Venture capital has a serious gender gap: Here’s how to fix it

That female-founded tech startups still struggle to find investment, in 2024, is a point of shame for the industry. It goes without saying that this imbalance should be confined to decades past.

Tech startups need investment to become successful. Yet today there is an amazing disparity between the levels of funding received by female-led tech startups and male-led ones. Time after time research reports show this disparity to exist. Time after time commentators say it should not exist. Yet it persists.

This disparity is no surprise given the context of the wider society in which we live, where, for example, the Trade Union Congress’ (TUC’s) regular look at gender pay disparity finds Women’s Pay Day – the day when the average woman stops working for free compared to the average man, was 21 February this year.

Biases – conscious and unconscious – have been shown to contribute to the disparity when it comes to investment in female-led startups. It should be a thing of the past. What’s causing it, and how can investors change?

Looking at the gender funding gap numbers

Last year, the Alan Turing Institute published a report titled Rebalancing Innovation: Women, AI and Venture Capital in the UK, which showed that female AI founders receive six times less funding than males of venture capital (VC) funding deals involving AI startups. Even when they do get funding, female-founded AI startups were found to receive six times less capital per deal on average compared to startups founded by male entrepreneurs. Women-led firms received approximately $1.64 million (£1.3 million) per deal against $10.86 million (£8.6 million) per deal to all-male teams.

This is replicated in other areas of tech. Women Who Tech found that 65% of female founders were told they would raise more money if they were men and 70% of women reported differential treatment while raising funding, specifically because of their gender.

This isn’t just apparent in tech. Female-founded companies received only 2% of all VC investment in 2022, per Pitchbook data.

Female founders deliver more ROI

The bottom line for VCs is that if they want a good return on their investment. It is possible to find examples of VCs that are emphatic in their support of female founders, and who are clear that female founders are often a very good investment.

In its 10-year review, First Round Capital looked at ten year’s worth of data from its first decade of operation and its number one finding was that companies with a female founder performed 63% better than its investments with all-male founding teams.

The Alan Turing Institute research found that only 5% of Venture Capital (VC) firms that participated in funding deals have an equal or majority representation of women atthe decision-maker level. The Institute is clear that steps to redress the funding disparity revolve around fixing this gender imbalance. They say this goes hand in hand with fostering an inclusive culture, monitoring investment practices and diversifying the ecosystem.

This can be harder than it looks. Biases, both conscious and unconscious, are at play in much of society, and fixing them can be a slow process – too slow for Elizabeth Shaw, founder of 1000 Black Voices.

“There must be a shift from slow, incremental progress to clear and rapid action. The House of Commons Treasury committee is calling for such action,” Shaw tells ITPro.

The UK Treasury Committee Shaw references criticized VC funders on many grounds, noting not just that all-female founders receive a mere 2% of all VC funding but also that VC investment is unacceptably concentrated in London and the South East.

“In the twenty-first century, it shouldn’t come as a surprise to investors that women and those from ethnic minority backgrounds can start successful businesses,” said Harriett Baldwin MP, then chair of the Treasury Committee.

“Given public funds play a key role in the success of the UK’s venture capital sector, more must be done. Firms must be compelled to reveal their diversity data when applying to these tax reliefs in an effort to increase transparency and drive change. Government incentives could also be tweaked to encourage more regional venture capital investment.”

Further, the Committee recommended that the Treasury make collecting and publishing the diversity statistics of venture capital firms and their investments a requirement for eligibility.

Shaw agrees: “Shining a light on the gender and ethnicity gap from startup to exit provides visibility of data, investment opportunities, and evidence for change. Urging the government, banks, and VCs to play a more authentic role is vital.”

Steps to address the VC funding gender gap

Appoint more women on boards and change culture

Heather Delaney, Managing Director and Founder of Gallium Ventures is clear that women need to take their place on the boards of VC funders, but this alone is not enough. There is also a wider education program to be undertaken: “From an investor perspective, there’s a two-pronged approach.

“Firstly, ensuring better representation for women in C-suites to reflect the consumer market and enhance the appreciation of female tech founder proposals. Secondly, promoting the unlocked potential offered by female tech founders among the existing male-dominated VC boards. This would involve educating them about female-focused industries and the values attached to them, so that decision-making is not impacted by lazy assumptions.”

Promote female-led and focused investment funds

Female-led and focused investment funds are another way to help redress the balance. They are only a partial solution though. The risk is that female funding is ghettoized leaving male-dominated VCs and male founders as the mainstream – a position they already occupy. Female-led VC firms who network, provide mentorship in tech, and show their successes to the world help promote the outstanding value of supporting female-led startups.

Delaney covers many bases when she says, “Opening up the VC funding world’s pockets to female founders in tech represents a great opportunity for a number of stakeholders; for founders to further develop their businesses, for consumers to have greater choice, for investors to increase their returns, and for the economy as a whole to unlock potential.”

Promote female-led and focused investment funds

In the end, while the case for funding more support for female-led startups is clearly made, society is taking a long time to get with the program. Female-led investment funds do solid work, but, the transformational solution would be changing how the wider VC world goes about its business.

We’ve already seen how bodies like the UK’s House of Commons Treasury Committee and the World Economic Forum are working to encourage more support of female-led startups. Maybe legislating bodies need to take up the baton and sprint with it, rather than allowing wider society with its wider social attitudes, to meander along.