A new report from the research firm Pitchbook reveals a trend reversal in the realm of investments in startups founded by women.
2021 was a record-breaking year for fundraising, exits, and IPOs of high-tech companies, the peak of which halted due to the war in Ukraine, the rising inflation and drops in the capital market. VC funds and angel investors are demanding more from companies seeking investments, and entrepreneurs are now facing more obstacles on their way to financing. However, female entrepreneurs’ fundraising growth rate continues to rise, both in deal value and number of deals, which at present are at the highest level, compared to the years prior to the records set in 2021.
One of the prominent fields in which women are happily embraced by VC funds nowadays is fintech. Last year, women-led fintech companies raised more than half of the total amount raised, a significantly higher increase compared to previous years. Even in 2022, there is a strong windfall for female fintech entrepreneurs, who benefit from large fundraising sums and a high number of transactions compared to other fields.
A surprising figure that emerges from the report, shows that despite the decline in valuations of late-stage companies, early-stage startups founded by women, are experiencing the opposite, and there is an increasing trend of up-rounds: investment rounds at a higher valuation. Female entrepreneurs have gained increased trust from VCs, as the growth in their companies’ valuation is even higher than that of male entrepreneurs.
This trend also extends beyond traditional VCs. Angel investors also show confidence in ventures founded by women. Thus, this year the number of investments by angels in women’s startups was higher than in all the years preceding the record year of 2021, with an indication of higher funding sums, which accumulate to a total of 7 Billion Dollars.
Women have proved themselves to be a smart investment, that knew how to adapt quickly and wisely to the turbulence of the market. Female management is often characterized by openness, listening, and encouraging team members to express themselves and exchange opinions, even if those contradict the initial line of thought. As a result, the decision-making processes are collaborative, taking into consideration a lot of information from different viewpoints. This prevents herd mentality, and instead motivates dynamism, and real-time adaptation to changes, creating a fertile ground for producing creative solutions.
The investment in women has also proved itself in the bottom line, which is critical now more than ever. The fluctuations throughout the year have led to a change of priorities by investors and companies, and the burn rate of cash is now prioritizing the company’s longer run-rate. According to the data published by Pitchbook, the median cash burn rate in startups founded by women is lower. Smart use of funds will determine which company will make it through the coming year, and a company that manages its risks wisely will be able to preserve itself even if the fundraising options will be limited. Therefore, it is easy to see why investors, who today are more sensitive to risk, prefer investing in companies founded by women.
Although this trend change indicates that the market is maturing, it is important to note that there is still a long way to go to bridge the huge gap in absolute fundraising amounts by women vs. men. Despite the lively discourse on the importance of a diverse team and reducing gender or racial biases in order to maximize returns, this position has not yet been reflected in the dry data. Although female entrepreneurs managed to firmly withstand the market storms of 2022, the total US VC deal value for women’s startups stands at 3.6 Billion Dollars, compared to men’s ventures, which is nearing 155 Billion Dollars.
In recent years, many studies have been published reveal the inclination toward male-led startups and the subsequent cost in returns. In 2018, Boston Consulting Group published a study that found that startups with at least one female entrepreneur generate 2 times more revenue for every dollar invested than startups with all male entrepreneurs. The more women there are in the decision-making centers of the investment world, the more the industry will be able to neutralize natural biases from the investment decision-making process, and it seems that the funds and investors that take diversity into account, will be the main beneficiaries.