When investing in science-driven companies, identifying promising risk reward profiles is only half of the decision-making process. Though identifying and analysing promising investment opportunities is important, the decision to fund a specific company is often ultimately based on a gut feeling. This gut feeling is largely rooted in a feeling of trust.
There are three different company characteristics where trust plays a crucial role for a potential investor:
- Trust in the underlying data and science – Confidence here often comes from high impact peer reviewed publications or the reputation and track record of the scientists involved in the company.
- Trust in the future market – The belief that the relevant product market will develop positively and that the business model is valid.
- Trust in the management team – Feeling that the people involved in the venture will execute the proposed plan and be able to switch gears if need be.
Investment professionals can use a variety of tools to evaluate these three different categories. To assess the underlying science, investors can check the data points, ensure the experimental setup is sound, check whether the right controls and most predictive models have been used, etc. For the market, one can look into past developments and try to extrapolate what the future will bring. But to evaluate a management team, especially in start-up companies with first time CEOs/CSOs, decisions are usually subjective and based on instinct.
Failing to fund females
Venture capital funds try to base their investments on informed decision-making: thorough analyses backed by statistically sound assumptions. There is however an important factor that often gets overlooked by investment managers: the impact of gender diversity on the performance of start-up companies. Companies with both men and women in their management teams simply do better than those with only one gender.
Judging by the figures, investors seem to have missed the memo on the benefits of gender diversity. In an article published just last year, Eva de Mol and Janneke Niessen analysed 40 investment funds, from 2010-2018, and evaluated the gender composition of management teams from the start-up companies that received funding. Their results were shocking: only 6.8% of the companies backed by investors were headed by mixed-gender teams. Companies with female-only teams raised a measly 1.6% of the total capital; the overwhelming majority of the funding went to male-only start-ups. This bias cannot be explained by the lack of women in management positions alone: although the gender composition of management teams is imbalanced, according to a study by MassBio women still account for close to 25% of C-level positions in life sciences companies.
Companies with both men and women in their management teams simply do better than those with only one gender.
The results of this study should be alarming to investors. There is a rapidly growing body of evidence showing that businesses with more women in leadership roles outperform male-dominated companies. A BCG analysis, published in May 2018 in collaboration with MassChallenge (a US-based global network of accelerators offering start-up companies access to mentors, industry experts and other resources), revealed that businesses with women in the founding team generate twice as much revenue per dollar invested compared to exclusively male-led ventures.
According to PitchBook Data, companies with female founders only received 2.2% of the Venture Capital raised across all sectors and geographies between 2016 and 2018. Furthermore, female-founded companies only receive half the amount of capital as compared to that raised by male-led counterparts. As with the C-level management, this percentage is not based on the lower number of female-founded companies looking to raise money: in the MassChallenge-accelerated companies, 42% had at least one female founder. Clearly, all these observations consistently point to a biased decision making, so this begs the question: what is causing it?
An issue of trust
The gender disparity in funding can’t be explained by the underrepresentation of women in management and founder positions. It also doesn’t make sound financial sense. Could it be that the subjective choices taking place when investors evaluate a new company are somehow skewing the funding in favour of men? Is the gender of the investors themselves affecting investment decisions?
Businesses with women in the founding team generate twice as much revenue per dollar invested compared to exclusively male-led ventures.
To put things in context, according to CrunchBase, a full 92% of partners in the biggest US VC firms are men. In the EU, these numbers may be slightly better, but nevertheless there is no escaping the fact that most investment pitches are evaluated by men. This may be at the root of the problem.
People like to finance people they resemble and understand; familiarity builds trust, and as we discussed in the opening of this article, the instinctive trust in management team members is a huge factor in the decision to fund a company. It could be that we are caught in a loop of men funding men, despite the numbers telling us that diversity is better for business.
Bleak though it may seem, there is opportunity hiding in this tangled web of inequality. By uncovering a potential reason for the gender gap in funding, we bring to light a potential solution: if we address the gender imbalance in the investment industry, we may also inadvertently rectify the underfunding of female-fronted companies.
On a final, uplifting note: it’s important to remember that things are already moving in the right direction. The Labiotech.eu lists ‘Women Leading in European Biotech’ and ‘Women Entrepreneurs in EU Biotech’ are both continuously expanding! And authoring this article is a female Managing Partner of a life sciences investment firm; we just need to keep the ball rolling!
Interested in this topic? Then read the follow-up article!
Sources:
https://www.massbio.org/news/recent-news/massbio-and-liftstream-study-shows-gender-gap-in-life-sciences-sector-perpetuated-by-companies-culture-processes-and-talent-management-136757
How diverse leadership teams boost Innovation BCG January 2018
Why Woman owned start-ups are a better bet, BCG May 2018
Page 1, 27-09-2018 © Het Financieele Dagblad
