Why aren't angel investors backing more women-led businesses?
Which sounds like a better investment to you: weight-lifting trackers, robots that drill tunnels, and golf booking apps? Or fashion sharing websites, at-home fertility products, and sustainable lipstick? Do you think your gender influences whether you’d be excited to boast about backing these firms, even just a little bit?
These are all real deals that I’ve seen through my angel investing networks. Angels invest their own money in early-stage start-ups before they are developed enough to attract the interest of venture capital (VC) investors. ESG has put the spotlight on investing in women-led listed companies, though the problem is even more stark at earlier stages of investing.
I am part of Hermesa, an angel investing group that exclusively backs women-founded startups, and NaiBAN, which backs startups in Africa, 50% of which have women co-founders. I am also part of (de-facto male) angel networks with no such explicit investment goals beyond making money. In those syndicates, I sometimes, but rarely, see women in the founder teams.
My leading theory for why this happens within angel groups is not access, and not because men found better businesses. For investors that disproportionately back businesses founded by their own genders, I think it is because of “bragging rights”. As a man, I imagine it is cooler to tell your buddies that you invested in a Lamborghini rental app, versus an underwear startup like Spanx. You may understand the potential of the business better if you can imagine how you would or would not use the product, even though you are unlikely to be representative of its target market. Anecdotally, it is also ‘fun’ and socially useful to invest in your friend’s companies, which might disproportionately favour your own gender.
I see a similar dynamic play out in women-focused angel groups, where we see many companies with a woman-oriented clientele. This initially perplexed me, as I thought it would be better for women founders to focus on male-dominated or neutral markets, thus breaking the stereotype of founding start-ups just for other women. However, in addition to these companies that challenge the status quo, I now also believe that we should unequivocally support businesses that serve women. They represent half the potential customers in the world, and there may be even more investment opportunity because most investors aren’t paying attention.
Since angel investors are spending their own money, they have every right to back startups that have a fun story, or “investor-founder fit”, which I cynically see as a euphemism for investing in your younger, more ambitious self. No one is holding them accountable to invest in a company with a solid business model. At the VC level, however, the funds are being invested on behalf of someone else, and they have a fiduciary duty to those investors. Here, bias matters, if it gets in the way of performance.
At worst, investing in women is probably as good as investing in their male counterparts. At best, investors could be missing an upside.
I am wary of ESG-activist research papers that run numerous regressions to show that women-led businesses perform better on a few obscure metrics. That there might be no statistically significant relationship between gender and leadership suggests that women-led businesses are no worse than those led by men. A Harvard University paper emphasises that the founder’s gender is statistically irrelevant to the performance of start-ups, despite documented investor bias to the contrary. They also report that identical pitches are better rated simply when delivered in a male voice.
If you do believe the studies, many show that women-led start-ups perform better. In one example published by BCG, teams with women received less than half the funding on average versus an all-male team, yet achieved cumulative revenues that were 10% higher than their all-male counterparts over a 5-year period. Having women in the investment team also helps. For every 10% share increase in women partners at a VC, funds have 1.5% higher returns and 9.7% more successful exits.
All this implies that investing in women-led start-ups should not be seen as “just” an ESG strategy that investors are forced to comply with. It is a value creation opportunity, or merely a fairer way of investing, if there is not much financial difference between men- and women-founded companies.
Despite the advantages and limited downsides to investing in women, the statistics on VC investment in women founders are grim. All-female teams in the UK receive less than 1% of all VC funding according to a 2019 study. Meanwhile, 89% of funding goes to all-male teams.
In the US and Europe, the picture is similar. Over the past 30 years, US start-ups founded by women have received 2.4% of capital on average, and still receive under 3%. European all-women teams received 15 times less funding than all-male teams in 2023, and mixed teams took home just 20.5% of total VC investment.
There are myriad reasons cited for this, including access to networks, limited pipeline and very few female VC partners (13% of UK partners, 15% in the US). A UK report highlights, though, that even with the pipeline available, teams with women are getting funded disproportionately less. 25% of pitches received were from all-women or mixed teams, versus receiving 11% of total VC funding. Angel investors may also be partly to blame for limiting the pipeline of women-founded teams that survive until VC stage investments, if they aren’t choosing companies on their business merits alone.
I do think more women in VC roles will help, and I don’t deny that women investors might also have a preference to back products that target themselves. But I think it is incumbent on men, who are the vast majority of angel and VC investors, to pay attention to why they are excited about a deal if they care about levelling the playing field and making good returns.
Is it because of its market potential and founder quality? Or is it really about whether the founder looks like them, and being able to brag about funding the next big golfing app over drinks? Even the Garrick, one of London’s all-men member’s clubs, has finally decided to let women into a space traditionally occupied by men. Given the potential for upside, it’s time for early-stage investors to do the same.