Gender and Venture Capital Lead Investors: Why does it matter?

According to Crunchbase in 2017, only 8 percent of venture capital (VC) partners of the top 100 VC firms globally were women. According to a recent study conducted by Gender Metrics , an even smaller percentage of women act as lead VC investors. This gender disparity is impacting which entrepreneurs get funding as well as how funded companies develop and grow.

Why focus on lead VC investors? Lead VC investors tend to exert the greatest influence on investment deals: they set the price and terms of the investment, take a large part of the round, and usually represent the entire funding round on the funded company’s board.

Research data on lead VC investors for Early Stage investments made in the United States (2012 – 2016) was compiled using the Pitchbook database. The bubble graph provides a visual representation of the study’s results. Each bubble represents a VC partner lead investor. The size of the bubble indicates the overall number of deals per lead investor. Female lead VC investors are represented by green bubbles and male lead VC investors represented by blue bubbles.

The total sample of 283 VC partners includes 38 female VC partners (13 percent) and 245 male VC investors (87 percent). The highest number of deals by a single lead investor was 122. Two male VC partners reached this level of deals in 2012 – 2016. The highest number by a single female VC partner was much lower at 56 deals.

It is also critical to note that during this time period, the vast majority of female VC partners (63 percent) were not active as lead VC partners in any of the VC deals made. In comparison, a much smaller percentage (38%) of male VC partners were not active as lead VC partners.

These preliminary results indicate that in terms of VC deal impact, women are playing an even smaller role than would be expected when looking at the total numbers of female VC partners. In other words: Measurement matters –  VC headcount and VC deal impact are not the same.

Solution? Creating more VC firms founded, funded and focused on women is part of the solution. Increasing the numbers of women VC partners in existing VC firms is another part of the solution. Increasing the numbers of women VC partners active as lead investors in VC deals must also be an integral component for tipping the scales toward gender parity.

What else? Real change needs to incorporate tracking and benchmarking mechanisms: Tools, metrics and measurements that take into account the entire scope of VC firm activities.

For further information including later stage investment results click here.

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Over $1 billion funding for women entrepreneurs – Will it work?

The Women Entrepreneurs Finance Initiative, also known as We-Fi is a $1 billion dollar fund and potential game changer in accelerating the further expansion of women’s entrepreneurship in developing countries beyond the micro level.

Launched at the G20’s leaders’ summit in July, the fund, administered by the World Bank and International Finance Corporation will be allocated to programs initiated by multilateral organizations such as the Inter- American Development Bank (IDB), Asian Development Bank (ADB), African Development Bank and others.

But will it work? Beyond the initial investment… will it be able to create more opportunities for women to start, grow and reap the benefits of successful entrepreneurship? Three issues are important to consider in the process before actual funding takes place: Ensuring longevity, Avoiding ghettoization, and Target group identification.

1.Ensuring longevity

$1 billion USD is substantial amount but not a limitless supply of money. Past experiences have shown that similar types of programs such as guaranteed loans for women entrepreneurs disappear once the project funding has been spent.

The issue is embedding a new gender aware mindset within the implementing institutions.

  • This approach should include gender training for all decision-making levels and departments, not only the directly affecting staff. Brainstorming how other services could also be offered, developed and integrated.
  • A timeline for the stages of integration should be developed prior to project approval so that only institutions that are committed to integrating and ensuring the continuation as well as expansion of services receive funding.
  • See also the next point below….

2. Women entrepreneurs are ‘ghettoized’ and only considered for funding earmarked for women entrepreneurs

An important sub-component of the We-Fi should be raising the visibility of women entrepreneurs through metrics and data collection:

  • Metrics need to be systematically integrated and increase the data on women entrepreneurs (who get funding and outcomes) what works and what doesn’t work.
  • There should be an individual skilled in data collection included in the project team and budget.
  • Before data collection, the needs of three key stakeholders must be incorporated: 1) What types of metrics do fund managers need? 2) What type of data helps in further project development and implementation? 3) What type of data would be useful for policy making at the regional/national level?
  • The collected data should be compiled and developed into analytics.
  • The resulting analytics are made available to other institutions (banks, funding agencies, multilaterals) as tools to screen/access potential candidates for funding (similar to the use of psychometrics for bank loans).

3. Maintaining a focus on high growth women entrepreneurs

Surprisingly, this may be the most difficult issue to address. Operationalizing ‘growth oriented’ entrepreneurship is especially tricky since existing definitions tend to be vague or difficult to measure. Yet it is of paramount importance that  the growth aspect not be lost in the administration of programs and initiatives. Clear definitions of growth-orientation need to be developed since traditional micro-finance programs are not able to meet the funding or capacity building needs of growing businesses.

Working definitions should be developed prior to project funding and incorporate elements of business track record (employees, revenue, profits), sector viability, innovativeness (current and potential) entrepreneur human and social capital (skills,  networks, experience, education, etc.) as well as aspirations for growth.  See earlier blog on Defining high growth/high impact entrepreneurship.

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Defining high growth/ high impact entrepreneurship

entrepreneurship-lighbulb(1)A widely accepted definition of high growth entrepreneurs identifies these enterprises as exhibiting an average annual growth (number of employees or by turnover) greater than 20% over a 3 year period[1]. Based on this definition, the Organization for Economic Cooperation and Development (OECD) found that high growth firms constitute between 3% and 6% of all firms.

Another definition for high impact companies introduced in 2011 takes into account a firm’s sales and employment growth[2]. High-impact companies showed sales that at least double over a 4 year period and an employment growth quantifier (product of its absolute and percentage employment change) of at least two.

However, both these definitions require large amounts of firm level, longitudinal data that is difficult to operationalize across multiple countries and regions.  A 2011 Ernst and Young study of entrepreneurship in 60 countries found that only 3 out of every 1,000 respondents achieved high growth[3]. These high impact entrepreneurs were defined in terms of their growth aspirations: as those entrepreneurs who intend to increase their number of employees fivefold in the next 5 years. They also exhibited certain identifiable characteristics: They tended to be college educated and had internationally-oriented businesses. The study was based on Global Entrepreneurship Monitor (GEM) data.

In 2015 the Global Women Entrepreneur Leaders Scorecard adapted the parameters introduced by the 2011 Ernst and Young study to specifically identify high impact women entrepreneurs.  The Scorecard defined high impact women entrepreneurs as those who exhibit characteristics associated with high growth outcomes but which may currently be aspirational rather than already achieved[4]. The 3 criteria used included: college educated women entrepreneurs, women entrepreneurs that have a  market-expanding, innovative businesses and are intending to employ at least 10 people and plan to grow more than 50% in 5 years. Market expanding, innovative businesses are identified as the percentage of women entrepreneurs with more than 1% of customers outside of the home country.

 

Sources:

[1]OECD (2007). Eurostat-OECD Manual on Business Demography Statistics, Paris: OECD.

[2] Tracy, S. (2011). Accelerating Job Creation in America: The Promise of High Impact Companies, Research report commissioned by the U.S. Small Business Administration, No. 381

[3] Morris, R. (2012). ‘The 2011 High-impact Entrepreneurship Global Report’, sponsored by Ernst and Young, Endeavor, and the Global Entrepreneurship Monitor

[4] Aidis, R., Weeks, J. and Anacker, K. (2015), The Global Women Entrepreneur Leaders Scorecard 2015: Data and Methodology

 

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How homophily hurts high-growth entrepreneurship

triplets_homophily

Homophily refers to the tendency for people to form connections with others like themselves. This tendency has been found to occur broadly across age, race and political inclination. Homophily has also been found to influence many types of relationships ranging from personal friendships and marriage to business-related work advice and support. No surprises then, that homophily also affects Venture Capitalists (VCs) in their hiring behaviors as well as in funding of high-growth entrepreneurs. In fact, recent research by Gompers & Wang (2017) identified patterns of homophily-based hiring by VCs and homophily-induced information flows. Both of which have resulted in fewer women choosing to be high-growth entrepreneurs or VCs.

The real issue is not blatant sexism, but rather a marginal preference for a male vs. female candidate which results in more male VC partners and more VC funding for male high growth entrepreneurs. At the VC firm level, a small bias towards hiring someone of the same gender may seem trivial but the cumulative effect results in persistently low representation of women in the VC industry. In other words, ‘individual’ preference in the ‘white’ male dominated VC industry translates into a continuing trend of ‘white’ male dominated VC firms in spite of the presence of suitable candidates that are women.

Ample evidence captures this trend: Of the top 100 VC firms in the US, only 7% of the VC partners are women and only 18% of funded companies were founded by women in 2016.

Why does it matter?

At the personal level homophily may feel like the right thing to do but in reality interferes with rational judgement of individual or business merits. Moreover, homophily can result in unintentional glass ceiling effect consequences for those individuals such as women, who are not already well-represented in the VC community.

The negative effects of gender homophily have been identified elsewhere including among US physicians in referring specialists to Medicare patients. In this case, since most referrals are still made by male physicians, biased referrals lower demand for female specialists. Since specialists tend to earn more than primary care physicians, this behavior significantly contributes to the average gendered earnings gap among physician specialists.

The simple solution in both cases, for VCs and physicians alike, would be to increase the numbers of women at the decision-making level. However, at a more fundamental level, in order to counter the persistent effects of homophily, increased exposure to diversity as well as increased availability and use of metrics and assessments would allow for ‘choices’ to develop based on a broader range of criteria that go beyond superficial similarities.

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Getting it Done: Barbara Kasoff – Champion for Women’s Business Advocacy

regulations-rules

Even when public sector institutions commit to policies that include a gender perspective, the knowledge and capacity are often lacking to ensure that women will be able to benefit from the specific initiative or intervention. More involvement is needed to better understand how high level policies can be activated to benefit women. Women’s organizations can play a key role in this process.

WIPP (Women Impacting Public Policy) is an excellent example of a women’s organization that filled the gap between policy and practice needed to facilitate the development and growth of women owned businesses (WOBs).

Co-founded by Barbara Kasoff in 2001, WIPP elevated the visibility of women business owners in the US using 3 key strategies:

  • Information & training
  • Advocacy & lobbying
  • Coalition-building

Information & Training: WIPP educates WOBs on economic policy and current legislative initiatives that impact business health and growth. For example, in 1994, a US government procurement target was set so that 5% of annual spend for US government contracts should be awarded to WOBs. However, in spite of this policy, very few WOBs were able to bid and win government contracts. WIPP educated and provided training to WOBs regarding the procurement bidding process.

Advocacy & Lobbying: WIPP’s legislative strategy is to have the greatest possible impact for WOBs. WIPP representatives regularly meet with members of the US Congress, the White House and federal agencies to educate and lobby for legislative reforms.

It was only through years of concerted effort by WIPP, to educate WOBs on the application process as well as to lobby US government officials to modify contract requirements that the 5% annual women-owned small business procurement target was met in 2015. However, the third key strategy, Coalition-building, lay the groundwork for the other two strategies to succeed.

Coalition-building:  From the onset, WIPP had a clear, strategic vision. Instead of acting alone on behalf of its own members only, WIPP formed a coalition of 79 women’s business organisations that represents over 4.7 million business women to create a unified and powerful voice for WOBs based on a platform of common economic issues such as US procurement policies and access to capital.

Barbara Kasoff served as WIPP’s President for 9 years and most recently served as WIPP’s President Emeritus. Her message was simple: If you don’t like the way government regulations affect your business, get involved. She led by example, facilitating billions of dollars in US government contracts to reach growing numbers of WOBs.  We are grateful for and benefit from her visionary leadership!

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Effective Business Environment Reform: A Gendered Perspective

reform

In developing countries, projects or interventions tend to address the needs of women at the base of the pyramid or micro-business owners. In contrast, very few initiatives focus on the gendered effects of the regulatory, business or investment environment on business women with small or medium-sized businesses (SMEs). Though there is evidence that equal legal rights increase women’s business ownership[1], there is insufficient evidence on which business and investment reforms have the greatest impact on women’s business activities. Moreover, little is known as to which efforts can support the process of Business Environment Reform (BER).

A number of initiatives are underway in developing countries to include a gendered perspective in BER. However, given that these initiatives are still in the early stages of implementation, lessons can be drawn from advanced economies such as the US that developed in the process of gendered business reform.

Two concrete best practices are highlighted below

1. Women’s Business Centers: A one-stop shop for women entrepreneurs

Though it may seem gender neutral on the surface, the timing, location and content of business support services are inadvertently tailored to the needs of men. In several advanced western countries, women’s business centers (WBCs) have been introduced to address the specific needs of women. WBCs offer specific benefits for women:

  • The entire experience is much longer than a single classroom-based course, and can be said to be more “relational” than “transactional”.
  • The locations are more “women-friendly”, often providing child care and offering courses at varying times, to meet the needs of women who are balancing the demands of jobs and family responsibilities.
  • The client experience is more holistic, going beyond classes about writing business plans to include one-on-one counselling, peer roundtables, individual or group mentoring, and discussions of work–family balance. Often exercises or sessions focus on building self-esteem and ‘entrepreneurial’ confidence of women, many of whom lack business role models or previous managerial experience.

For example, in the US, the Office of Women’s Business Ownership provides partial funding and management oversight to over 100 non-profit organisations that provide entrepreneurship training and technical assistance primarily to women. Each Women’s Business Center (WBC) tailors its services to the needs of its individual community.

2. Women’s Advocacy is essential to ensure implementation

Even when public sector institutions commit to policies that include a gender perspective, the knowledge and capacity are lacking to ensure that women will be able to benefit from the initiative or intervention. Through the involvement of their members and through targeted advocacy, women’s organisations can increase the visibility and success of these interventions.

An example of the specific role women’s advocacy can play in gender-focused business development comes from the US. In 1994, a target was set that 5% of annual spend for US government contracts should be awarded to Women Owned Businesses (WOBs). However, it was only through years of concerted efforts by Women Influencing Public Policy (WIPP), to educate WOBs on the application process and lobby the government to modify their contract requirements, that the 5% annual target was finally met in 2015. A critical component to its success is that WIPP does not act alone, rather, it brings together a coalition of 78 business organisations to advocate for common economic issues such as procurement policies and access to capital.

What these two best practices illustrate, is the need for national government involvement to support women’s business centers as well as active coalitions of women’s business organizations to ensure reforms are effective.

Overall, gender-neutrality in BER is rare. Therefore, as a rule of thumb, no intervention should be assumed “gender neutral” simply because the differential effects are not obvious —activities should be assumed to disproportionately benefit men unless analysis has informed gender-sensitive design, confirmed through sex-disaggregated results measurement. The focus for interventions should be on business reform and investment activities as these often seem to be gender neutral when in fact they are not.

For Further information:

Gender and Business Environment and Investment Climate Reform for Bangladesh by Aidis, R. (2017), report commissioned by UK DFID.

Gender Dimensions of Business Environment Reform: A Guide for Policy Makers and Practitioners (2010) by Simavi, S., Manuel, C. and Blackden, M., World Bank.

Business Environment Reform and Gender, Business Environment Working Group (BEWG) (2016) by Miles, K., Donor Committee for Enterprise Development (DCED)

[1] Source: Women, Business and the Law Report (2014). Based on 94 economies for which data is available.

 

 

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Trump and Women’s Entrepreneurship in the US: Gender, Elitism and Privilege

ivanka-and-donald-trump

Donald and Ivanka Trump

To date, Trump’s biggest influence on his ideas regarding women entrepreneurs has arguably been his entrepreneur daughter Ivanka Trump.

Trump may also base his notions of women’s entrepreneurship on his own experiences as an entrepreneur.

In this regard, both Trump and his daughter’s entrepreneurial success was strongly influenced by their father’s privileged position.

In Donald Trump’s case, he was able to capitalize on the ‘Trump’ name as well as enjoyed a loan of $ 14 million dollars from his dad.

For Ivanka Trump, her rise to entrepreneurial success was strongly facilitated by Donald Trump’s success as both a real estate mogul and as a television celebrity in ‘The Apprentice’.

There is no question that both Donald and Ivanka are savvy and talented entrepreneurs. But both also benefitted from their ‘status’ in starting and growing their businesses

Donald and his daughter Ivanka fit the characteristics of ‘Privileged Entrepreneurs’ – based on  the ‘Melting Middle’ typology of the six main types of entrepreneurs. Privileged individuals experience less entrepreneurial impediments due to their elite or celebrity status. For example, privileged entrepreneurs have access to networks and resources due to their social status and family connections. Entrepreneurs in this category are not less capable than other entrepreneurs rather in addition to their personal skill and talent, they enjoy privileges which allow them to ‘function’ above the normal limitations of the existing institutional environment. In this way, they often do not encounter the same regulatory barriers and have access to key resources such as financing, contacts, connections and insider information not readily available to the unprivileged.

Examples of privileged entrepreneurs are often found among the siblings, in-laws and children of the ruling elite.  Both Isobel de Santos and Valentin de Luz Guebuzza are examples of women entrepreneurs that enjoy this type of privileged status. Isobel is the daughter of Angola’s President and Valentin is the daughter of Mozambique’s President. For both Isobel and Valentin, their elite status greatly reduced or even eliminated gendered impediments to business startup and growth.

In Ivanka’s case, before joining the family business, Trump worked for Forest City Enterprises. Later she developed her own brand and introduced a line of jewelry (the Ivanka Trump collection) which was launched at her first flagship retail store called Ivanka Trump on Madison Avenue. Ivanka is principal of Ivanka Trump Fine Jewelry and she is also Executive Vice President of Development & Acquisitions at The Trump Organization. She has further released her own line of Ivanka Trump Lifestyle Collection which includes fragrance, footwear, handbags, outerwear and eyewear collections. Prior to her father’s presidential campaign, Ivanka’s estimated net worth was $150 million.

So what does this mean for the future of women entrepreneurship in the US? If Ivanka Trump becomes the ideal for women’s entrepreneurship then like in many developing and emerging economies across the world, we will see privileged women continue to translate their status and business acumen into successful businesses. However, our entrepreneurial ecosystem as a whole will suffer greatly, as unprivileged women entrepreneurs continue to face gendered barriers to access to capital, networks and visibility needed to start but grow their businesses.

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