Alternative Finances

Who’s Funding Female-Led Startups?

“If we want to have more women in tech, it is not enough to get more women engineers and executives—we need more women founders, because it is the founders of companies that set the cultural tone for so much that happens in Silicon Valley.”

–  Peter Thiel

While there are many opinions as to the why of the situation, it is almost impossible to deny that diversity is not the tech economy’s strong suit.

Last week, for example, Twitter released its diversity figures — just in time for most Americans to go on vacation for the Fourth of July. The news? Despite pledges made last year, the gender split in its general workforce is 70 percent male to 30 percent female, and in core technical positions that split is even more pronounced: 90 percent male, 10 percent female. African Americans are 1.7 percent of Twitter’s workforce — or 49 people out of 3,000 total.

And while it is easy to single Twitter out, since they are the most recent recipient of the “Bad Diversity Headline Award,” their numbers are hardly unique. Google has similar stats, as do Facebook and Amazon (Jeff Bezos’ new female shadow aside).

Peter Thiel makes an interesting and valid-seeming point: setting a goal of simply hiring more women is not working. So the real change in the hiring practices is likely only going to take shape with a change in leadership culture. And while that makes sense and seems reasonable, there is a rather large problem with pursuing that solution. Venture capitalists and banks are arguably less excited about giving money to female and minority entrepreneurs than tech companies are to hire them.

According to a study by Babson College, only 2.7 percent of the 6,517 companies that received venture funding from 2011 to 2013 had women CEOs. A 2012 study by Dow Jones was slightly less pessimistic, they found that about 7 percent of venture capital dollars go to women-led startups. And while the data bounces around depending on the study — and what the definition of “female” led being used is — there are no studies that show women or minority entrepreneurs receiving 10 percent or more of VC dollars.

And while investment is not a great path for many female led startups, looking for traditional loan financing isn’t any better. The U.S. Senate Committee on Small Business and Entrepreneurship found that female entrepreneurs receive fewer loans or get less favorable terms than men.

Now while there doubtlessly are people in the world who would conclude from this information that women just aren’t entrepreneurial — in the face of data, that is an implausible conclusion.

According to the federal government, 20 percent of the firms in the U.S. with revenue over $1 million a year are female-owned, and there are a myriad of studies that indicate that female-led startups, in general, bring in higher revenue and are profitable more quickly than their male-owned counterparts. (Ah, maybe because no one will give them venture money or lend to them!) It is worth noting, however, that the sample sizes are grossly imbalanced which complicates direct comparisons.

Female entrepreneurs are out there – it’s just difficult for them to find funding. An MIT study found that both VCs and loan officers preferred their pitches coming from attractive men. Women (and unattractive men) did far less well in securing dollars even when doing the exact same pitch.

However, it looks as though tech itself is helping to make the tech world more inclusive almost in spite of itself. Why? Because being there in person to “seal the deal” is becoming less the “only path” for those building new businesses — whether that meeting was with an angel investor, VC or banker. Alternative financial services platforms have removed that step for some types of funds gathering. While this has made the marketplace for business funding a little less personal, it’s also the case that it’s expanded the range of options that female entrepreneurs can access.

The Crowdfunding/Alt Lending Blindness Boost

While women do not do nearly as well as their male counterparts in typical investment scenarios, they do extraordinarily well on crowdfunding platforms.

Researchers from NYU and Wharton discovered that female-only businesses improved their chances of funding to 40 percent by putting their projects on crowdfunding sites like Indiegogo and Kickstarter. In tech, women-led Kickstarter projects saw a 65 percent funding rate, as opposed to just 35 percent for men.

CircleUp is a private equity platform for consumer businesses, on which female-founded firms are nine times more successful raising capital than they are with traditional banks, and five times more successful than with venture capital investors, according to data CircleUp provided to Fast Company.

SmartBiz — an alt finance player that allows entrepreneurs an electronic platform to get gain access to SBA loans though a greatly expedited process — says that though they see a diversity of business types on their platform, they have noticed an interesting pattern with their firm’s demographic use pattern.

“We find that over one-third of our business are women owned businesses. Whereas with a traditional bank it is typically in the single digits,” SmartBiz General Manager Evan Singer told PYMNTS in a recent interview.

CircleUp CEO Ryan Caldbeck told Fast Company that he doesn’t believe the success of crowdfunding is gender-specific, but that it just offers a superior path for a lot of entrepreneurs regardless of background.

“Entrepreneurs in general are not well served by the existing closed network of funding,” he told Fast Company. “Online marketplaces are open and transparent. The result is quality entrepreneurs find success more efficiently.”

Singer in his conversation with PYMNTS, however, was more specific. He did note that while the success itself is not specific to gender, the relative distance that electronic platforms put between business and those who could offer them money is important to evening out access.

“I think a lot of what we can do online is remove that personal bias that might happen in the real world,” said Singer, also noting that bias does not necessarily reflect a bad terrible person whose goal is to deny funding to outsiders. It is just easier in-person to focus on whether someone matches your expectations, whereas the setup of online platforms drives the focus onto the business fundamentals themselves.

The “Underpriced Assets”

Before diversity was a favorite topic in the industry – 500 Startups was founded in 2010 to focus on atypical efforts, particularly those led by women, minorities and those in foreign countries.  Since then, and to this day, their leader, VC Dave McClure wants it to be clear to all that they are not doing this because they are good, kind people who innately care about diversity.

“I’m a greedy f***ing bastard,” he told a crowd at an industry event earlier this year. “We’re doing this because we think we’re going to make money. We invest in women and minorities because we think they’re underpriced assets that the rest of the world is missing.”

And 500 Startups has put its money where its mouth is. The firm has backed 1,000 startups in the last five years. Of those, 250 have female founders — and over 150 have a female CEO. Of those, 300 have gone bust, two have valuations north of $1 billion (unicorns), and about 20 companies have valuations over $100 million (centaurs).

“We also have lots of My Little Ponies,” McClure said. “It’s everything that’s not a centaur or unicorn but where we think we’re going to make money.”

And though not everyone out there expresses themselves quite as fluidly as Mr. McClure, the sentiment that there might be something to greater diversity is perhaps quietly catching on.

Earlier this summer Intel Capital — an investment arm of Intel — unveiled its “Diversity Fund.”

The $125 million fund is dedicated to investing in companies run by women or underrepresented minorities over the next five years. To qualify for funding, companies must have a female or minority CEO or founder — or the CEO must have at least three direct reports who are female, African American, Hispanic American or Native American.

“Our goal is to help scale them and make them more viable,” Lisa Lambert, the Diversity Fund’s managing director, said in an interview with Fortune.

She further noted that the goal of the fund was not philanthropic, but revenue oriented. “They have to generate revenue for our strategic interests,” says Lambert.

With the gap as large as it is, crowdfunding, alt finance and a fund or two will not turn the situation around overnight.

But what all of the emerging solutions have in common is a new focus — which is financial, rather than fairness.

At the end of the day, the firms that find the best innovator the fastest just might end up funding the next Facebook. And if a platform gets there by blinding out bias, they give everyone else an incentive to find an effective filter so they don’t miss a big opportunity.

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