Female VCs face major disadvantage: the reality of gender washing in venture capital

Exploring the harsh reality of 'gender washing' in the venture capital industry. We unveil how systemic biases and superficial diversity claims continue to perpetuate a significant funding and power disparity for female VCs and entrepreneurs, underscoring the urgent need for genuine inclusivity and equitable practices.

Traditionally a cornerstone of innovation and business growth, venture capital is increasingly being scrutinized for its skewed gender dynamics. According to a new report, a striking financial divide has emerged in the UK: from 2017 to 2023, all-male-owned venture capital (VC) funds raised 10.3 times more capital than their all-female counterparts and nearly five times more than mixed-gender-owned funds.

Digging deeper into the statistics reveals a more nuanced picture. Despite women VCs being twice as likely to invest in female founders, these startups receive only a fraction of total funding. In the UK, a mere 23 women hold a significant ownership stake in VC firms, a stark contrast to their male colleagues.

Looking beyond the UK, the trend continues. A study by RateMyInvestor and DiversityVC once again reveals that only 9% of founders of VC-backed startups in the US are women. This vast disparity highlights a systemic issue deeply ingrained in the venture capital industry.

The impact of gender imbalance in venture capital

The lack of women in influential VC roles directly affects the capital flow to female founders. With women more inclined to invest in female-led businesses, the dearth of women in powerful positions in VC firms means that female founders are consistently underfunded. This scenario was evident in the first half of 2023, where only a tiny percentage of total equity investment deals were directed towards startups with all-female founders.

The argument for gender diversity in VC firms extends beyond fairness – it's a strategic imperative. Diverse management teams, particularly those with a significant proportion of women, have shown superior performance compared to male-only teams. This data underscores the untapped economic potential and innovation that lies in embracing gender diversity within the VC sector.

In the realm of VC-backed startups, there's also glaring disparity, with only a minor fraction of founders being women or from ethnic minority groups. This imbalance extends to VC firms, where the workforce predominantly consists of white males, with women representing a small fraction of investment professionals.

Sadly, the scenario isn't much different among Limited Partners (LPs), where gender disparity persists, albeit less studied. These patterns are coincidental and often perpetuated by implicit biases and the representativeness heuristic. These cognitive processes, while subconscious, significantly influence decision-making, leading to a preference for startups and founders that align with familiar, established archetypes and inadvertently sidelining those that don't fit these preconceived molds.

Unpacking gender washing

The term ‘gender washing' refers to the superficial promotion of gender diversity, which, in reality, masks the ongoing dominance of men, particularly in senior and ownership roles. This phenomenon is not just about visibility – it's about the actual distribution of power, decision-making authority, and economic benefits within firms.

The repercussions of gender washing are far-reaching. Women in the VC sector often hold senior titles that belie the actual scope of their authority or stake in the company. This discrepancy leads to disillusionment, driving many older women to leave the industry. Additionally, it creates a misconception among investors, who might believe they are engaging with diverse firms, not realizing the limited authority or shareholdings of these women in senior positions.

The gender disparity and the prevalence of gender washing in the venture capital industry pose significant challenges. However, recognizing and actively addressing these issues opens up the potential for a more equitable environment and fully realizing the venture capital ecosystem's potential. As the industry evolves, moving beyond mere representation to genuine empowerment and equity is crucial, unlocking the vast potential of diverse investment teams and female-led startups.

Ada Ventures: leading by example

A beacon of hope in this landscape is Ada Ventures, co-founded by Check Warner and Matt Penneycard. With an equitable partnership and diverse investment portfolio, Ada Ventures is a model of what balanced ownership and decision-making power can achieve in the venture capital sector.

Earlier this year, the London-based venture capital firm announced its second angel investing program group, featuring participants from various parts of the UK. The program includes 20 members, each poised to invest as much as £50,000. Founding partner of Ada Ventures, Check Warner MBE, highlighted the program's diversity:

Our cohort is composed of 65% women, 20% Black, 20% Asian, 15% LGBTQ+, and 10% individuals with disabilities. Addressing our toughest challenges requires talent from diverse backgrounds and experiences.

David Savage, Nash Squared's Group Technology Evangelist, also recently shed light on what fundraising is like for female entrepreneurs and what solutions exist to fix the lack of investment from the VC community and beyond.

Currently, just 15% of founders are female, and we're seeing little encouragement to suggest there will be a dramatic increase in that number as just 2p in every £1 goes to female founders from the VC community.

Savage shared with me his hope that the recent film would show that an increased number of women in the VC community would make a difference. But sadly, this doesn't appear to be the case. By contrast, Savage was told that women surviving in the VC community have to 'mask' themselves to survive, and they're not able to operate as they'd wish to in such a male-dominated industry. For real change to occur, there has to be diversity amongst the gatekeepers to capital.

It’s reflective of a wider disconnect between discussion and EDI policy across technology. Nash Squared has tracked the participation of women in technology for over 25 years through our Digital Leadership Report, and change is glacial.

Moving beyond representation

There is no escaping the fact that the Venture Capital (VC) industry, despite increasing awareness and concerted efforts to foster inclusivity, continues to be predominantly influenced by a narrow demographic. The stark underrepresentation of women, minorities, and individuals without an Ivy League background paints a picture of inequality.

The current homogeneity in the VC industry is worrying. It stifles diverse perspectives and ideas, which are crucial for innovation. This lack of variety in viewpoints also negatively impacts the effectiveness of VC firms and their startups.

"The diversity in thought, experience, and background is critical for nurturing a thriving ecosystem that can effectively identify and support a broader range of entrepreneurial ventures, fostering a more dynamic and resilient economy."

To shift this paradigm, the VC industry needs to recognize these cognitive biases and actively work towards embracing and celebrating the rich tapestry of diverse talents, experiences, and perspectives that can drive innovation and economic growth.