Shaded questions and hostility come despite the fact that gender-balanced leadership show a 25% greater increase in valuations compared with those that have imbalanced teams.
The private equity and venture capital industries have piled up trillions of dollars in assets, yet little finds its way to female-led businesses.
The dry powder from both sectors has hit record levels—with around $3 trillion in global assets under management. In emerging markets, just 7% of private equity and venture capital is invested in portfolio companies run by women, according to an International Finance Corporation (IFC) study on gender balance released Thursday.
Equally distressing, the median woman-led business received only 65% of the funding secured by the male-led one. That is largely because more women get backing for their start-ups early, at the accelerator and incubator stages, when funding sizes are small compared with later rounds.
There are plenty of headlines and statistics about the lack of women at the top of Fortune 500 companies, on Wall Street and on boards. But the IFC’s report brings to light a deeper problem: investors’ subconscious biases.
Anecdotally, female start-up founders have disguised early pregnancies and taken off wedding bands when they go into fundraising meetings. Investors hesitate when they see women with competing priorities, or so the thinking goes. During due diligence, women founders are asked about risk management and the potential for losses; their male counterparts are asked about their lofty visions, growth and expansion.
These shaded questions come despite the fact that gender-balanced teams and businesses have proven they can deliver, says Heather Kipnis, one of the report’s authors. Companies with balanced leadership show a 25% greater increase in valuations compared with those that have imbalanced teams. Such firms also outperformed peers, increasing their valuation by 5.5 percentage points per year.
With funding restricted, a big drop in female leadership usually follows, Kipnis notes. Almost a third of businesses with female CEOs eventually switched to a man at the top, while only 2% of male-led businesses changed to a woman.
Another problem is that male investors often undervalue women-led businesses catering to female interests because they may not appreciate the nuances of such sectors. That can affect subsequent funding rounds. Stitch Fix Inc., an online service that curates clothing and brings it to customers’ doorsteps, is one such example. By sheer grit, the founder built a company that now brings in more than $1 billion of revenue and actually turns a profit, an anomaly in Silicon Valley. Unfortunately, such perseverance and confidence is uncommon among female founders.
Meanwhile, the top ranks of private equity are male-heavy, with just 11% female representation. That is about 17 percentage points lower than other businesses.
Men and women have widely diverging views on why that is the case. Most men attribute it to factors such as female interest in the field or a limited talent pool; women think it has more to do with internal issues at companies, including retention, recruiting and hiring biases. Research suggests it is firm-level issues that exacerbate the differences. Ultimately, this creates a self-reinforcing cycle.
So how do we break it? Taking ownership of the issue; making senior leaders accountable; and training managers on subconscious biases—as Kipnis says, “You don’t know what you don’t know”. It is also important to collect data to know where you stand and ensure policies are in place to promote retention before and after family leave. More effort should be made to bring women into deeply entrenched and hard-to-break networks of male executives.
Several general partners at private equity firms say these are amongst their priorities, but only 3% have strategies to alter the equation. That has a trickle-down effect on portfolio companies.
Little steps can go a long way, so it may be worth putting a few extra million dollars to work—and getting a valuation bump while you’re at it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.