Whenever Adam Quinton hears, once again, about the paltry sums of venture money being invested in businesses led by women, he sees green.
The angel investor, who is founder and CEO of the one-man-fund Lucas Point Ventures, is a special kind of contrarian investor: one who invests heavily in firms with women leaders. Contrarians buck conventional wisdom and buy when they think a negative crowd has misapprehended the value of an asset, aiming to realize outsized gains when its intrinsic value is revealed. In Quinton’s view, the crowd has withheld support from women and minority entrepreneurs unreasonably, so that’s where he looks to invest.
Indeed, businesses with women CEOs receive a tiny 3 percent of U.S. venture-capital dollars — just $1.5 billion of a total $50.8 billion invested during the 3 years from 2011 to 2013, according to a comprehensive 2014 study by Babson College. Companies with one or more women on their executive teams received only 21 percent, or $10.9 billion. That means all-men executive teams are four times more likely to win venture funding than teams with even one woman.
“The rate is so low that it’s hard not to believe there is some failure or dysfunction or — to put it more bluntly — bias,” Quinton says. And where there is bias and market failure, “that’s probably a better hunting ground for me,” he says, “there seems to be some kind of opportunity you can capitalize on.”
Quinton is one of rare breed of male investors who makes it his business to invest in women-founded or -led companies. Up to now, a movement to improve women’s access to capital has largely focused on increasing the number of women investors, who have been more willing to support female founders and are also in short supply. But given the fact that 94 percent of VC partners are men, equal access to venture capital for women entrepreneurs won’t happen without more men like Quinton — men who see lucrative investment opportunities.
Business, Not Charity
Indeed, Quinton is quick to say that his investment choices aren’t made out of the goodness of his heart. “I want to make money,” he says. “It would be nice to make money and make the world a better place, … but I’m just doing it to make money.”
In the last 5 years, he has invested in 15 companies, all but two of which have at least one female founder. (He declined to disclose how much money he has invested.) One of his best-known picks is The Muse, an online recruiting company founded by Kathryn Minshew and Alex Cavoulacos that he bought into in 2012. “They took it from nothing to what is a significant business, and on a good growth trajectory,” he says.
It’s too early to say definitively how well his portfolio has done, Quinton says. Angel investing is a long-term game that typically involves multiple failures that are, hopefully, more than made up for by a few home runs. But he says that, so far, his failure rate is lower than average and enough of his companies are doing well that he thinks his fund will outperform.
In fact, research has shown that venture capital firms investing in companies that include women entrepreneurs do perform better. Even so, Babson found that women were on the executive teams of only 15 percent of the companies VCs chose to invest in during 2011-to-2013 period it studied (these firms skewed older and larger in both revenue and employees). A mere 2.7 percent had female CEOs. This, at a time when women own 36 percent of all U.S. businesses, according to the Small Business Administration, and the ratio of male to female startup entrepreneurs is fairly equal.
Another male investor who has made an outsized number of bets on women is Jeremy Liew, a partner at the prominent Silicon Valley early-stage firm Lightspeed Venture Partners. During the past 5 years, he has put $178 million to work in companies founded by female entrepreneurs, most consumer-facing companies. Some 30 percent of Lightspeed’s consumer-oriented investments have a female founder.
Like Quinton, Liew says his investments are only good business. In his case, they are a byproduct of an investment strategy that is focused on tech companies with products or services that are popular with young women.
“We believe that young women are the early adopters of popular culture,” and that their enthusiasm is predictive of what will go mainstream. It happens that women often have insight into what other women and girls want, he says. “It’s not like you have to be a woman to build a product that women like, but we’re certainly seeing a lot of it.”
So while one of Liew’s claims to fame is his early investment in male-founded Snapchat — whose disappearing mobile messages first took off with young women — he was also a first-round investor in two strong women-founded companies, actress Jessica Alba’s The Honest Company and Katrina Lake’s Stitch Fix. He has also found success with TaskRabbit, founded by Leah Busque and now led by Stacy Brown-Philpot, and StyleSeat, founded by Melody McCloskey.
“We try to invest in the very best entrepreneurs who are going to make us the most money,” Liew says. If his team invests in women founders, “it’s not that we’re doing it because it’s good for people…. It’s not charity. This is very much a business decision.”
And if other investors are missing out on opportunities because they have blinders on, he adds with a laugh, “I don’t mind that.”
The Business Case
VC investment in women-led businesses has actually picked up in recent years. The proportion of funded businesses with women executive-team members during the 3 years of 2011 to 2013 — 15 percent — is nearly triple 1999’s level of less than 5 percent, Babson says. The improvement is due in part to the development of a fairly robust ecosystem of female-focused accelerators, angel networks and VC funds explicitly taking on investment bias. Typically, these enterprises are led by women investors, some of whom abandoned big firms to escape the entrenched old-boy mindset.
Indeed, women have shown themselves far more likely than men to invest money in companies with women leaders — twice as likely when a company has women executives and three times as likely when it has a woman CEO, according to Babson. As such, many activists have focused on growing the ranks of women investors, which is quite small. In fact, women accounted for only 6 percent of venture-firm partners in 2013, a decline from 10 percent in 1999, according to Babson.
While bolstering the ranks of women investors would undoubtedly improve women entrepreneurs’ access to capital, the reality is equal access for women won’t happen without men investors. Though, unfortunately, some men may seek to use money to exert sexual power over women, as The New York Times revealed recently, other honorable men are moved to invest by the unfairness of the status quo. Take prominent Seattle tech entrepreneur and angel Jonathan Sposato, who has pledged to only invest in companies with at least one woman founder. But the best way to win over the masses of male investors is, undoubtedly, to show them the money.
It certainly worked for Kevin O’Leary, the notoriously bottom-line driven “Shark Tank” investor known as Mr. Wonderful, who skews his investments toward women-run businesses. “I don’t want to start gender warfare, because, frankly, I’d give money to a goat if I could get a return,” he told CNBC last month. But over 9 years of investing in small companies he discovered via the TV show, “not some of my returns, all of my returns, have come from the ones run by women or owned by women.”
Mr. Wonderful’s companies helmed by women include Bottle Breacher, Easy Daysies, Honeyfund, Surprise Ride and Wicked Good Cupcakes. As of December 2015, more than a third of his portfolio was comprised of businesses owned or run by women, and their returns were on average 75 percent higher than those led by men.
Why Women Outperform
O’Leary speculated that the women’s outperformance is due to more effective time-management skills and an aptitude for setting achievable quarterly goals. The women-run firms in his 44-company portfolio reach their goals 90 percent of the time, compared to 65 percent for men-run firms, he says. He believes these strengths lead to higher employee morale and better results.
Other investors back up his conclusion that women’s companies perform better. First Round Capital, a big seed-stage technology-focused fund based in New York, did an in-depth 10-year-anniversary study of the 300 investments it made from 2005 to 2015 and found that investments in companies with at least one female founder performed 63 percent better than those with all-male teams.
Other possible reasons for strong performance include smarter decision-making that follows from more diversity of thought. Plenty of research shows that diverse teams — those that include women and minorities — are more successful because they challenge stale ways of thinking, re-examine facts, generate more innovation and sharpen performance.
Also, women have shown more efficiency with money. They achieve comparable early-year revenues using an average of one-third less committed capital than men, according to Illuminate Ventures. And women entrepreneurs are known for taking more carefully calculated risks. Indeed, the stereotype that women entrepreneurs are “risk-averse” is untrue, a BMO Wealth Management study finds. Rather, women are confident risk-takers who appear to be more “risk-aware,” a trait that improves business decisions.
Ironically, that risk-awareness can be a liability when it comes to winning venture money, Quinton of Lucas Point Ventures says. When pitching their companies, women tend to be more conscious of the downsides as well as the upsides — and to express them — which can be misinterpreted as troubling risk-aversion, he says. “In the larger VC world, they’re all working to a business model that requires them to shoot for the stars in a big way.”
Another liability in landing investors analysts cite is women’s lack of long-standing contacts in the old boys’ club that is angel and venture investing. Women are also less likely than men to tap networks of friends and acquaintances to secure funding, according to a Kauffman Foundation study.
Joseph P. Hildebrandt, co-founder and managing director of the Phenomenelle Angels Fund, has spent the last decade trying to change that. Its original fund, which closed in 2007, invested $7 million from about 40 women investors (and a few of their husbands) in 10 women-owned tech and biotech companies in the Midwest — four of which he says could prove “home runs.”
“A part of what we wanted to do with the fund was create that network of women, some of whom had invested before and some of whom hadn’t invested that much,” he says.
He actually ended up creating a network of women and men investors. Hildebrandt later raised a second $8 million fund from both that has invested about half its money in women-owned firms. He also established two side funds close in size to the original two funds.
Hildebrandt and his wife and daughters are sizable investors in the fund family. “I look for opportunities to invest, especially in private startup businesses, and I consider it a plus when there’s a woman leader connected with it, but I’m always looking at the bottom line,” he says.
“The increase in value and returns of companies with women leaders and CEOs has helped bring to the attention of other investors to not just look at their good ol’ boy networks,” he says. “As people start seeing results, it’s going to change.”
With reporting by Nusha Balyan.