The Misadventures of Venture Capital
This is the final installment of a three-part excerpt. It is an edited version of Chapter 3 of Maddy Dychtwald's book, Influence: How Women's Soaring Economic Power Will Transform Our World for the Better. (Voice, Hyperion)
As a woman-owned startup backed by venture capital, Corazonas, a start-up snack company making chips that are clinically proven to reduce cholesterol, is in a small minority. In 2008, just 6.8 percent of U.S. venture investment went to women-owned firms, according to Dow Jones VentureSource.
Think of it. This is a staggering statistic. Just 6.8 percent. When more than half of all new companies are started by women. The venture capital community lies at the very heart of business innovation in the United States, funding the biggest, boldest business ideas -- those most likely to transform industries and make a bundle along the way.
By directing almost all their funds exclusively toward male-owned companies, are venture capitalists suggesting that only men will create the winning companies of the future?
Yes, in a way, they are. If America's biggest and most visionary investors are, essentially, gamblers looking for the next big win, they're clearly giving the best odds to men, not women.
For women, this flow of money from men to men is a big red roadblock in the middle of the American economy. But if women don't play a significant role in designing, launching and owning the companies of the future, women's economic confidence can't and won't translate into true influence. If the boys' club continues to control investment in new ventures, sending cash to other boys to finance their boys' club companies, the culture will change far more slowly than it could. Or, as the authors of a report from the Diana Project, a multiuniversity research program on women-led ventures, put it: "The substantial funding gap limits women's opportunities to grow their ventures aggressively and lead high-value firms."
This funding disparity became glaringly clear during the internet bubble in the late 1990s. "Investment money was pouring over the transom. It was like a fire hose," recalls Kay Koplovitz, founder of cable television's USA Network, who currently serves as chairman of the board for Liz Claiborne and board member for CA, an information technology management company. She also runs a venture capital fund called Boldcap Investments. "But women couldn't get in front of the stream." That wouldn't matter so much if venture funding didn't have such a big impact on the future of business, on determining which scrappy entrepreneurs get a shot at realizing their vision and who gets to make the big money.
So what's going on? Are all venture capitalists simply sexist? Not at all. Studies suggest there are several key structural reasons for the lack of investments going to women-owned companies. For one, most venture investments result from personal connections -- and for the most part, women haven't cultivated the necessary relationships with the investors (mostly men) making the deals, whether those investors are affluent early-stage "angels" or private equity firms.
"Although women excel in building social networks, their circle of contacts contains few individuals who can 'chauffeur' their deals to equity investors," concluded Candida Brush, a professor of entrepreneurship at Babson College and coauthor of the 2004 report from the Diana Project, a series of studies on women in the venture capital industry. "Women are rarely included in investors' networks and have very few points of access through referral."
Another explanation for the lack of funds flowing to women-owned firms is that women, while starting more businesses than men, are less likely to start the kinds of companies that early-stage investors are looking to fund.
The industries with the highest percentage of firms headed up by women tend to consist of services: retail (19 percent); professional, management and educational services (16.3 percent); and health care and social assistance (7 percent). Most of the time, investors don't stand to make big returns on service or retail businesses like these. Furthermore, many of the businesses women start are very small-scale. "Seventy percent of women-owned businesses earn $50,000 or less right now," says Nell Merlino, founder, president and CEO of Count Me In for Women's Economic Independence, a nonprofit organization that, in 2005, launched an initiative called Make Mine a Million $ Business to boost women-owned businesses over the million-dollar sales mark. That $50,000 is barely an income for one person, let alone a thriving business that would lure investors.
Most important, many women-owned companies just don't have much growth potential; they're the kind of business Kay Koplovitz calls "cookie companies."
"There's nothing wrong with cookie companies," she's quick to point out. "But that's not the kind of company venture wants to fund." What venture does want to fund is high-risk companies that require a serious infusion of cash before they can scale up. Products like computer chips, clean fuels and technologies, medical tools or techniques. Companies like YouTube and Google. Brands like Corazonas -- that take big risks and big money to launch -- risks and investments that established corporations can't afford.
"The head of operations for a big food company came in and asked me, 'How can we do what you do?' " Capello recalls. "You can't," she told him. Not unless the company was willing to put 10 percent to 15 percent of its budget toward research and development, toward experimentation and testing. And today's competitive business climate won't permit that. "If a big, publicly traded company spent 10 percent to 15 percent of its dollars experimenting, the stock price would crash," she notes.
Innovation is a high-risk game: Many venture investments go bust. But for every 10 that fail, one succeeds big-time. It goes public, and the investors suddenly own stock worth a fortune. Or the startup sells to a big company, and early investors do well from the sale.
Of course, not every entrepreneur wants venture capital. Missy Park of Title Nine has avoided outside investors, preferring to grow the company based on its own revenue, so she can keep control. "We may have missed opportunities by not raising capital and scaling more quickly," she admits. "But what I got in return is a business where I have all the control, where I can make sure I'm fostering the vision and that we're focused on the long-term success of the brand, not just on quarterly earnings."
But while the venture route isn't right or necessary for every business, those venture capitalists who continue to invest little or no money in women-led startups may soon find themselves missing out on key opportunities.
Although the majority of women-owned companies have relatively small revenues, says Merlino, there are about 1.8 million women business owners who are already at the threshold of bigger business. Her Make Mine a Million initiative is actively seeking to push many of these ventures over a million in revenues.
"Just imagine if we could set loose those companies that already have great products and services and make those available on a wider basis. What if 50 percent of women's businesses were at $250,000 to $5 million revenue each? Every time you crunch those numbers, it puts people back to work, and in work settings that may be much more friendly to people's lives -- men and women."