On a clear Friday morning in April, in a room near the top of the New York Times building with a humbling view of lower Manhattan, the world’s financial epicenter, eight groups of women wait to pitch their businesses.
They’re vying for $25,000 in early-stage investment by five so-called angel investors. First up is Miki Agrawal, who speaks casually, convincingly and fast. She has done this before. She locks eyes with the five investors, one by one, as she describes something every woman in the room can relate to—the fear of period leaks.
The line of underwear she developed with the other two women who founded Thinx would end that worry forever, she says, with four high-tech layers of fabric in the crotch. By the time she gets to the part where girls in developing countries often miss a week of school while they are menstruating simply because they lack proper sanitary supplies, and how her company would donate washable pads for every pair of underwear sold, the investors are nodding, totally into it.
The entrepreneurs have just completed something called the Pipeline Fellowship, which is trying to level the playing field for women in angel investing, an increasingly integral part of America’s capital formation. startups with at least one woman on their founding team are roughly 18 percent less likely to attract equity investors than their all-male counterparts, according to 2013 data from an ongoing survey by Emory University. Yet they are almost 20 percent more likely to have generated revenue—and that’s no small distinction in a world where the vast majority of venture-backed startups fail. Data collected by PitchBook found only 13 percent of all venture capital deals in the United States went to women in 2013, a significant increase from the firm’s 2004 data that put the figure at 4 percent. But that still means 87 percent of deals are being given to all-male teams.
The numbers paint just part of the picture. The rest is made up of the experiences—often ranging from frustrating to infuriating—of female entrepreneurs navigating the world of equity investors, where 96 percent of senior venture capitalists are men.
The anonymous confession-sharing app Secret is rife with posts by female entrepreneurs bemoaning the process of finding financial backers. “Just got out of a meeting with a [venture capitalist] who couldn’t stop staring at my boobs. Not sure whether this means we have a better or worse chance of getting his investment,” reads one.
Kathryn Minshew, who co-founded the career advice and job-search tool The Muse in 2011, says women are frequently asked to drinks by VCs who say they might be interested in investing. But instead of a business meeting, it turns out to be a date. Over the course of her company’s first year, Minshew says, she spent “probably 30 hours, maybe more” going on bait-and-switch drinks of that nature.
“One of the very common questions I get from younger entrepreneurs is, How do you very nicely confirm with an investor that something is a business meeting and not a personal meeting, without offending them?”
Natalia Oberti Noguera, the founder of the Pipeline Fellowship and a self-described “LGBTQ Latina and a feminist with a capital F,” has come to terms with that bias. That’s why the crowd assembled in the Goodwin Procter offices for the pitching event is almost entirely women. Just two men are in the audience, to support their co-founder Holly Pressman, who is pitching their finance-education site FinLit.com. Oberti Noguera’s program trains women to be angel investors, through mentoring with seasoned investors and workshops on issues like due diligence and valuation. The five women at the table in the pitch meeting—an insurance executive, a mortgage executive, two magazine executives and the vice chair of a New York City school, were nearing the end of the program, the part where they narrow down eight potential investments to three.
“People will probably invest in people who make them feel safe, and usually that means people who are not different. So if that’s how we work, let’s get more women and people of color on the investing side,” Oberti Noguera tells Newsweek.
In the first half of 2013, according to the Center for Venture Research, just 16 percent of companies pitching to angel investors were women-owned, but 24 percent of that group got funded—a higher rate of success than the deal rate overall. That may in part be thanks to programs like Pipeline Fellowship, Golden Seeds, 37 Angels and others like them. Angel investors back projects they feel passionate about, and that are in their early stages of development, in return for equity in the businesses. They are a different financial species from venture capitalists, who invest institutional money—from pension funds, university endowments, wealthy individuals—in much larger sums, and typically require a seat on the board of the business they back, as well as an equity stake.
In a study released by Harvard in March, investors, both men and women, heard real startup pitches adapted from real businesses. Each pitch was shown in one of four ways to different investors: in one version, a male voice presented the pitch alongside a photo of an attractive man. In another, the voice was male and the photo of the man was less attractive. Another two versions were narrated by a female voice, one with a photo of an attractive woman and one with a less attractive woman.
Investors chose businesses presented by men 68 percent of the time. Only 32 percent of investors chose to fund the ventures presented by women, despite the pitch being exactly the same. The pitches by more attractive men fared considerably better than the ones by less handsome, while better-looking women did slightly worse, by a negligible margin, than their less pretty female counterparts.
You read that right: Both men and women would rather invest in a man over a woman, especially if the fellow has the right look.
“It’s more about intuition than data,” says Deb Nelson, the executive director of Social Venture Network, which connects social entrepreneurs with socially conscious investors. In traditional profit-driven investment, especially with early-stage funding where data are scarce, the decision of who to fund can come down to which entrepreneurs look and sound as if they will succeed. As long as the image we conjure in our collective imagination of a capable business leader is an attractive (likely young, likely white) man, that intuition will look a lot like sexism, racism and ageism. “We need to unlearn how we’ve been socialized,” Nelson says.
Consider the story of a tech startup called Clinkle. Its 22-year-old white, male CEO, Lucas Duplan, raised $30 million in investment over the past year. Now, the company has laid off a quarter of its staff, lost its chief operating officer and has been christened a hot mess by the tech news website Re/code, all without putting out its product yet, an app to stealthily transfer payments between smartphones.
“I don’t think it was the app that was impressive,” one former employee told Business Insider. “I think it’s Lucas who is so compelling. He sells the vision of what every investor wants, which is a 20-year-old, white, male Stanford computer science major. He fits the bill. He appears to be the next Mark Zuckerberg, and he carries himself that way.” Duplan declined to comment for this story.
Oberti Noguera says there’s a wider lesson to be learned from such stories.
“If a guy has a really great exit, then of course that guy was awesome. And if a guy doesn’t do well, it’s like, ‘Well, he must’ve not had the pricing strategy down pat.’ But if a woman doesn’t end up succeeding, it’s ‘Oh, women suck,’” she says. “We don’t have enough female success stories, so the failure stories end up overshadowing everything. We have so many white–guys stories, but that doesn’t mean that if the guy is white and wearing a hoodie that he’ll succeed.”
If looks aren’t a good benchmark for investors, what is? A 2012 report from Dow Jones found that a company with at least one female executive at the vice president or director level was more likely to be successful than companies with no women at that level. For venture-backed startups with five or more female executives, the report found 61 percent were successful and only 39 percent flopped, compared with a 50 percent failure rate overall. The study did not find any statistically significant relationship between a company having female founders and its success, perhaps because there were so few represented: Of the 20,194 companies in the report, only 1.3 percent had a female founder.
There are those who argue women need to adapt to the system, rather than the other way around—that it’s the women themselves who are to blame. And not all of these critics are unreconstructed Mad Men–era throwbacks.
“VCs don’t have a bias against women entrepreneurs; we’re just bad at pitching,” claimed a headline on the website Venture Beat last year. The author, Mauria Finley, a woman who founded Citrus Lane, a subscription service for children’s products, says women don’t think big enough and spend too much time focusing on details. In The Boston Globe magazine, Fiona Murray, one of the authors of the Harvard study, wrote that women should “watch sports” to have something to chat about with male investors.
“Women have to do things proactively against a tide of bias,” Murray tells Newsweek, adding that “it’s not to say those biases are okay. It’s not just what women can do, it’s what men can do too.”
All the investors Newsweek spoke with say that having something in common does make an enormous difference to winning their support. Having a personal connection with the proposed product also makes a difference.
According to a study of a wide range of corporate firms by the Center for Talent Innovation, 56 percent of employees said the leaders at their companies didn’t value ideas they don’t personally see a need for, “even when there [are] strong data and evidence that it’s a good, marketable idea.”
Jules Pieri, who founded e-commerce site The Grommet in 2008, says she has seen that in action. “Every woman has heard this if her business has a consumer side to it: They say, ‘I’ll go ask my assistant, I’ll go ask my wife about this.’ And you just want to jump out the window,” she says.
BLOWING UP THE MODEL
Projects like the Pipeline Fellowship are focused on getting more women with resources to invest in other women. But such solutions operate within the equity-investing system. Danae Ringelmann wants a better system: online crowdfunding campaigns, housed on sites like Indiegogo, which she founded in 2007. She says 47 percent of the projects that reach their funding goal on Indiegogo are female-led.
“Being able to sell your idea to one person is a dependency that really shouldn’t matter. You’ve changed your whole approach for that one person, what you think that one person wants to hear,” Ringelmann says.
Before Indiegogo, she worked in investment banking. One day, she went to an event in New York City, where people making films and theater productions could meet potential investors, even though she didn’t have the money or influence to fund a project. One director approached her, hopeful that she could help make his production of Arthur Miller’s Incident at Vichy an off-Broadway reality.
She co-produced a concert reading—where potential investors can attend and consider whether to invest. Ringelmann ultimately couldn’t gather enough capital to get the play staged, partly because she didn’t have a personal relationship with enough theater investors.
“The people who wanted the play to come alive the most didn’t actually have the power relationships to make it happen,” she says. Years later, Indiegogo came out of that sobering experience. “We decided to use the Internet to blow that [model of capital] up,” Ringelmann says.
Indiegogo has helped thousands of entrepreneurs get started. Businesses that want to seek traditional investment later have used the success of their Indiegogo projects as proof of their project’s viability, according to Ringelmann.
For its part, Indiegogo still needed venture capital to get off the ground. Ringelmann says her team was rejected by over 90 venture capitalists before they raised their first VC dollar. But now the funding appears to be flowing: In January, the site announced it had raised $40 million in Series B venture funding, the funding stage meant to speed growth.
A fact that gets lost in all the bleak reports about the capital gap is that women start many successful businesses without VC funding. Indeed, women own 30 percent of all businesses in the United States. Many choose not to approach investors in the first place. Instead, they grow their businesses at a rate directly proportional to their businesses’ success.
The point of venture capital isn’t necessarily to grow a sustainable business. The point is to make a lot of money. The VC’s investment is worthwhile only if and when the company has a major liquidity event, called an “exit,” by either being bought or going public. Exits are very rare, and most VC-backed startups fail.
When a fledgling business makes a successful pitch and receives a sudden injection of millions of venture capital dollars, it has often made an agreement to grow as fast as possible. Perhaps it moves into offices and goes on a hiring spree. It’s racing toward the exit.
For all their expertise, venture capitalists are basically shooting craps, only with worse odds. Just 2.3 percent of venture capital deals end in a payout of more than $100 million, and 0.18 percent get a payday that exceeds $1 billion, but those are the margins that major firms are gunning for. More than 90 percent of venture capital-backed startups fall short of their projected success, according to Harvard Business School research. Fully 45 percent fail entirely and return nothing to investors, according to data from Sand Hill Econometrics. Another 25 percent might make some money, but fail to return all of the original investment. In both cases, or around 70 percent of the time, the entrepreneur walks away with nothing at all.
MIT engineer Limor “Ladyada” Fried didn’t seek out any investors when she founded Adafruit, her a DIY electronics kits company, in 2005. Adafruit had over $22 million in revenue in 2013 and is expected to double its 50-person staff this year. Fried isn’t opposed to venture capital or angel investment, but with a company that focuses on education and “making more engineers,” rather than short-term profit, Fried doesn’t see how the equity investment model would fit in, at least for now.
Adafruit has more than 1,800 products for sale and is engineering new ones all the time. It recently launched a new children’s show about electronics called Circuit Playground. An investor might consider all those diverse focuses “outside the core business” of shipping out kit orders, but it’s just how Adafruit does things, Fried says.
“Had we taken investment and not constrained growth, we could have made some mistakes with hiring and space. It’s given us more flexibility to not have the pressures of a return on investment from an outside group. We’re growing at our own pace and on our terms,” Fried says. “There hasn’t been a challenge that a cash infusion could solve. And we know that taking on investment and investors would take one important thing away that cash definitely cannot solve: time.”
It’s a lesson women and men could take to heart.