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Historically, it has been enormously challenging for women-owned businesses to secure funding, but the situation took a turn for the worse in 2020 following the outbreak of COVID-19. Despite a significant rise in overall U.S. venture capital investments, startups founded solely by women raised $1 billion less than they had in 2019, representing a deal count decline of 2.2% and a 3% decrease in total dollars invested.
It certainly seemed as though the hard-won gains made by female entrepreneurs in recent years had been all but lost. But the tides are changing again.
In the first nine months of 2021, women-founded firms in the U.S. raised almost twice as much venture funding — more than $40 billion — as they did in 2019 and more than 10 times as much as in 2011. Women still receive a fraction of the investments of their male counterparts, but there’s no doubt that this is a step toward equity.
So what factors are driving these changes?
1. A Rise in Female Entrepreneurship
Women-owned businesses were hit hard at the beginning of the pandemic, closing down at much higher rates than businesses owned by men. Nonetheless, the shift to remote working and permanent changes in workplace culture did present some opportunities for female entrepreneurs.
Between February 2020 and January 2022, 1.1 million women in the U.S. left the labor force, accounting for 63% of all jobs lost during the pandemic. These women might have sacrificed their stable day jobs, but it has allowed them the increased flexibility and time to pursue their entrepreneurial dreams. In addition, business owners have better access to benefits like affordable childcare and small business grants and loans, making it more feasible for women to start and maintain their businesses.
More women-owned businesses mean more choices for venture capitalists and ultimately more investments where they are most needed.
2. More Women Employed at Venture Capital Firms
Venture capital firms have long been dominated by male employees, but this is steadily changing over time. A recent report from PitchBook found that women make up 15% of general partners at venture capital firms today, representing a 25% increase from 2019.
Given that just 10% of female investment partners have held their position for more than 10 years, it’s obvious that the presence of women in this industry is a fairly new phenomenon.
As women at these firms continue to rise through the ranks and earn decision-making powers, it figures that women-owned businesses will be properly considered and secure additional funding.
3. A Rise in DIY Trading
Research from BNY Mellon revealed that only one in 10 women across the globe felt as though they fully understood investing, and just 28% felt confident investing their money — factors that have likely contributed to today’s large investment gap.
But with the nation subjected to repeated COVID-19 lockdowns, many people pursued alternate ways to make money and pass the time, something that may have led to a rise in DIY trading among both men and women.
Notably, women are typically more disciplined when it comes to investing and trading than their male counterparts. This means that when women do participate in financial markets they prove to be valuable players, making informed and reasoned choices about where to invest. They may have chosen to invest in other women.
4. Growing Awareness of the Benefits of Diversity and Inclusion
Venture capitalist firms are increasingly aware of the many benefits associated with diverse and inclusive workforces. In 2020, for example, Goldman Sachs surveyed 500 large equity funds in the U.S., concluding that female-only and mixed-gender investment teams outperformed those run exclusively by men.
Furthermore, research has shown that venture capital teams with shared ethnicity have 6% lower success rates for investments, and venture capital teams with shared school backgrounds have 12% lower success rates.
Diverse teams invest in diverse businesses, which is great news for women and minority-owned companies.
Looking Toward the Future
While it’s promising to watch as these positive changes unfold, there is significant progress still to be made. This is particularly true when it comes to the representation of other marginalized communities, including Black and Hispanic women. Indeed, Crunchbase reported that Black female startup founders received just 0.34% of all U.S. venture capital invested during the first six months of 2021.
Driving diversity and equity in this industry isn’t to the exclusive benefit of venture capitalists and female — or other marginalized — entrepreneurs. When more money is invested into women and minority-owned businesses, there will be more products and services available on the market that cater to these communities. In certain sectors, namely healthcare, larger investments in startups, small businesses, or patented technologies could be nothing short of life-saving.
To continue advancing, venture capital firms must invest in initiatives that diversify their workforces and strive to provide equal opportunities for women and minority-owned businesses.
Image Credit: Dean Drobot / Shutterstock.com
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