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Gender Inequity in Venture Funding
Silicon Valley's male dominance is a significant impediment to maximizing our innovation capacity.
Striving for Innovation Maximization
I wrote previously in Growth is Progress about Paul Romer’s Nobel-winning work with Semi-Endogenous Growth theory, which provides a pretty elegant foundation (albeit with a mouthful of a name) for much of what I’ll be writing about here and building in real life:
The basic idea is that ideas are nonrival - they are infinitely usable. This infinite usability of ideas means that income per person depends on the aggregate stock of ideas, not the stock of ideas per person. Just as more autoworkers will produce more cars, more researchers and innovators will produce more new ideas.
People produce ideas and, because of nonrivalry, those ideas raise everyone’s income. This means that income per person depends on the number of people searching for ideas (i.e., researchers).
Even in 2023, perhaps the largest area of opportunity in building this stock of innovators and ideas lies with female innovators.
Igniting GDP Boosts
We’ve very clearly seen progress in the gender disparity of both productivity and innovation. As I wrote last week, Brouillette used patent data to document that in 1976 less than 3% of US inventors were women. In 2016, the share had increased to 12% - still far far too low, but still 300% greater than 40 years prior.
But the gap is closing far too slowly. From “Who becomes an inventor in America?”,
“The gender gap in innovation is shrinking gradually over time, but at the current rate of convergence, it will take another 118 years to reach gender parity.”
They further find that:
“if women, minorities, and children from lower income families were to invent at the same rate as white men from high-income families, there would be four times as many inventors in America as there are today.”
Looking back over history, “falling barriers [to women and minorities] explain roughly 40% of aggregate growth in market GDP per person” over the past 50 years. That is, increasing access to idea creation is responsible for about 40% of the growth in the largest economy in the history of the world. This is not a small effect size!
Turning our attention to the future, Brouillette et al again find that raising innovation rates within women to the levels of males today would yield:
6.4% gain in steady state income per person
Annual GDP growth of 0.3% for the next century
Put differently, closing the gender innovation gap would effectively add 15% to our standard GDP growth for a full century1.
If we expand this beyond US borders, BCG estimates that fully funding women could add $5T to global GDP:
Estimate precision is not the point here - instead I’m simply attempting to show that closing the gender gap is absolutely essential if we wish to maximize innovation in this country, and the faster we do so, the larger the compounding effect will be.
I’ve previously stated that a goal we as humans, and I in particular, strive for is maximizing total global innovative capacity, which requires both addressing and solving for the funding inequities that currently feature in our ecosystem. That is, the closure of the equity gap is a necessary outcome of our work to maximize innovation.
The key player in funding innovation today, especially in the private markets, also happens to be a major contributor to the gender inequity in innovation. I’m talking of course about the Venture Capital industry.
Venture Must Lead the Way
Though it’s possible that future economic epochs require different forms of funding, venture capital will for at least the next decade or three represent the key piece of financing for (primarily software-based) innovation.
Now, if we listen to the talks and interviews and stories with venture capitalists, we may come away thinking that they are, as a class, well-intentioned and just as interested in anyone in driving gender-based equity of their funding engine.
I find these stories understandable but lazy; truth adjacent and self-serving. If we want the unsavory truths we should discard the platitudes provided annually to Techcrunch and instead follow the money.
First on the agenda is to directly unpack the funding inequities I’ve thus far referred to only vaguely.
For those of you who don’t follow the venture industry closely, capital deployment absolutely exploded over the past decade, riding cheap capital during an extended long bull run to unprecedented heights. We can already view 2021 as the peak of the “venture bubble”, with 100% year-over-year growth in capital deployed, but we can see clearly below that the funding pace has quickly fallen off:
This massive growth did not reside solely within growth funds, as early-stage funding also peaked in 2021 after steady, linear growth throughout the decade:
And on the back of all of this activity, total funds grew 4x, with assets under management (AUM) growing even faster (6-7x) over the last decade:
These new funds are not tiny, as we’ve seen the mass amounts of capital aggregated into mid- to large-sized funds:
So we have a clear story here that the coupling of a decade-long bull run in the economy with a prolonged low interest rate environment enabled the largest aggregation and deployment of venture capital in the history of the asset class. More venture dollars reductively should mean more innovation, so this is a good thing.
Venture Funding is Male Funding
A quick glance at funding for female founding teams indicates a very similar growth story:
But looks are deceiving, because although total funding to female teams increased absolutely, proportionately it has remained unchanged for a long time, and not just unchanged but miniscule:
In the midst of venture’s largest historical influx of capital, female founding teams remain glued to ~2% of total capital deployed. And here we can semi-objectively measure the value of adding a male co-founder to the mix - mixed gender founding teams raise about 8x more than female-only founding teams.
This delta is even starker when we map against all founders:
Here we see that all male founding teams raise 40x more than female founding teams, every single year.
Annual funding to all-female founding teams has exceeded $4B just once (the bubble year of 2021). For context, in early 2021, Robinhood alone raised $3.4B - more than the total raised by all-female founding teams in the prior year.
Women represent 50% of the population and 56% of the labor force, but female founding teams currently represent just 7% of total venture deals and 2% of total capital raised. How is this possible?
The issues are numerous and effect every phase of the funnel:
Too few female founders
Lower success rates in securing deals
Less value captured with each deal.
The Founding Gap
Founder gender gaps start early, at the angel investing stage. Women-owned ventures account for just 28% of entrepreneurs seeking angel capital, and 21% of these women entrepreneurs received an angel investment in 20193.
Further work studying AngelList, the dominant platform for angel funding, validates these numbers, finding that 16% of Founder CEOs, and 21% of all founders, are female.
At the very least we’ve triangulated that female participation in the venture ecosystem as a founder is a relatively lonely endeavor, as their male counterparts outnumber by a factor of 3 to 5. And this inequity manifests in a paltry proportion of total venture deals driven by female founding teams:
This pronounced gender gap persists all the way through the startup life cycle, as only 20 women have ever led an IPO, and even highest-level participation in public companies remains significantly depressed:
The gender gap thus starts early, with a significantly small proportion of females founding venture-backed companies. Those women who do found companies find it significantly more difficult to successfully raise capital for their venture.
In 2019, men who applied for startup funding had a 60% higher likelihood of being funded than did their female counterparts. And even when female founders do successfully make it through the funding gauntlet, they typically secure far less capital.
Comparing participants in an accelerator, BCG found that women (again just a quarter of participants) raised less than half of their male counterparts despite generating greater revenues from their startups:
This gap expands into angel investments:
We see that female founding teams not only raise less money but at lower valuations. These inequities extend even into industries “dominated” by women. Researchers classified industries as being “dominated” when more than 50% of founders in the given sector are of the given gender.
It’s no surprise that female-dominated represent just 11% of such sectors in France, nor that male founders out-raised in male-dominated sectors by more than 2x:
But even in female-dominated sectors, female founders raise just 3-5% more than their male counterparts.
The thesis of this newsletter, and of our work more broadly, is to help persist humanity’s positive progress by maximizing our innovative capacity. Innovation creates new ideas, and because ideas are non-rival, they can hypothetically benefit every person on the planet.
The most glaring opportunity in venture funding is glaringly obvious yet still remains unsolved - venture capital is for males, and until we close this gap, we cannot hope to maximize our innovation capacity.
We’re not talking about incremental improvements here. No, gender equity in innovation would yield GDP-level positive impacts. Venture is not the whole of innovation funding, but it is the dominant player in the private markets and arguably the most visible, given that most of our largest companies were venture funded.
But we have significant work to do, given that:
Female founders are outnumbered by 3-5x.
Female founders are less likely to successfully raise any venture capital.
Even when successful, female founders raise significantly less capital.
As a result, just 2% of venture dollars today flow through to female founding teams. These are facts, but they don’t tell us why, and they certainly don’t provide any clear suggestions about how we accelerate the necessary inequity reduction.
These are topics we’ll unpack next week.
Assumes 2% annual GDP growth.
I use venture capital as a proxy for innovation funding here because it represents, at present, the dominant ecosystem for private-market innovation funding. Public funding differs at least a bit from venture, given the construction of that ecosystem is quite different, but we’ll take that on in future installments.
This latter value actually represents an increase (from 18%) the year before.