Why Are Women in Europe Missing Out on VC?
New research from the European Investment Bank identifies the barriers to risk capital for women entrepreneurs in Europe, on both the demand and supply side, with multi-level recommendations to get them ready for institutional funding. We interview Shiva Dustdar, Head of Division at EIB’s Innovation Finance Advisory, about the report’s key findings and implications.
There’s been a lot written about the VC funding gap - how does this research build on that?
The report is based on Pitchbook data of Series C VC funding across the last ten years, in Europe, the US, and Israel. We also did a series of qualitative interviews with key ecosystem players, from fund managers to entrepreneurs. It was important to us to take a broader view and consider women in the C-suite and women investors, as well as women founders, to get both a demand and supply-side analysis.
On the demand side there was a knowledge gap in terms of, what is the stock of female entrepreneurs and female-led companies in Europe? What sectors are they in? Where are they based? What are their experiences? We wanted a better understanding of the constituency we're trying to support. We initially wondered, is there really a problem in terms of our financing supply, or is it that there aren't any women-led companies, or somehow they don't need our financing?
European VC Ecosystem Builders
Check Warner, Ada Ventures and Diversity.VC
Simone Brummelhuis, The Next Women and Borski Fund
Council for Investing in Female Entrepreneurs (UK) and Investing in Women Code
source: GenderSmart
On the supply side, we were trying to understand whether gender lens investing is integral to existing VC investment strategies or ad-hoc. Do we now have an emerging group of investors, funds, banks seeing this as a business opportunity?
What new data or insights did you uncover?
The first thing we found is that there is a funding gap but there’s actually quite a good stock of women entrepreneurs in Europe compared to the US (38% vs 45%) - which debunks the idea that there isn’t anyone we could be supporting. However, if you look at the share of funding it shows rather quickly that there is a problem.
One of the reasons for this is the lack of women making investment decisions. There is a tendency to invest in people who look like you - so, while there are generally fewer investors that are women-led, those that are led by women are twice as likely to invest in women-led enterprises or even three times more likely to invest in women CEOs. The data suggests that the more you support women as investors, the more you could unlock financing and support for women-led companies - this is where in the future our advisory will really come in.
The report suggests that women entrepreneurs are more risk averse.
“The data suggests that the more you support women as investors, the more you could unlock financing and support for women-led companies”
There's a hypothesis that women are more risk averse which may mean they avoid growth strategies that involve debt or leveraging equity - things that would give you the scale up potential, but also mean taking more financial risk. Our study was not a psychological study to really dig deep into risk taking bias. But we did interview headhunters, fund managers, and female entrepreneurs directly, and there was definitely anecdotal evidence. This may be linked to not really knowing or understanding what the various sources of financing are. And perhaps once there is more familiarity and public sector support to build capacity, the appetite for risk will increase. Maybe there's not just a level enough playing field or enough information flow. We think it's important to look at what the data tells us in a holistic way, from the companies’ perspective, the entrepreneurs’ perspective, and then also from the investors’ perspective.
The other thing that came out in terms of risk bias was actually down to investor bias. We heard over and over again from female entrepreneurs that they were treated differently when they pitched male investors. So an entrepreneur who may not be as comfortable taking a risk could then be put in a situation where they feel that the investor also sees more risk, which could have a compounding effect.
What’s the role of public capital?
In the EU, government agencies are among the most active investors in women-led companies. In the US, this was institutional private capital and corporate VC. So the European public sector has a critical role to play, both in mobilising private investment and increasing funding across the lifecycle of women-led companies. Some of this is about private capital incentives: if the public sector is, for instance, a limited partner investor in a fund, making sure that there are KPIs or special envelopes for others.
Recommendations for a Robust Ecosystem
Policy:
Short term: New gender metrics and KPIs
Long term: Gender-focused EU funding, an investor ‘seal of excellence’ for gender-based investments
Financing:
Short term: Back more first-time women-led funds, wider deployment of targeted facilities to banks
Long term: Explore innovative financing solutions
Advisory:
Short term: TA to banks, targeted fundraising support for women-led companies
Long term: Develop European network of ‘gender-conscious’ investors
Awareness:
Short term: Disseminate information among investor and entrepreneur networks
Long term: Systematic monitoring of gender data
Source: EIB
This isn’t in the report, but a recent experience at the advisory illustrates how public sector support - even if not financial - can help move the needle. One fund manager who wanted to launch her first biotech VC fund got in touch with us after reading some recommendations we’d made in another research paper on financing medical breakthroughs. She’d previously been a very senior partner at a key life science biotech investment fund as well as being a medical doctor, so she really knew what she was talking about. She wanted to raise a new fund, using our recommendations to build an investment approach. All of a sudden, she was having meetings with LPs who weren’t giving her the benefit of the doubt. EIB’s advisory gave her financial advice on how to potentially structure the fund in order to have the best prospects of investment, but crucially gave her visibility and strengthened her investment case. Ultimately, she managed to raise €200 million in a first close, which is quite something for a first time team in Europe.
Has COVID-19 made you rethink the role this research could play?
The macro data so far suggests that companies across the board are facing even tougher times for financing. But venture capital funds and corporate venture funds are supporting their existing portfolio companies. So if women-led companies haven't benefited enough in the past and might not be on the radar of some important investors, who are now very preoccupied with just protecting existing investments, they may not make it into the next rounds. On the supply side, it also is generally a difficult time to raise new funds.
It is also a huge opportunity for women, given that governments and the EU are taking over quite a bit of the risk of providing credit and liquidity to companies. I would certainly encourage women-led companies to take advantage and not be left out. COVID is an opportunity to rebuild the economy not only on a more green but overall more inclusive, diverse and therefore more sustainable basis.
Why Are Women Entrepreneurs Missing Out On Funding? Reflections and Considerations can be downloaded here.
Photo by Christina @WOCinTech on Unsplash