Practical analysis for investment professionals
01 July 2019

The Venture Capital Gender Gap: What Qualifies as Female Content?

There are too few women making venture capital (VC) investment decisions and too few women receiving VC investments. As a result, various worthwhile initiatives have sought to increase the presence of women on both sides of the VC equation, especially among those receiving VC funds. But these programs are sometimes criticized for giving money to ventures that actually have very few women associated with them in any impactful way.

But there is a solution: a points-based system similar to the one the Canadian radio industry uses to determine Canadian content, known up here as CanCon.

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Simple, clear, and easy-to-understand rules around FemCon (female content) will eliminate disagreements over whether any given company qualifies as a worthy, gender-diverse recipient of funds meant to promote women in the space.

To be clear: We don’t need rules for companies with all-female founders, executives, and board members. Neither do we need them when there are no women. We need them for the cases in between!

So just how bad is the VC gender gap? Pretty awful, and it’s not getting better. In the United States in 2018, female-founded companies received just 2.2% of VC dollars — the same as the year before. On the investing side, under 10% of decision makers at VC firms were women and nearly three quarters (74%) of US VC firms didn’t have a single woman investor. In Canada, 15% of VC partners were women in 2018, and female-founded firms receive about 4% of all VC dollars.

The Billion Dollar Fund is one initiative working to channel capital to female-founded start-ups, with plans to transfer $100 million to qualifying companies by 2020 and a billion dollars over the next 10 years. X Factor Ventures, a $3 million early-stage fund, is also working in this space. A Canadian government program, BDC Capital’s Women in Technology (WIT) Fund, has C$200 million and is investing both directly in “female-led” companies — more on the definition of that later — and indirectly by allocating money to emerging venture funds that have at least one woman partner and have pledged to invest in female-led tech firms.

While targeting money to women-led companies is a good thing, the funds allocated to narrowing the VC gender gap are a drop in the VC bucket. Global VC investment in 2018 totaled $255 billion, with the United States accounting for $131 billion and Canada, C$4 billion. So those funds directed toward plugging the gender gap are much less than 1% of the annual total and spread over multiple years.

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What’s the Standard?

What makes a company woman led? Using the definition from the BDC WIT Fund: “[I]t has a female founder, co-founder, CEO or executive driving the direction of the business. Executives must be in their role for a minimum of one year.”

Those standards make sense: We don’t want a company hiring a token woman at the last minute just to secure funding, and we don’t want to invest in a company that has an all-male board and executive suite but has all its junior roles staffed by women. And having one woman on the executive team is better than none, right? But still . . . is the bar high enough?

A couple of recent articles say no. Now, before I cite them, I should note that I am not criticizing any of these organizations: They are good initiatives made up of good people and are simply following the rules they’ve been given. My point is that we should focus on making the rules better.

The feminist website LiisBeth — “Field Notes for Feminist Changemakers” — conducted an analysis of the 20 companies that have received BDC WIT money  While a majority did at least a bit more than the bare minimum, four of them barely did that.

Nancy Wilson, the founder and CEO of Canadian Women’s Chamber of Commerce, raised similar points about the BDC fund in a recent op-ed headlined “What’s a ‘women-led’ company? We need a standard definition.” She proposed setting a higher standard for investee companies:

“. . . firms with a minimum of 50-per-cent women-identified ownership and a minimum of 50-per-cent management representation with senior-level, strategic decision-making abilities . . . if a fund is directed to support women in a particular industry, at least one of the women in a senior leadership role must be in a position directly related to that industry. In the case of technology, that requires a woman to be chief executive officer, chief technology officer or other tech or development role at the most senior level.”

As a former VC, I applaud Wilson’s direction, but I think the bar she sets is unrealistically high for 2020. The half women ownership and management and CEO/CTO standard will take a long time to meet and likely means that BDC would be dreadfully slow in putting all of its $200 million to work. In April of this year, BDC announced that it had deployed $14 million in the last year. (Although the fund was expanded in 2018, it has been around since 2016, so it isn’t exactly starting from zero.) At that rate of capital deployment, BDC would need another 13 years to invest the balance of its funds, and that’s assuming the low “at least one woman somewhere” standard. Setting the bar much higher would extend that time frame well beyond 13 years.

So is there a middle ground?

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The CanCon Model

Up until 1971, Canadian musicians were seldom heard on Canadian radio. So the Canadian Radio-Television and Telecommunications Commission (CRTC) established rules that required stations to dedicate a minimum of 25% of their airtime to Canadian content, or CanCon. How did these rules define “Canadian content”? They applied a multi-point system called MAPL — like the Canadian flag: cute, eh? Points were tallied based on who wrote the Music, the Artist who performed the piece, where it was Performed, and who wrote the Lyrics.

So what would a FemCon formula look like?

FemCon: A Point System to Measure Female-Led Firms

  • Founders/Ownership: If a woman invented a product, even if she no longer runs the company, that ought to count for something. The same is true if women constitute an ownership stake of 10% or more. So let’s give half a point per female founder/owner.
  • R&D Team: Even after a firm is founded, lots of work still needs to be done in R&D. The US average for women in IT roles is just under 25%, so no points should be awarded for just being average. But how about one point for 37.5% and two points for 50%?
  • Executive Team: Let’s assign one point per woman, with two points for CEO.
  • Board of Directors: Yes, the board matters, but not as much as the C-suite. Half a point per female board member sounds about right.
  • Advisory Board: Advisory board members have no legally binding influence on a company, but they can still play a role. We’ll give a quarter point for each woman.
  • If more than half the employees are women, that deserves a point.
  • If the company is specifically working on something that serves women customers or solves a problem for women, that’s worth another point, maybe even two.
  • One purpose of these kinds of programs is to reward not only female-led start-ups but also female-led VC investing firms. So if a company has received material funding from a female investment partner — meaning that the actual lead partner who made the financing decision was a woman — then that gets another point.
  • If the firm has a mission statement talking about a commitment to gender equality and so on . . . but no female founders, engineers, execs, board members, etc.? Zero points. Talk is cheap. Only action matters.

Currently, BDC seems to be saying that a score of one point might be enough to qualify. Equally, the X Factor and Billion Dollar Fund seem to award money based on a single female founder. I agree with LiisBeth and Wilson: That’s not enough. So I have made the various point-getting categories as wide as possible and with some easy ways to score multiple points.

Investment Professional of the Future report graphic

Should four points be the new bar? CEO plus CMO, and two board members? CFO, 38% of the R&D team, two founders, and a female-led VC investor? That raises the bar but keeps it within reach.

All of the above is tweakable, of course, and nothing is set in stone. But doesn’t the concept seem like a plausible approach?

And let“s not leave it at that. Couldn’t such a system be a model for other kinds of diversity investing? Women are indeed underrepresented when it comes to receiving VC dollars. But so are people of color in the United States, especially African-Americans and Hispanics. A similar points system could work for these groups, too.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/jozefmicic

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About the Author(s)
Duncan Stewart, CFA

Duncan Stewart, CFA, was an active portfolio manager from 1993 to 2005, and is now director of technology, media, and telecommunications research for Deloitte Canada. In that role he has researched millennial attitudes to financial services and the gender gap for women in IT.

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