Going Beyond 2%

With female founders under-represented across the board, is there a place where they stand a higher chance of success than others?

It is now common knowledge that only 2% of the billions of dollars invested in startups globally every year are allocated to female founders.

Female founders are few and far between, with the vast majority still unable to secure VC backing. The “why” remains unknown. In 2020, female-founded companies reported twice the return per dollar invested than their male counterparts. There is empirical evidence that demonstrates investing in diverse founding teams results in 25% higher valuations. The literature on the positive impact of gender diverse investment portfolios on the bottom line is expansive and empirical. Yet, how do we justify that the yearly growth rate of total capital invested in female-founded start-ups is decelerating, reaching an all-time low of 15% between 2016 to 2020, from 20% in 2013?

The statistics are bleak across geographies, but what is happening at the micro levels of stage and sector? Do female founders stand a better chance of being funded if they are in some industries as opposed to others? Is there a relationship between the stage of the company and its likelihood of receiving VC backing? Does geography play a role?

On Industry

The data paints a clear picture:

VC-backed female founders are found in larger concentrations in specific sectors, including healthcare and education. Is it thus plausible there is a relationship between funding for women-led start-ups and the industry in which they operate? Or is it mere correlation?

Why does this correlation exist? Could it be the prevalence of female leaders in those industries? For example, when exploring a correlation between the leadership roles of Fortune 500 companies and companies (co)founded by women, we found that 12% of Fortune 500 companies in healthcare have female CEOs, and 11% of healthcare start-ups are female founded. Meanwhile, 6% of Fortune 500 construction and real estate companies on the Fortune 500 list have female CEOs and 5% of 2021-funded proptech or construction start-ups were founded or co-founded by women.  Whereas the data and reasoning is not sufficient to drive a straight correlation across industries, other industries see similar data points, causing us to ask why this might be the case – could it be that leadership roles provide inspiration to younger women, or confidence to investors?

Since healthcare and education are typically and historically female-dominated sectors, and in the last 24 months both have exhibited record momentum in attracting venture investment, does this mean we will see an increase in venture dollars allocated to women? Global venture investment in EdTech is set to break a record by the end of the year, already amassing $15 billion in funding as of Q3 2021. The healthcare sector is also growing at unprecedented levels, with 2021 being digital health’s best funded year to date, with $21.3 billion being allocated, globally, in the first nine months.

On Stage and Series

Women-led businesses experience a downward trend in capital allocated as they travel across their lifecycles. 23% of seed dollars, 19% of early-stage funding, and 9% of late-stage funding went to companies with at least one female founder in 2020. These numbers are even lower for sole female founders. Over the past five years, more than 2,000 companies with sole female founders have been funded in the US, according to Crunchbase. Of these companies, 75% are at the seed stage, 20% are at early stage, and 5% are late stage. 

Combined, what does this mean at a later stage, when the company moves into the realm of public markets? Women-led private companies who are successful at going public can be counted on one hand: four of 2020’s 442 IPOs were female-founded companies; less than 1%. Of the four, three were digital health companies and the other was in EdTech (the irony!). Considering women are typically more funded in those industries, is it possible women make it in some industries and not in others, and that a correlation exists between sector and the success of women-led businesses? …and what does that mean for female founders in male-dominated industries?

On Geography

With the exception of East Asia, predominantly China, where representation of female-led businesses is highest by value and count, the story is geography-agnostic. In Africa, while women run 40% of SMEs, they receive a mere 1% of funding from VCs. While venture funding is breaking records on a quarterly basis in emerging markets, funding for female founders has not witnessed commensurate growth, with only 7% of total private equity and venture capital funding going to female-led businesses.

The subject of underfunded female founders has been a point of discussion for some time now, with the numbers changing painfully slowly. The recognition that the venture industry is not conducive to women sustainably raising funding rounds is becoming a common, widely-accepted, reality.

As the world continues to encourage entrepreneurship from increasingly younger ages across educational institutions, it only makes sense to explore different methods to encourage and enable women to grow their companies through their lifecycles, from ideation all the way through to exits or IPOs, and empowering them to become leaders in their own rights. Perhaps then, the 2% can slowly become 3%. That would amount to roughly $30 billion in additional funding – imagine that!