Friday, September 29, 2023

Australia’s sophisticated investor rules hurt female founders

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Shreya Christina
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Angel Investing in Australia is currently a boys’ club.

A LinkedIn search for Angel Investor, Australia location, returns page after page with a male to female ratio of 9:1.

It’s not something that they (the guys) did maliciously, but something that absolutely needs to be fixed.

The data is all too real and well known, we’ve all heard the recent statistic: “Women founders have secured just 2% of venture capital in the US by 2021”. When it comes to raising capital, men consistently outperform women, while women-led companies face a more difficult path to raise funding.

According to a 2020 report by Women in VC, only 4.9% of Venture Capital partners in the US are women. When there is a lack of diversity among investment decision makers, they tend to invest in only a small fraction of the existing opportunities, based on their experiences and networks.

One way to influence the ratio of women writing checks would be to increase the number of female angel investors. Many VCs start out as angels before moving into venture capital.

Why do we see such a huge gender gap among the people who fund startups?

I believe it’s a cycle, the ‘cycle of funding’ if you will:

  • Founders have traditionally been inclined to be more masculine than feminine.
  • A founder’s first round of funding is often friends and family.
  • Men generally have more male friends than female friends. When they organize a friends and family round, of course they go to their group of [mostly male] friends, because that’s who they know.
  • So their first dressing table is skewedly masculine, if not quite masculine.
  • When the founders go to pick up the next round, those male angel investors then take to their networks to share the startup with their, you guessed it, mostly male friends.
  • When the founder starts recruiting VCs, they are more likely to be funded as they already have early validation from angels. Furthermore, startups with a warm introduction to a VC were 13 times more likely to get funding than those without, found a study by British Business Bank
  • When the startup has a successful exit, the founder and all early investors go into banking. With an exit and cash in their pockets, they are more likely to start a new business or reinvest that money in the next startup, so the cycle starts over.

It’s a circle that just needs to be broken.

While I’ve been meeting more and more female angel investors lately, most of the female founders I speak to still say they don’t see a difference in the investor mix they stand for yet.

What must be done to break it? Here are four things I think are necessary as a starting point:

First, founders should deliberately think about their cap table from day one. All founders should purposefully make room for diversity (not just gender, for that matter) and make an effort to create diversity among their shareholders.

Second, wholesale investor status rules MUST be updated. In particular, we need to create a path to wholesale status through education and experience. The advanced investor testing favors men for two reasons, firstly because we still have a gender pay gap in Australia. Second, because the age at which professionals naturally achieve the income necessary to meet the income test is also the age at which women tend to have children.

If we don’t have enough women participating in the pre-seed and seed investment landscape, we will continue to struggle to bridge the gap of female founders. Lauren CapelinDirector at Startmate, recently brought forward proposed policy changes in this space.

Third, let’s get more women around the Investment Committee (IC) table. Promisingly, it seems the ratio is changing and more funds are attracting female partners (We recently celebrated.) Jackie & Elicia at AirTree, Jessy from Afterwork Ventures and several others), but we’d do well to see this accelerated. If there are women in the room at IC, the ratio between male and female founders who are funded will become equal.

Fourth and finally, those who write checks need to look at the data and prioritize investing in female founders. Facts collected by First Round Capital, for example, found that the female founders it funded outperformed the all-male founding teams it funded 63%. add more faith, Research of the Kauffman Foundation found that female-led teams generate a 35% higher return on investment than male-only teams.

It’s time we finally break new ground in terms of closing the gender gap that exists between female and male founders seeking funding. Founders along with VCs and angel investors have the greatest power to fuel change.

I believe that as a larger pool of investors enter the angel investment space, it will bring more diversity and less bias.

More female investors will lead to more funded female founders, which will lead to more exits for female-led companies. More successful female founders means more women who have the opportunity to re-invest in the ecosystem later, either as a second founder or as an angel investor.

It is critical for women to stand up and join in. There has never been a more important or exciting time for women to take the plunge into angel investing.

To help with this I am open my calendar for all women who want to chat or learn about angel investing.

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