Entrepreneurweek Be Driven

Why Men Get VC Money and Women Don’t….and How that is Changing

Author: Janine de Nysschen

If you’ve ever made a pitch for funding from a venture capitalist, you’ll know all about the laundry list of must-have financials and projections that you have to prepare – and if you’re smart, you’ll also know everything you do has to follow the venture capitalists golden rule: He who has the gold makes the rules!

Not surprisingly, this should prompt you to want to know more about how VCs make choices about spending their gold. Sure, you’ll read all the well-intentioned advice in the world about how to woo a potential VC with a clear, crisp pitch that shows the brilliance of your business idea and its likelihood of making them millions. Then you watch an episode of Dragon’s Den or Shark Tank, and you soon discover that nine times out of ten, the men behind the money table respond less to the business idea than they do to the person pitching it.

Welcome to the second golden rule of venture capitalism: Investment is in the jockey, not the horse. Stanford research and a study by the Simmons College School of Management point to VC mental filter as “a template consciously and unconsciously developed over time within an institutionalized context and based on the venture capitalist’s experience with mostly male-led venture projects, fostered by industry preferences and patterns of behavior, formed by education and networks, and guided by personal life experience.”

VCs call it pattern recognition. Or, to put it another way, as VC John Doerr from heavy-hitters KPCB does: if you’re white, under 30, a technical geek with no social life, and a Harvard or Stanford dropout, you can line up for VC money.

The truth is that VCs invest in a stereotype, and that right now, the stereotype of high risk-tolerance, abnormal work ethic and business acumen seldom comes in the female form. Shaherose Charania, founding member of Women 2.0, recognizes that it is harder for women to obtain funding than for men. She points out that historically, women-led companies have received less than 9% of venture capital investments. And in 2007, the proportion of funded female CEOs dropped to 3%.

Before this devolves into a gender debate, let’s look at four more-or-less objective facts that support this VC behavior for not backing women.

• Fact # 1: Women don’t get VC money because men hold the purse strings. Did you know there’s only one woman in the 2009 top ranked 84 venture capitalists listed by The Funded? Back in 2007, Forbes magazine’s Midas List of top venture capitalists featured five women. According to a recent Gatekeepers of Venture Growth study by the Kauffman Foundation’s Diana Project, 70% of women venture capitalists were in partnerships that had closed deals with women-led companies. Since only 4 to 9 % of all VC deals go to women, it follows that women played a major role in most of the deals that went to female entrepreneurs, regardless of how few they were. If there were more women doling out money, there would be more women getting it.
   
• Fact # 2: Women don’t get VC money because they don’t belong to a band of brothers. At least three of Guy Kawasaki‘s tips on how to get noticed by a VC involve getting an introduction by someone you know mutually. Kawasaki calls it schmoozing, and says: “it’s much easier to make a sale, build partnerships, create joint ventures–you name it–with people that you already know than with people you just met.” Unfortunately, women tend to hang out in different networks to men – especially in business. Even more interestingly, women connect in social networks rather than “emotional” networks. According to Harvard’s Bat Batjargal, “Women have larger social networks for advice and resources. But men, surprisingly, have larger ‘emotional’ networks – the complex of associations that provide warmth, praise, and encouragement. And men apparently profit more from these emotional attachments than women do.” Emphasize the profit part – think of VC funding as a form of male encouragement and praise. Batjargal’s surprising findings show that women may have wider and bigger social networks than those set up by male entrepreneurs, but “the bigger the network, the less the revenues and profits for women.”
   
• Fact #3: Women don’t get VC money because they aren’t computer geeks or engineers. In the past two decades, the majority of VC funding has gone into high tech and engineering fields. In 2004, only 3% of tech firms and 1% of high-tech firms in Silicon Valley were founded by women. According to a PricewaterhouseCoopers and National Venture Capital Association MoneyTree™ report, in 2009, VCs invested a total of $17.7 billion in 2795 deals. The breakdown of that included $3.1 billion in 619 software deals compared with $3.5 billion that went into 406 biotech deals. Money goes to tech enterprises with higher ROI opportunities, and women have traditionally tended to start businesses in the “more steady money” retail and services sectors. Added to that is the geek-speak issue. When it comes to VC pitches, forget the Venus and Mars nuances, and start with the fact that their business terminology doesn’t match up. The majority of VCs have academic backgrounds in engineering, computer science or biotechnology – areas where women are traditionally in the minority.
   
• Fact #4: Women don’t get VC money because they don’t have the right experience. Contrary to common opinion, VCs are not big risk takers. There are two things they investigate carefully before parting with their gold: the investment opportunity, and the management team that will be helping to realize it. When you’re a VC funding startups and early ventures that are predominantly tech in nature, you’re looking to back a management track record. The general guideline is to invest in someone who has had the right experience – and often that investment is into serial entrepreneurs or former CXOs from tech fields. Even if the idea is brilliant, it’s not unusual for VCs to dictate the composition of the management team. Back to Guy Kawasaki who has a VCAT test – for would be venture capitalists – which reveals that good VCs have typically worked at both a successful startup and a failed one, have survived a long economic downturn, have held a CEO position, understand fiduciary responsibility and know what a public company should look like. It stands to reason then, when it comes to pattern matching, these same VCs will look for similar instincts and experiences in the jockey they’re going to bet on, and women rarely have the necessary stable credentials.
   

Fortunately for women seeking VC investment, there’s another truism that venture capitalists are adding to their rule book: All that glitters, is not gold.

There are plenty of good reasons why 30 year old geeks should be nervous and women entrepreneurs should be excited. The filter that venture capitalists have been using to pick their jockeys for the ROI race is being influenced by the changing role of women in business. More and more research is pointing to the successes women bring to the business world, and the gender distinction is fading in key VC investment areas of software and biotechnology.

Cindy Padnos, founding managing director of Illuminate Ventures, is a thought leader and role model in the women entrepreneurship space. With a focus on being more inclusive of women high tech entrepreneurs, Illuminate Ventures is spreading the message on investing in women. And Padnos has comprehensive research on her side to show that women are a better bet.

Here are the five quick facts from studies by Illuminate Ventures and organizations like the Kauffman Foundation that reflect the reasons for the perceptual change in the VC world around investing in women entrepreneurs:

• Women entrepreneurs are amongst the fastest growing group of business owners, because of a shift in their education and career choices.
• Women have the same entrepreneurial drive as men. Women start companies because they want to build wealth, capitalize on their business ideas, like the startup company culture, and want to be their own boss.
• Women are gaining more ground in high-tech and developing better business networks. More and more organizations such as Astia and Women 2.0 are creating environments that allow women entrepreneurs to connect and thrive, and supporting their efforts for accelerated funding and growth.
• Women have been proven to build companies that are more capital-efficient than those founded by men, and they use less capital to achieve the same or higher revenue performance in early-stage years.
• Women don’t fail as often as men: in fact, women-led high-tech start-ups generate higher revenues per dollar of invested capital and have lower failure rates than those led by men.
   

Perhaps the best word on this subject comes from Mark Heesen, president of the National Venture Capital Association, who says: “There are more women in the world. They represent a greater share of markets and purchasing power. Being more proactive about increasing their presence in the industry just makes sense.”

Just in case you missed it, let’s repeat that sentence: women represent a greater share of markets and purchasing power. In other words, when it comes to the global economy, she who has the gold makes the rules.

There’s no doubt that when reports and studies of women and VC funding are generated in five years time, the picture will be remarkably different. That’s because venture capitalists know a good investment opportunity when they see one, and women are a sure bet for future entrepreneurial success.

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