Women Face Demand and Supply-side Constraints in Venture Capital
3 min read · Dec 2024
Brush, Candida G., Nancy M. Carter, Patricia G. Greene, Myra M. Hart, and Elizabeth Gatewood
The number of women moving on to decision-making roles remained low compared to men.
Summary
A significant share of academic research on venture capital focuses on men, both as capital deployers and entrepreneurs as a result of their overrepresentation in the sector. This is a critical gap as theories and recommendations based solely on men’s experiences are incomplete and not fully generalizable. This paper, however, shifts the focus to capital flow through the lens of women with two objectives: 1) to evaluate the historical trends in venture capital investments in women-led businesses, and 2) to examine the pipeline of women across venture capital firms.
Method
This quantitative paper consists of two studies, framed within a conceptual framework that examines both the supply and demand sides of venture capital. The first study, focusing on the demand side, explores the flow of investments into women-led businesses over time. The authors analyze data from 20,000 portfolio companies, 34,000 executives, and 120,000 company investments, from 1957 onwards, and provide descriptive statistics on the history of investments in women-led businesses. The second study addresses the supply side, examining the representation of women in the venture capital industry using data from Pratt’s Guide to Venture Capital for 1995 and 2000 including funds under management, company age, investment preferences, and management. They identify the number and gender of senior management and present descriptive statistics comparing the number and share of women in VC in 1995 versus 2000.
Key Findings
Prior to 1980, very few investments were made in women-led businesses. After the 1980s, the number of investments grew, but the overall share of capital going to women-led businesses remained small.
Between 1957 and 1980, no year saw more than 3 women-led businesses receiving venture capital funding.
Between 1981 and 1987, the number of investments in women-led ventures increased notably but only represented 4.1% of all investments.
From 1987 to the end of the study period in 1998, the share of investments in women-led businesses fluctuated between 2.3% to 4.1%.
The number of women working in venture capital has grown in absolute number but has stalled or reversed in the share of employees.
While the absolute number of women working in the VC industry increased from 358 in 1995 to 512 in 2000, their percentage representation declined from 9.8% to 8.8%.
Additionally, the growth in the absolute number of women in venture capital was primarily driven by an increase in leadership positions such as partners, directors, and presidents.
The number of women moving on to decision-making roles remained low compared to men. While the number of men in senior leadership positions grew by 120% from 1995 to 2000, the number of women in the same positions grew only by 60%.
Takeaways
The authors highlight an important puzzle. Despite the increasing number of women entrepreneurs and women professionals in VC, the amount of investments in women-led businesses has not grown proportional to these gains. Why? The authors speculate that this is partly a matter of networks. Early-stage investments rely on strong networks. If women have a hard time finding and connecting with investors, then they will have a hard time securing the necessary capital to grow their businesses. Increased female representation in the venture capital pipeline could lead to a rise in investment opportunities for women-led businesses, as research shows that women investors are more likely to support female entrepreneurs and invest in women-led businesses.
Increasing the number of women in VC roles is essential to drive change. A more diverse pool of investors can lead to better outcomes for women-led businesses in securing capital. Research from a 2004 follow-up study indicates that a greater presence of women venture capitalists can lead to increased network connections, more proposals, higher investment rates in women-owned firms, and ultimately, greater access to capital for women entrepreneurs. Research has shown that women-led businesses outperform male-led businesses in revenue and return on investment, despite being underinvested. As this is a market opportunity, it could be a wake-up call for men at VC firms to actively evaluate, connect with, and invest in women entrepreneurs.
References
Brush, Candida G., Nancy M. Carter, Patricia G. Greene, Myra M. Hart, and Elizabeth Gatewood. 2002. "The role of social capital and gender in linking financial suppliers and entrepreneurial firms: A framework for future research." Venture Capital: An international journal of entrepreneurial finance 4(4): 305-323.
About WIN-VC Canada:
New Power Labs is the research lead of the Women and Nonbinary (W) Impact (I) Network (N) for Venture Capital (VC), a national collaborative of organizations working to provide services, programming, events, and dedicated resources to women and non-binary entrepreneurs and gender lens investors across Canada who are working towards becoming investment ready and increasing the pool of investors driven to invest in these ventures.
This research is part of WIN-VC Canada, supported by the Government of Canada. WIN-VC acknowledges the support of Innovation, Science and Economic Development (ISED). ISED has awarded funding for WIN-VC that will make the venture capital environment more inclusive for women by transforming traditional investment processes, processes and knowledge into respectful and meaningful approaches that value equity and impact with a focus on diverse women and non-binary entrepreneurs and SMEs including Black communities, Indigenous peoples, racialized populations, persons with a disability, 2SLGBTQ2+ and new Canadians.
