In the age of the celebrity founder, investors and commentators alike are consumed with the business giants that have seemingly conquered the world. Our appetites are relentless when it comes to even the most routine action or soundbite from Musk, Bezos, and Zuckerberg. And, in today’s meme-ified markets, investment dollars and airtime flow to these leaders and their companies in far greater volume than to anything else.
As any Twitter jockey will eagerly explain, the best investors are contrarian. They jump on trends before anyone else, find gold in others’ trash, and are greedy when others are fearful. But the biggest, most obvious contrarian play is one that has existed forever and takes no effort to unearth.
Female founders and women-led companies, despite systemic barriers, have amazing upside potential. For investors trying to back the next Bill Gates, start with women.
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Perspective needed, stat
As anyone who has ever walked down a street can observe, the population hovers nearly equal between men and women. But that’s where the parity ends. Venture-capital funding to female founders represented 2.3 percent of the 2020 total, according to Crunchbase. That’s down from 2019’s 2.8 percent, which was an all-time high.
In 2019, Harvard Business Review reported that 7 percent of elite startups’ board members were women.
Advocacy group All Raise determined that women made up 13 percent of “decision-makers” at venture-capital funds; 65 percent of the funds had zero female partners.
The social implications here are obvious and widely discussed. From an investment perspective, it’s just really stupid.
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Even with a tiny fraction of funding and inadequate support from the financial community, women-led startups outperform. In 2018, Boston Consulting Group sponsored a study that compared men- and women-led startups. Out of the 350 startups it observed, BCG found a two-to-one funding advantage for the male founders. It also found that, cumulatively, the women-led startups generated 10 percent more revenue over a five-year period. That equated to $0.78 in revenue per dollar raised for the women and $0.31 for the men.
This isn’t to say that women are inherently better business people than men. But it’s interesting that an industry that prides itself on objective quantitative analysis has such a glaring blind spot.
Numbers aside, there are some easy observations to make:
1. Given that most startups are founded, managed, and funded by men, they typically cater to male audiences even if the product or service is not focused on a specific gender. That could be easily changed if the companies made a point to have equal representation in decision-making positions, but most don’t. A Kaufmann Fellows study found that women-led companies hired 2.5 times more women. The resulting diversity in thought is undeniably good for innovation and business strategy.
2. Many startups fail because the teams never quite found product-market fit or grossly overestimated the addressable market. It’s hard to find a pitch deck these days that doesn’t show zero to $100 million in annual recurring revenue between years one and three. There is truth to the adapted social-media meme, “Lord give me the confidence of a male 25-year-old startup founder.”
The lopsided fundraising environment forces female founders to show greater subject-matter expertise along with more conservative, attainable goals. They’re put under greater scrutiny at nearly every step of the startup journey compared to their male counterparts.
Simply put, female founders outperform because they have to.
3. Both investors and consumers are voting with their dollars more and more, especially the younger crowds. The Denver Post’s Bruce Deboskey recently wrote that of the 68-million-strong Gen Z members, 90 percent believe that companies must act to help social and environmental issues. With data like that, any new startup worth its weight in Clubhouse rooms has to be purpose-led. Women, along with minority founders, have a major advantage here as they’re more likely to have witnessed (or been victim of) the societal issues that urgently need fixing.
Again, not a knock on male founders (I am one), but it’s simply harder to sympathize with and champion causes that one hasn’t experienced.
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Timing the trade
The best time to have invested in female founders was the same day we started investing in male founders. The second best time is today. None of the studies or data presented above is brand new or surprising to anyone who has been paying attention. There are more advocacy groups, accelerators, incubators, and thought-leaders focused on this than ever before.
There are headline-busting stories that prove how wrong the institutions have been to ignore half the population. Whitney Wolfe Herd, the 31-year-old Bumble founder, is one of the youngest self-made billionaires in the world. She was a co-founder at Tinder, had a bad experience with one of the other founders, and left to start a dating app that approached things from the woman’s perspective. When she rang the opening bell at Nasdaq earlier this year, she did so with her 18-month-old son on her hip.
We’re going to hear many, many more stories like that in the coming years. Of the endless investment criteria and pontificating that investors do to find the next smash hit, female founders may show the most asymmetrical returns of them all.