VC Funding Barrier Eases for Women

Woman Peeking Over the Fence

Although women stand a greater chance of getting venture funding than they did a decade ago, they’re by no means on equal footing with men when it comes to financing their startups, according to researchers and venture capitalists.

The percentage of U.S. venture backing for startups with at least one woman founder reached 13 percent in 2013, dramatically higher than 2004’s 4 percent. Those numbers come from the private equity and venture capital researcher PitchBook.

Chart of U.S. Deals to Female Founders

While the number of women who act as angel investors, venture capital partners or limited partners has helped push those figures higher, they don’t equal a silver bullet in terms of breaking the funding barrier that women entrepreneurs face.

For example, in her Harvard University thesis, Alisha Diana Ramos found that 18.2 percent of female VCs actively search for women entrepreneurs, 45.5 percent somewhat actively search, and 36.4 percent don’t actively search.

“Gender shouldn’t be a criteria for funding,” says Cindy Padnos, founder and managing partner of Illuminate Ventures, a $20 million fund for early stage investments. “But it also shouldn’t be a barrier.”

Barriers to Funding

While landing funding is challenging for anyone, women face additional hurdles. One is the relatively small size of the network of women venture capitalists, angel investors and limited partners at VC firms. While having women in these roles doesn’t make it a slam-dunk for a woman entrepreneur to receive funding, it at least expands the potential network of funding sources and referrals she may receive.

Chart of femal VCs at the firm
By Alisha Diana Ramos

In her thesis, Ramos cited the Diana Project, a multi-university study which found less than 10 percent of VCs are women. It may be coincidental, but funding for women tends to hover around the same percentage and less. Ramos noted that women entrepreneurs tend to receive only 4 to 9 percent of a VC’s total funding in a given month.

That fits with Padnos’ observation that having more women as investors can raise the volume of deals closed with woman-founded startups.

“Half of the investors in our fund are women, so I am sure we see more deal flow of women-led companies than others,” she says. “We also probably see a larger portion of women entrepreneurs because our advisory members are largely women, too.”

Besides the dearth of networking opportunities, women face other challenges, as well. One is the number of non-technical female entrepreneurs who lack a technical partner. “You need a complete team when you try to raise capital,” Padnos observes.

Next, because women tend to have smaller networks, they need to spend an inordinate amount of time identifying the contacts who can provide the “best” introduction to an investor. Basically, Padnos says, you’ll be judged by the company you keep. The higher caliber the reference, the more weight it will carry with the funder.

Finally, women tend to restrain their vision. “I frequently see pitches from women where I need to push them to get their grand vision for their business,” Padnos says. “If a woman takes too much time before getting to the point about the size of the company she wants to create, the investor is impatient and may not want to wait.”

Where Women Land Funding

So far this year, only 10 percent of total funding of software companies involved a woman founder, says Pitchbook Senior Analyst Peter Fogel. In retail the number was 40 percent.

When a woman entrepreneur does land outside funding — beyond help from friends and family — it typically comes from angel investors, followed by venture capital firms. A much smaller portion comes from loans, Ramos says.

Chart of Sources of Funding
By Alisha Diana Ramos

As for ways in which women have successfully secured venture funding, it largely comes via an introduction from one VC or angel to another, according to Ramos’ report. That’s followed by a male friend making an introduction. The third is from attending a startup event. (An introduction by a woman is fifth.)

Making a pitch or demo at an event came in fourth, which loops back to Padnos’ comment that women need to ramp it up when explaining their “big vision.” Remember, investors are already being critical when listening to a pitch, so you can’t allow yourself to do their work for them. Connect the dots rather than underplaying during your pitch, Padnos says. Start with your grandest vision for the company.