been a combination of factors: network-based recruiting, delayed promotions, and an overall lack of ‘culture fit’ at some firms that leads partner- and principal-level women to look for different opportunities.”
That’s likely why a growing number of women are foregoing the traditional path and building their own VC firms from the ground up. In the last five years, the number of women-led funds has nearly quadrupled, and it continues to accelerate. “Career advancement can be limited or take years at venture firms, if there even is a path to an equal partnership,” says Jessica Peltz Zatulove, a VC investor and cofounder of Women in VC. “Starting a small ‘proof of concept’ fund can be the fastest way for women to get ahead in venture and build a track record.”
According to the data, the 275 new VC funds started and led by women represent a massive economy-wide opportunity. These funds are poised to invest in 7,000 companies in the coming years, potentially creating more than 80,000 jobs. When these companies have meaningful exits—like getting acquired, or listing in the public stock exchanges—the wealth created will go some ways to improving the gender wealth gap. And when that new wealth is reinvested, it will most likely go to a new generation of underrepresented founders. The potential for a positive flywheel is awe-inspiring.
However, the durability of these small, first time funds is still very tenuous. Ninety percent of all women-led funds are considered “emerging” managers, with 73% of them founded in just the past five years, 23% currently raising their first fund, and 44% deploying it. These new funds have not been investing long enough to establish a track record. They need years for their portfolios to mature, for companies to exit, and for their investors to realize returns.
Raising a fund is a huge feat for all VCs, but especially for new funds run by industry outsiders with little experience and nontraditional backgrounds, all of which describe your average emerging fund manager. And while mainstream institutional investors—those who traditionally invest in VC funds—have started to focus on the diversity of the fund managers they support, the bulk of their dollars are not available to emerging managers until their funds are larger and their track record established.
Even as these new VCs attempt the impossible, they are limited in their ability to run a full fund operation on a micro-fund budget. The economics of a small VC fund are punishing: most funds charge 2% of assets under management to operate the fund. That means that a $10,000,000 fund must subsist on a $200,000 annual operating budget. This might sound like a lot, until you take into account that this budget must pay for salaries, payroll tax, rent, travel, legal fees, and every other aspect of operating a business.
“It’s important to recognize that women-led fund managers are founders too—just a different type of business,” says Zatulove. “There are a lot of parallels with the fundraising experience that women managers have to the stories you hear from female founders of startups.”
I know a lot about the challenges faced by women trying to raise venture capital, both from experience and from stories I’ve heard from the companies in my community. In every year since it’s been measured, less than 3% of venture capital is invested in women-founded companies in the US. And although slow progress was being made, last quarter was the lowest funding for women founders in more than three years.
The lack of women on the other side of the table is a big reason why, and an addressable one. Women VC partners are twice as likely to invest in startups with at least one woman founder and more than three times as likely to invest in startups with a woman CEO, according to data from Pitchbook and All Raise. That’s why the explosion in new VC funds raised by women is as critical as it is heartening. And why it’s so important for the whole ecosystem to get behind them.
Leslie Feinzaig is the founder & CEO of the Female Founders Alliance.