Venture capital (VC) is an industry dedicated to building the future, and recent data shows that it is blazing a trail when it comes to the representation of women in a traditionally male-dominated field.
VC has always stood out as a subsection of the alternative assets space, but one aspect that is beginning to draw particular attention is the fact that more and more women are successfully launching funds. In 2022 alone, more than 150 woman-led VC firms were founded. In this article, we explore what is driving the acceleration of female representation in the space and the lessons other fields can learn to improve gender diversity.
The empowerment and seniority of women in venture capital has progressed rapidly in recent years and outstrips female representation in other asset classes. According to the 2022 State of Gender Compensation in Venture report published by First Republic Bank, 43% of staff in director and principal roles at VC firms in 2022 were female. This represents a dramatic increase over a two-year period; the report put this figure at 27% in 2020. The increasing representation of women in VC also stands in contrast to the broader alternative investment industry, with Preqin’s 2022 Women in Alternative Assets report stating that 20.9% of staff at these levels were female.
Smaller and younger firms tend to have the highest proportion of women in the most senior roles, with 31% of firms with AUM of less than US$100 million having women as managing partners. This is likely due to the increasing numbers of female-owned VC funds. Preqin data shows an almost 400% increase in female-owned funds holding a first close in the 10 years to 2022, jumping from 32 in 2013 to 155 in 2022. A 2022 article, also from Preqin, noted that the shutdown of roadshows and in-person meetings during the pandemic put female founders on the same platform as their male counterparts.
This new wave of female-led VC firms is targeting opportunities that more mainstream VCs may overlook and actively backing female-founded and female-focused businesses, completing the circle of venture capital supporting women from the ground up. From dedicated funds like the Female Founders Fund (FFF), which are backed by names like Goldman Sachs and Melinda Gates, to firms like BBG Ventures whose primarily female-founded portfolio includes 58% non-white founders.
Learning from the best
The VC industry is also becoming more aware that diversity of thought in management teams and boardrooms is proven to be beneficial for returns. As a 2020 study from the Wall Street Journal concludes, “Diverse and inclusive cultures are providing companies with a competitive edge over their peers.”
The impact across businesses is clear: socially diverse groups are more innovative and productive, consistently delivering better financial returns. This is borne out in the data on VC funds, according to Preqin. Female-owned VC funds with vintages between 2010-2019 delivered a median net IRR of 23.5% to LPs, slightly higher than non-women-owned funds (23.2%), and also had a significantly lower standard deviation of returns of 20.4% compared with 31.5% for non-women-owned funds.
Institutional investors are conscious of the performance benefits that diversity brings, and increasingly willing to back diverse investment teams. McKinsey’s State of Diversity in Private Markets: 2022 noted that LPs are increasingly channelling their capital to diverse asset managers. When surveyed, investment professionals at insurance funds, pension funds and endowments said they would provide 2.6 times more capital to a diverse team than to a comparable non-diverse team. The same report highlights that women are increasingly founding their own firms, building diversity into the DNA of next generation private markets firms.
As an industry that is willing to embrace change, VC offers female founders the opportunity to start diverse and stay diverse. Established male-led venture capital firms are also being proactive, with more than 50% of firms having policies and programmes in place to promote diversity in their recruitment and career development programmes, according to the State of Gender Compensation in Venture 2022 report.
Other service providers within the VC industry are also taking steps to support female-founded asset managers, aiding them through some of the challenges that come with shattering private equity’s glass ceiling. IQ-EQ’s Launchpad programme, for example, was set up to address the prevailing gender imbalance in asset management, working with female founders to help them navigate the industry and achieve success. Since its launch in late 2021, the programme has already supported 12 female-led funds.