If you’ve ever watched ABC’s popular television show, Shark Tank, you learned quickly that investing in startups is part math, part compatibility, part taste and part gut instinct.
In addition to the economics of the deal itself, the panel of investors—the Sharks—typically consider many other factors, including the uniqueness and lasting appeal of the product or service being offered, existing and potential competition, including future copycats, and the personalities, competency and dedication of the founders. They also frequently consider whether the business is a good fit with their existing investment portfolios, how much of their time may be involved (in addition to their money), and whether their involvement, as financiers and/or advisers, will really make a difference.
All these calculations occur during and after the pitch, in which the founders put it all on the line, triggering a barrage of questions from the Sharks, such as ‘If I invest, how do you plan to use my money?’ ‘Do you have any sales?’ ‘What’s the basis of your valuation?’
The one thing Barbara Corcoran, Mark Cuban, Lori Greiner, Robert Herjavec, Daymond John and Mr. Wonderful—Kevin O’Leary—don’t seem to care much about, though it may be a factor in their decisions in more subtle ways, is the gender of the contestants: whether they are men or women. After all, the object is to make money, so who cares, right?
There’s evidence that some venture capitalists (VCs) perhaps do care. A recent analysis by several of my colleagues and the nonprofit startup accelerator MassChallenge found that “when women business owners pitch their ideas to investors for early-stage capital they receive significantly less” than their male counterparts. Based on a survey of 350 startups, they learned that businesses started by men raised $2.1 million, on average, while those started by women raised just $935,000.
That’s thought-provoking in and of itself, but even more so when you consider that the report—which looked at 258 startups founded by men and 92 founded or cofounded by women—also indicated something else: that the firms started by women did better financially, on average, than those started by men. “In terms of how effectively companies turn a dollar of investment into a dollar of revenue,” the report says, the startups founded and cofounded by women proved to be “significantly better … investments,” generating “10% more in cumulative revenue over a five-year period: $730,000 compared with $662,000,” despite the lower initial investments.
Taking a broader view, women entrepreneurs appear to be doing okay. “The 2018 State of Women-Owned Businesses Report,” commissioned by American Express, indicates that women were the sole or majority owners of an estimated 12.3 million U.S. businesses at the beginning of 2018, and were starting additional businesses at a rate of more than 1,800 (net) per day—an indication that they seem to be finding the capital they need to start and build their businesses. In fact, year to year, from January 2017 to January 2018, the number of women-owned U.S. businesses increased by approximately 700,000, the AmEx report indicates.
What should we make of all this?
First, it’s important to realize that all of these numbers are based on a limited sample of 350 startups (out of a universe of millions each year) and that we don’t have a complete picture of the companies’ financials, including capital that may have been acquired from other sources, including family, friends, personal savings, social networks, SBA loans, and so forth. So we probably shouldn’t make any sweeping judgments based on these data alone.
Despite this data hole, there is abundant and definitive evidence that women entrepreneurs are being shortchanged by the venture capital community. According to the National Women’s Business Council, a government advisory body, access to capital is a real problem for many women entrepreneurs. Underscoring this, a March 2018 Women’s Business Council report, prepared by researchers at the Library of Congress, indicated that women business founders “are three times less likely to access equity financing through angel investors and venture capitalists” than men.
Which leads to a simple question: If women-owned startups generate higher revenues than those owned by men, why isn’t this reflected in early-stage investment activity?
Unfortunately, it’s a simple question without a simple answer. There are many reasons.
Is bias a factor? It may be in some cases. But research shows that women venture capitalists, just like their male counterparts, invest more in male-dominated startups; it’s not just a “guy thing.”
So how do we bring about more equity? For one, women simply need to ask for more. The BCG-MassChallenge analysis found that men “are more likely to make bold projections and assumptions in their pitches” and that women typically “are more conservative in their projections and may simply be asking for less.” While I’m not encouraging women to load up on the BS, it wouldn’t be a bad idea simply to ask for more. Confidence is key.
A second observation was that women don’t defend their proposals as aggressively as men. “If a potential funder makes negative comments about aspects of a woman’s pitch, rather than disagree with the investor and argue her case, she is more likely than a man to accept it as legitimate feedback.” If the criticism is legitimate, okay; learn from it. If you think it’s wrong, don’t be shy about saying why. Washington notwithstanding, it’s possible to disagree without being disagreeable.
Most venture capitalists and angel investors are interested in just one thing: getting into a potential blockbuster business early, on the cheap, and making a killing. Convince them that “that business” is yours and the gender investment gap will disappear.
Investing in businesses is never a sure bet. Investing in women-owned startups, however, appears to be a good bet.