98 Percent of VC Funding Goes to Men. Can Women Entrepreneurs Change a Sexist System?
Last year, the largest VC deal for a female team was $165 million -- a stark contrast to that for males, which was $3 billion.
This story was originally published on June 29, 2018, and has been updated.
It was January 2017. A 26-year-old Nadia Genevieve Masri made her way up to the second floor office of a venture capital fund in San Francisco. She was there to ask for $500,000.
Masri already had four startups under her belt, and she was raising her first round of VC funding for Perksy, a market research company targeting millennial and Gen-Z audiences. She knew market research was a $45 billion industry and that there was no leading mobile solution -- meaning companies like Pepsi were spending well over $50 million per year without certainty of directly reaching younger generations. Masri's idea: an app where, in exchange for rewards at companies like Nordstrom, Sephora, Delta and Netflix, users would answer stacks of focused questions from brands on their likes, dislikes and views on current events.
Masri had done the research: She knew her service was unique, that companies would pay for it and that, with the right capital, she could deliver promising results. But the men sitting across the table weren't sold, telling Masri she was too early -- that they wanted to "see how this goes."
Self-doubt lingered in the back of Masri's mind: It's probably just me. It's probably just the way I'm communicating this. Nevertheless, she kept plugging away, raising $250,000 in a friends and family funding round, then pitching her idea to Marcy Simon, an angel investor in New York. Simon was the first angel to cut Masri a check, and she helped rally other investors behind the idea -- leading to another $250,000 in funding and Perksy's January 2018 launch. Within six months, that initial $500,000 in funding brought in $3 million in the pipeline.
Masri still thinks back to those VC rejections and the insecurity that accompanied them, but she has a new outlook now. She says if you're second-guessing your company, remember the rejection may have nothing to do with your idea itself. Throughout the fundraising process, Masri doesn't remember meeting with a single female venture capitalist. And even after her company's seminal success, she still gets eyebrow raises from male investors when she talks about next steps.
"I think I made so many excuses for the VC industry, and it wasn't until recently that I realized I shouldn't have been making excuses for them," says Masri. She says it's not a black-and-white issue, that there are some great male venture capitalists, but the industry itself needs to be conscious of the issue and make way for change. "We're all on the same team here," she says. "I say what I say because I want the industry to be better."
Masri's experience points to a much larger issue.
In 2017, only about 2 percent of the $85 billion raised in VC backing went to female-founded startups based in the U.S., according to data from research firm PitchBook. Women are also raising smaller rounds than men -- averages of $5 million and $12 million, respectively. Last year, the largest VC deal cut by a team of female founders was Moda Operandi's $165 million Series G, contrasting starkly with the largest round of their male counterparts: WeWork's Series G at $3 billion.
When it comes to black women founders, VC statistics are even bleaker. Black women raised only 0.0006 percent of the $424.7 billion in total tech venture funding raised since 2009, according to a study by digitalundivided, an organization, incubator and accelerator aiming to advance equity in tech and entrepreneurship. For black women who raised less than $1 million in 2017, the average funding raised was $42,000. Compare that to the average seed round for all startups in 2016: $1.14 million.
"The good news is there are two times more black women-led startups than there were when we originally did the report back in 2016," says Darlene Gillard, chief community officer at digitalundivided. The number of black women who raised over $1 million in 2017 is two times that of the previous year. Still, she says, there's much more work to be done.
Another key issue: Just 1 percent of all women-owned businesses use VC funding, according to a new report from EY and the Women's Presidents Organization. "If there aren't more who get it, fewer will seek it," says Lisa Schiffman, global lead of EY Entrepreneurial Winning Women, a national competition and executive education program for women entrepreneurs. That idea doesn't just affect today's entrepreneurs: It could propagate in future generations of women. "If they don't see that it's possible, then they're not going to go in that direction… [it] can place artificial limits on what they can accomplish," says Schiffman.
Even for those women who do seek a VC injection, the problem extends to the implications of that funding: Women entrepreneurs on the whole are paying themselves less than their male counterparts -- almost 30 percent less, according to research by J. Thelander Consulting, a firm that collects private compensation data. After an analysis of more than 160 early-stage private companies with less than $15 million in funding, results showed that the average woman entrepreneur paid herself $179,444 annually. Male founders, on the other hand, paid themselves an average annual salary of $232,659. When it came to stock options, the difference was even more striking -- female founders retained an average of just over 25 percent in company shares, while male founders claimed just over 42 percent.
Real equality may require an overhaul of the VC model as it stands today, introducing new options for looking at solid investments. Another recent report by J. Thelander Consulting showed that male VC investment professionals outnumber their female counterparts five to one.
"The venture capital [model]... is inherently sort of a white male majority model," says Nell Derick Debevoise, founder and CEO of Inspiring Capital, a consulting organization for purpose-driven businesses. She notes that, although it makes many startup ideas possible, it's a style of investing that "white men with money have developed" centering on long-shot opportunities -- the majority of which likely won't yield a profit. She believes that truly serving diverse founders and ideas will mean diversifying funding types as well.
"I have noticed a significant difference with female partners," says Masri, who notes that women are the number-one market driving most consumer purchases. That translates to a potential blind spot for venture capitalists when it comes to more nontraditional business ideas.
"If I'm a black woman, I might have an incredible idea about hair weaves, but investors who are typically white and male are not going to understand that, even though it's a multibillion-dollar industry and there's opportunity there," says Gillard.
If you're looking to raise your own VC funding, know that the best fits are often ideas with a large market that will be quick to scale, and founders typically have between five and seven years to return investors' money.
Here's what women entrepreneurs should know before taking the first-round plunge.
Learn like an apprentice.
Seek out someone with a lot of fundraising experience who has nothing to do with your company. That way, they can serve as an objective third party. Have them teach you absolutely everything they know, including how to phrase your pitch and how to ask the kinds of questions venture capitalists may not want you to ask. Ask for guidance on how venture capitalists think, what they'll be looking for and the criteria they use to evaluate a pitch. Read up on the process and terminology so you'll know what they're talking about. Then, talk to other women about their experiences. "I don't think I had access to as many females to talk about fundraising [with] early on… I wish I did," says Masri.
Put on your research hat.
Before you choose which VC funds to pursue, do your research. Pitching to every VC fund to see what sticks isn't usually a good fundraising strategy, says Masri -- plus, it's inefficient. Instead, focus on the investors who are likely to be interested in your idea.
For example, some venture capitalists have never invested in a company run by a black woman, says Gillard. One approach: "Don't waste your time on the other hundred -- focus on the five that have actually invested in people like you," says Gillard. Investing guidelines are usually included on a VC fund's website, so you can see who's on the team and the companies they've supported. You can also search online for VC funds investing in companies led by women or specifically black women.
"I think males are judged on potential and females are judged on what they have done," says Masri. "When you show up, you already have to prove yourself." That's why it's important to be aware of a key difference in the way men and women tend to pitch ideas. While men often think best-case scenario and inflate projected revenue, women tend to be more realistic and modest in projections.
"Men are more comfortable painting the $1 billion exit picture when everyone in the room knows that's a total long shot," says Debevoise. Think big, and don't be afraid to let your numbers reflect that confidence. "Every investor will undercut your projections by 30 to 50 percent," says Debevoise. "If you come in realistically, they'll haircut you by half."
Get up close and personal with all the aspects of your business.
"Investors invest in people as much [as] -- if not more than -- they invest in the business," says Schiffman. They want to put money behind a confident and strategic leader who knows what they mean to accomplish and what they need to do to make it happen. Nail down the specifics of the market for your product or service, how far the business can feasibly go (be optimistic), the steps you'll take to get it there and why you and your team are the best people to make it happen.
You also need to be able to clearly lay out how the money will be used, approximate returns and which financial levers you'll need to pull in order to grow your company. Sit down with your company's numbers, financial statements and projections, have someone clarify any segments you don't understand and don't quit until you can clearly explain it all. "That's what someone would expect if they're going to give you five or 10 or 20 million dollars," says Schiffman. "Owning it -- and not only owning the parts that you love, but owning the entire undertaking -- is really important."
Know what you want, and make it very clear.
Show up knowing exactly what you want, be very clear about it and deliver a great pitch and projections. But avoid over-explaining or over-answering questions. Every extra sentence can provide more fodder for doubt and things to poke holes in, says Debevoise. Concisely and assertively lay out the industry problem, your solution, why it's better than any other and why you predict such large returns.
Another key tip? Give the investors an ultimatum, says Masri. Don't take them at their word if they tell you they'd like to "see how things progress" -- instead, ask them if they need more information (like metrics or customer testimonials) to make their decision. If not, ask them to give you a point-blank answer as to whether they're in or out so you know whether to keep them on your list or remove them. "When I go in, I'm like, "I'm here to do fucking business; what's the plan?'" says Masri. "I'm very clear about what I want."
Educate yourself about other funding options.
VC funding isn't the best match for every type of company -- in fact, the level of growth necessary in a relatively short period of time isn't a match for most, says Debevoise. For example, though Starbucks is currently the world's largest coffeehouse chain, it took much longer than seven years to build, so it likely wouldn't fit a VC model.
Another potential route? Financial buyers -- e.g., VC funds, hedge funds and more -- primarily aim to realize a return on investment. But strategic buyers -- often an "investment arm" of a large company -- usually seek out acquisitions that will tie in with the existing company. If you've got a unique idea in your field, you can research whether a strategic buyer in your industry might be interested in acquiring your company.
Other options vary greatly depending on your product or service. Crowdfunding is one option, and in exchange for funding, you could offer individuals equity, rewards or the promise you'll donate a percentage of the money to charity. There's also bank financing, including small business loans -- especially if you've got a home or other assets to use as collateral. A friends and family round of funding could help get you off the ground, and angel investors are another option, especially since an increasing number don't consider VC the default next step and could fund in exchange for equity or debt, says Debevoise. And finally, there's plain old revenue from customers.