The true cost of underinvesting in women-led funds and companies
The venture capital industry has a serious gender inequality problem. Only 12% of women make decisions at many venture capital firms, and most firms still do not have female partners. Founding partners represent only 2.4% of all partners. This is critical because founding partners primarily control a company’s investment decisions.
One of the results of this lack of gender inclusion in asset management companies is the similarly abysmal funding from Venture Capital to female-led startups. In 2020, just 2.3% of venture capital investment went to female-led startups, Crunchbase data shows.
The pandemic has exacerbated this with a 27% reduction in venture funding for female-led startups in 2020.
This lack of investment in venture capital funds and women-led startups has many reverberating repercussions across the global economy.
Less representativeness = less innovation
When half the population is excluded from venture capital funding, there is a huge loss in dealing with half of the world’s pain points, a missed chance to deliver products and services to a market with enormous purchasing power, and therefore a failure to explore large alpha pools.
Today, more than $10 trillion of total US domestic financial assets are controlled by women. By 2030, women will control about $30 trillion in financial assets that the baby boomer generation owns – that substantial amount could equal the US annual GDP.
Having more diversity across boardrooms, C-suites, funds and startups is a way to incorporate diverse points of view and include a broader base of experience and intellectual capital.
This glaring gender imbalance represents significant capital and returns left on the table. For example, ratings for startups with at least one female founder are 63% higher than for those with all-male founding teams.
According to a study by S&P Global, compared to the market average, female CEOs and CFOs produce noticeably better stock performance. Furthermore, the study indicates: “In the 24 months after appointment, female CEOs saw a 20% increase in share price momentum.”
A BCG study found that when women pitch their ideas to investors for seed capital, they are paid substantially less than men. However, companies founded by women end up delivering 2x more per dollar invested.
Impact on employment
The lack of gender equality and the correlated funding gap in female-led startups dramatically impact overall jobs for women. Startups with a female founder employ 2.5 times more women, while companies with a female founder and executive hire 6 times more women.
In addition, several studies demonstrate the link between gender inclusion and income inequality. Higher differences in labor force participation rates between men and women often result in unequal gains between the genders, thus creating and exacerbating income inequality.
Company culture and responsibility
New data suggest that gender-inclusive leadership is associated with increased corporate social responsibility. Additionally, there is a significant correlation between gender diversity and employee satisfaction for all employees, not just women.
Increasing gender inclusion is linked to better risk management through reduced disputes over income inequality, sexual harassment and equal opportunity litigation. In the boardroom, it was also found to decrease incidences of financial misconduct, with gender-diverse boards making fewer financial reporting errors and committing less fraud.
The time for inclusion is now
It has been a long time since the asset management industry more directly represents the diversity of people in our society and the world. We must collectively diminish the outdated habits and unconscious biases that prevent institutional investors from recognizing the immense talent and potential of the ideas presented to them.