Pandemic’s impact disproportionately reduced VC funding for female founders

Bias, seed-stage bottlenecks and slow structural change continue to hold women back

The last few quarters did not play out as as expected for venture capitalists or entrepreneurs; instead of a pandemic-fueled recession that cauterized the flow of private investment into startups, the economic shifts brought on by COVID-19 have given many companies a tailwind.

Venture capitalists ramped up their spend in Q2 and Q3, pushing private investment totals higher as software demand shot up as work went remote, e-commerce boomed and schools shuttered.

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The startup rebound is omnipresent around Silicon Valley. Startups are raising fresh capital amidst a pandemic — and then raising again (and again). Even startups directly impacted by COVID-19 are seeing green shoots, while local entrepreneurial scenes are growing as investors learn to write checks over Zoom.

But, while that’s a fortuitous narrative, it’s not the full story. Data from a variety of sources collated by TechCrunch shows that early-stage female founders have been disproportionately hurt by the pandemic’s impact.

The Exchange touched on this topic a few weeks ago, noting that “number of rounds raised by female-founded and co-founded companies fell year-over-year, with dollars invested in those rounds collapsing to 2017-era levels.” Other data indicated that the pandemic was landing more heavily on the shoulders of women than men, causing them to delay entrepreneurial plans.

This morning, The Exchange is fleshing out its understanding of the changing VC market for female founders, leaning on information collected by the FLIK Female Founders Report, PitchBook, January Ventures and a report from Balloon on the changes in venture and startups three years after the #MeToo hashtag spurred a global conversation about representation.

A VC rebound

The pandemic’s bite was felt in the second quarter when, if one subtracted the capital raised by Reliance Jio, VC investments fell by 9% compared to Q1 2020 and 23% compared to the year-ago second quarter.

In the third quarter, things turned around. North American startups raised $37 billion and Asian startups raised $24 billion, while European startups raised $9 billion. As The Exchange reported, “Asia’s result was its best since at least Q4 2018, as far back as our dataset goes. Europe’s total tied its high-water mark set in Q2 2019,” adding that “as a combined pair, venture capital outside North America might have just had its best quarter in years, if not ever.”

From fear in late Q1, to a middling Q2, to a boom in Q3. It was an impressive comeback. For some.

Female founders held back

In the third quarter of 2020, female founders (including companies with mixed-gender founding teams) in the United States raised 136 venture capital deals worth a total of $434 million. The dollar amount was down 48% compared to Q2 2020 and 36% compared to Q3 2019.

Turning to European data also compiled by PitchBook, the data is more mixed. While female-only founding teams have seen their percentage of European deal flow stagnate around the 4% mark — with not even a local maximum set in Q3 2020 — mixed-gender founding teams eked out a record result of 16.1% of total deals in the quarter.

The picture was flipped when it came to dollars in the period, with female and male teams seeing their percentage of the European venture capital market drop from 12.6% in Q2 2020 to 11.9% in the third quarter. At the same time, all-female founding teams saw their share of VC jump from 1% in Q2 2020 to 2.3% in the third quarter.

All that led to a mixed total result. On one hand, the amount of capital invested into female-founded and co-founded companies reached a new high in Euro terms, but deal count for founding teams that included at least one woman fell to levels not seen since Q3 2014.

In Europe things were a bit better (if still disappointing) in more ways than one. In America, then, the data felt mostly like a backslide for female founders.

What’s driving the uneven or lackluster venture capital scene for women building startups? Based on surveys and reports we’ve slowly accumulated over the past few weeks, we have a few ideas.

A seed-stage bottleneck

The 2020 FLIK Female Founders Report shows that the majority of female-founded pre-seed (72.3%) and seed-stage startups (72.4%) that were seeking funding were unable to raise their target amount in 2020. Comparatively, 40% of Series A female founders were able to raise their initial target amount, which is still less than half but suggests that slightly more mature startups had a better chance at raising follow-on funding.

The same report asked 250 female founders about the factors that impacted inability to hit fundraising targets. Respondents across all stages largely said they were impacted by investors freezing VC allocation, VCs who wanted lower valuations due to COVID-19 and a general lack of resources to learn about fundraising.

VC allocation only freezes when an asset class is uncertain about the future and wants to stick to investing in what they know. Since the majority of venture capital is still white and male — stay with us here — the majority of networks in venture capital are white and male. This means that VC allocation freezing disproportionately hurts female founders and is even worse news for BIPOC female founders.

While lack of resources continues to limit success, there has been some hope on this front. Lolita Taub writes a newsletter for underrepresented founders, there’s been a spur of equity-free accelerators and Y Combinator’s startup school has been relaunched to be offered year-round.

Rising gender bias

January VC, founded by Jennifer Neundorfer and Maren Bannon, puts together a seasonal survey of 100 early-stage female founders in the U.S. and Europe. Their latest, from September, is now slightly dated, but still pertinent to our exploration.

According to its data, 65% of a group of 100 female founders in the United States and Europe feel like their gender is holding them back, up from 50% in April of this year. Other data is similarly stark, with just 43% of respondents reporting that they “feel supported by the entrepreneurial community,” down from 50% in April. And just 11% reported feeling supported by the VC community, off from a similarly dismal 15% in April.

From bad to worse, then.

Still, there was good news as well. Female founders were getting more optimistic about raising capital as the venture market defrosted. Some 67% of the group of female founders felt more optimistic about raising than a year ago in September, a number that was just 27% in April.

Hoped-for changes fail to materialize

Why aren’t things getting better for female founders more quickly? A lack of change could be one of the culprits. We have a bit of data on what’s not changing to close.

A survey put together by Balloon, a software startup that aims to help other companies make decisions and collaborate free of bias, took stock of what “women founders, entrepreneurs and investors in the venture capital and startup spaces” were hoping to see change back in 2017, in the wake of the #MeToo movement.

The group then re-ran the experiment in 2020, collecting perceptions of what actually changed. Some of the data is encouraging, with 17.2% of participants saying that more “Education & Workshops” would help in 2017 and 22.7% of participants saying that they have seen that come to pass.

Other data points were more disappointing, with 2017 participants hoping to see more updated codes of conduct than 2020 respondents actually saw. But one data point stood out from the rest, namely women in leadership roles; 34.5% of 2017 participants said that this was needed. However, in 2020, “0% of participants noticed more women in leadership roles,” according to Balloon.

We bring this up in our discussion of venture capital and startup results because sexism holds women back. And seeing only slack progress in the key issues raised during #MeToo underscores how little, and how slowly, things are changing for women in the industry, like female founders.

Throughout the past few months, investors have often described a bifurcation happening in venture capital: The best startups are able to raise and anyone else is struggling to get a meeting. Today’s data signals that the bifurcation might not solely be based on metrics or actual credibility of a startup, but instead engrained sexism that hurts women.

In the future, The Exchange would like to report more positive data on this topic. Wouldn’t that be nice?