If you are a venture capitalist, you are almost certainly a man. But you would do well to know that your best chance to outperform the market is to invest your money in a company led by a woman.
That rule of thumb – cherchez la femme – would radically simplify complicated VC investment decisions. Yet, because men make up 91% of the VC industry’s executive ranks, the bottom-line performance of women-led companies has been chronically overlooked.
Securing funding to enable women-led businesses to reach their potential is needed to drive European innovation. The annual productivity loss to the European Union as a result of women leaving their jobs in information and communications technology (ICT) is around €16.2 billion ($19.1 billion). Though women represent roughly 52% of Europe’s overall population, they constitute only 34% of the EU’s self-employed workers, and 30% of its start-up entrepreneurs. Worse, in 2017, women-led ICT companies accounted for less than 10% of VC invested across the continent.
Research suggests that women-led companies, displaying some degree of risk aversion, are less inclined to pursue external financing options. Even when women starting new enterprises in the EU are aware of their opportunities to secure external funding, many still prefer to provide a significant level of start-up capital by themselves.
As such, female founders are less likely than male founders to pursue VC investment. The relative lack of female entrepreneurs, combined with women’s self-reported preference for “bootstrapping” their businesses, appears to have contributed to a reduced overall demand for external financing in Europe.
The situation in the United States is even worse. There, roughly four out of five VC firms have never employed a woman in a senior investment role. Just one of every ten new hires is a woman.
All told, a combination of risk aversion on the part of women, gender bias on the part of men, and the lack of female representation among investors and founders creates a vicious cycle that has been difficult to break.
That’s the bad news. The good news is that the cycle can be broken, especially when one considers women entrepreneurs’ far-reaching potential as innovators and job creators. Women-led businesses tend to attract more investment at later stages than their male-led counterparts. They also outperform the market in terms of median revenues, and are more likely to provide employment for other female entrepreneurs. These are just a few of the findings of a European Investment Bank Advisory Report that was released in early July.
In fact, the EIB also finds that women-led VC-backed companies in the EU enjoy higher exit rates in terms of deal value and volume. Mature VC-funded companies tend to hire more women in general, and this has contributed to a recent increase in funding for businesses founded by women or with women in executive roles. Equally promising, the European venture community has begun investing in women-led companies at an annual rate above that of overall investment growth in the region.
Global challenges like the COVID-19 pandemic underscore the need for more finance for female entrepreneurs, who have a critical role to play in responding to market shocks and contributing to economic recoveries. Amid the turmoil of the current crisis, there is an opportunity to encourage more gender-balanced innovation. But, to make progress toward gender parity and reap the full benefits of diversity, there will need to be fundamental changes in attitudes, business cultures, and institutions.
The EIB itself has been making a concerted effort to improve gender diversity within its ranks. But with just three female members (including me) on the nine-member Management Committee, it still has a way to go. Beyond establishing a better gender balance among the leadership ranks, the EIB Group also must ensure that its financing decisions benefit all members of the community equally.
To that end, the Bank has adopted a Strategy on Gender Equality and Women’s Economic Empowerment based on three pillars: protection, impact, and investment. The goal is to help identify innovative, high-growth female-led companies, and then provide advice, financing options, and assistance making connections with other market players. So far, these include lenders such as Spain’s CaixaBank, Romania’s Garanti Bank, the Netherlands’ Karmijn Kapitaal, and Italy’s UniCredit.
Other investment and development banks around the world should consider adopting a similar model. With a strong partnership between public banks and private investors, we can encourage VCs and other sources of finance to adopt a more gender-balanced approach. Ensuring access to finance for women-led enterprises ultimately creates jobs and contributes to our shared prosperity. Not only does empowering women make ethical and social sense, but it also happens to be good for business.
Lilyana Pavlova is a vice president at the European Investment Bank.
Copyright: Project Syndicate, 2020.
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