A widely quoted statistic is that only 2% of VC funding goes to female founders. For example, this Forbes article highlights that “only 2% of all VC funding goes to women-led startups” and asks “Why is only 2% of VC funding going to female founders”? If true, this statistic is substantial underrepresentation and needs to be urgently addressed. However, it’s problematic for several reasons.
1. The Statistic Ignores Diverse Teams
The 2% statistic actually refers to companies founded solely by women. It ignores diverse companies founded by both men and women. This is strange, because it means a statistic promoted to encourage diversity actually captures a lack of diversity. In the UK, the 30% club is an excellent initiative to encourage boards to comprise 30% women through voluntary action, not mandatory quotas. Taking 30% as a rough benchmark, if 30% of founders are women, and a start-up has three founders, the probability of a three-woman team is 0.3^3 = 2.7%.
Adding in start-ups founded by mixed teams takes the number from 2% to 28%.
2. The Statistic Is Opt-In
PitchBook, which gathers the data, requires an “opt-in” for a company to be classified as female-founded. One VC inspected the data and found that most of their female-founded start-ups were not classified as such. While anecdotal (this is just one VC), if this is true generally, then the data would be a substantial under-representation.
3. The Statistic May Have Unintended Consequences
28% is still far from parity. It suggests that 2% of funding goes to all-female startups, 26% to mixed-gender start-ups, and 72% to all-male startups. Thus, this gap certainly needs to be addressed. But, overstating the problem (2% vs. 28%) may lead to unintended consequences.
First, the 2% message may cause excellent women to self-select out of entrepreneurship, If they believe that VC funding is so biased that only 2% goes to women. It may discourage the growth mindset, similar to highlighting how few Asians are in professional (or even college) sports might dissuade Asians from tryng hard at sport. The 28% number still highlights the importance of addressing the gap, while reducing the risk that females opt out of entrepreneurship.
Second, it may lead to interventions that are themselves counterproductive. If the gap is perceived as so large that drastic action is needed, female-only VCs may launch seeking to plug the funding gap. This can lead to homogeneity and gender-segregated VC portfolios that are the opposite of diversity and reduces the flow of ideas to the VC or between the VC-funded companies. Moreover, evidence suggests that being funded by a female VC reduces the ability of the start-up to raise money in future rounds, as other investors worry that the initial investment was due to gender homophily rather than its inherent merit.
More nuanced and less drastic interventions may be appropriate that target the underlying causes of the funding gap, rather than just the symptoms. One example is analysing the different questions asked by VCs to male and female founders, as studied by this article (which still mentions the 2% number).
