April 6, 2022

Why VC funding for women has been dismal and what we can do about it

Read Principal Lucy Tan and Investor Jethro Cohen's thoughts on why VC Funding for women has been dismal.

Lucy Tan

February 28, 2022

Why VC funding for women has been dismal and what we can do about it

Read Principal Lucy Tan and Investor Jethro Cohen's thoughts on why VC Funding for women has been dismal.

Lucy Tan

Jethro Cohen

It’s a well-known statistic that women founders receive a shockingly low percentage of VC funding. In 2021, women-only teams received 2% of US VC deal value (18% if you include mixed teams). Australia fared only slightly better, with women-only teams receiving 4% of Australian VC deal value (17% if you include mixed teams).

If these numbers were on an upward trajectory then there’d be cause for cautious optimism, but that hasn’t been the case. Looking at the last 4-5 years, these percentages have stayed largely flat.

In October 2021, we opened our calendars directly to women founders after seeing that traditional methods of sourcing (e.g. inbound, referrals) were leading to less than 15% of our total founder meetings being with women.

Our hypothesis about the root cause was that access to VCs is the issue, not supply of talented women founders – it surely couldn’t be the case that across all founders in Australia, less than 15% were women. We suspected there were more women founders out there but they simply lacked connections into VC.

That LinkedIn post blew up and sure enough, both our calendars quickly became booked out 6 months into the future. It looked like supply wasn’t the issue. Now after four months of doing these office hours, we wanted to share some reflections and learnings to date.

We increased the number of women founders getting the first meeting…but that’s not enough

With dedicated women founder office hours, the percentage of founder meetings with women improved to 23% (if mixed teams included, 33%).

However, while getting that first meeting is one important metric, the ultimate question is whether we invest or not. If a VC is interested in investigating your business further, there will often be a second or third meeting and then a decision-making forum (the Investment Committee). We want to respect founders’ time so we will often provide a quick ‘no’ with feedback after the first meeting so as not to drag out the process or provide a quick ‘yes we would love to meet again.’

Below, we break down the percentage of meetings that progressed to a second meeting and a third meeting or more. Interestingly, mixed teams performed best (albeit with a small sample size) – 16% progressed into a 3rd meeting or more compared to 13% for men-only and 7% for women-only.

Why the rate of second and third meetings were low

One consistent theme among the women-only founders group was that they were more likely to be seeking a foundational understanding of venture capital, often to fill gaps in their knowledge around:

1. What do VCs look for in a founder?

2. What do VCs look for in a business?

3. What types of capital are available for my business and is VC the right fit?

We also found far more women founders booked time with us to ask for general advice and feedback on pitch deck, fundraising strategy and when to take on external capital.

Why was this more common in the women-only founders group? There are three potential drivers:

a) Selection bias. We were clear on LinkedIn that women founders didn’t need to be pitch ready to meet us – we’re happy to chat even at an earlier stage and get to know them

b) Systemically lower access to VCs or start-up networks. Several women founders mentioned that we were their first VC conversation and that they had had a difficult time trying to get a meeting elsewhere. VCs source their leads primarily through other VCs and angels, accelerators, news articles, Twitter and other online research. It becomes harder to find a founder if they aren’t in these channels so this can present a systemic barrier to access

c) VCs themselves need more diversity. The gender gap doesn’t just exist for founders – it also exists in VC. Harvard Business Review reported that only 12% of decision-makers at VC firms are women. When you have more women VCs, you have more voices that are willing to make diversity a priority and proactively look for ways to break down systemic barriers

How to increase the probability of getting a second or third meeting (and ultimately, investment)

As we ran these office hours, we realised we frequently shared the same advice to different women. But given that information was only passed on 1:1, we wanted to make it more scalable and share our view on the most common questions we were asked.

1. What do VCs look for in a founder?

The earlier stage company you are, the less data there is for VCs to analyse. Because of that, a huge part of the investment decision is centred around the founder. We get really excited when we see the following:

a) Founder-market fit. This is the answer to the question ‘why you?’ What is the unfair advantage that you have when it comes to tackling this market? Often on our calls, we found that women founders tend to downplay the ‘why them’ and focus more on the problem itself. Given it is such a critical factor that VCs assess, we strongly recommend not downplaying it and instead make it an integral part of the story

b) Distance travelled. When a founder has had to overcome many challenges to get to where they are, we take this as an indication of grit, persistence and resourcefulness. This helps us to build confidence that this founder has a profound capacity to execute or at the very least, to rapidly acquire the skills they need to execute

c) Ambition and vision to build a really large business. Every business needs to attract customers and employees. But when you’re starting small, how do you convince people to take that chance on you? This is why a founder with a clear vision who can communicate it in a compelling way is so important to us. It is an indicator on whether they will be able to convince customers and employees to buy into that vision down the line

Many investors have their own rubric for founders but the above is a quick and dirty summary of the key elements that we are searching for.

2. What do VCs look for in a business?

If the founder has a vision and ambition to build a really large business, VCs then need to validate that against what we know about the market itself.

a) Solving a massive problem. You’ll often hear VCs refer to TAM – total addressable market. This represents how much revenue is available for a given product or service. This is a non-obvious number because sometimes, the market will develop in ways you don’t expect e.g. Uber is worth far more than the taxi market it disrupted as it added regular people with cars to the supply of drivers and lowered the friction so that the demand side also increased. Ultimately, we need to believe that the market is already large enough or will become large enough to support a unicorn. This is because the economics for a VC work like this: you can make 10 bets and have the majority of them go to 0 as long as one of them becomes the next Canva (as at the time of writing, $40B valuation!)

b) A strong ‘why now’. Timing is incredibly important – being too early for the market means you run out of funds before you can truly take off and being too late means you’re fighting against a ton of competition. We want to see a convergence of factors in place that would suggest explosive growth is possible or likely.

There are other factors we will consider in a market (e.g. competitive intensity, complexity of the go-to-market) but at the high level, we need to be comfortable on at least the above two elements: large, attractive market and a strong ‘why now’.

3. What types of capital are available for my business and is VC the right fit?

There were several office hour meetings where the founder ended up rethinking whether VC was the best fit for their business after we talked candidly about what their ambitions were.

The below table is a non-exhaustive summary of the types of capital available and the purposes they might suit.

What’s Square Peg doing on this front?

Over the last 2 years, Square Peg has been growing our team and improving our internal representation. That includes hiring Piruze Sabuncu as a partner in Singapore, formerly Head of Southeast Asia at Stripe. We also have the amazing Casey Flint in Sydney and Orly Amir in Israel.

Our recent investments in companies with women founders include Retrain, Joyous, Pluang and Sternum.

But the stats for the industry speak for themselves – it is still dire and there is an enormous amount left to do.

What’s next for this year?

Increasing the percentage of VC funding for women founders will be a long journey, requiring systemic changes. We’re optimistic we’re on the cusp of real and tangible progress but it means creating a positive feedback loop as quickly as possible.

We expect successful women founders of this generation will pass on their wisdom and learnings to the next – incredible women such as Melanie Perkins (Canva), Kim Teo (Mr. Yum), Lucy Liu (Airwallex) and Alice Williams (Ovira) to name a few.

We also expect as the number of women VCs increase, access and support for women founders will improve. It was fantastic to see Jackie Vullinghs and Elicia McDonald (Airtree) get promoted to partners last year. There are also far more names than we can list here of other women VCs in the Australian and NZ ecosystem, such as Casey Flint (Square Peg), Samantha Wong (Blackbird), Phoebe Harrop (Blackbird), Jessy Wu (Afterwork), Isabella Rich (Our Innovation Fund), Georgie Turner (Tidal), Kylie Frazer (Flying Fox), Britt Bloom (EVP) and Rachel Neumann (Flying Fox).

In the meantime, we will continue to keep our calendars open for all women founders looking to build high impact, high growth businesses – we can’t wait to meet you and hear your vision!

Book a time with Lucy here.

Book a time with Jethro here.