More than a year into the pandemic, it’s clear that COVID-19 has deepened existing economic inequalities. The impact has been labelled a “she-cession” because of the disproportionate effects on women’s paid employment and earnings trajectory. Lesser known is that these uneven outcomes extend to women entrepreneurs, too: In 2020, global venture funding of women-led companies fell by a precipitous 27 per cent.
Historically speaking, times of economic uncertainty often motivate funding cutbacks and tighter budgets, as we witnessed after the 2008 financial crisis. But taking such across-the-board measures post-COVID-19 is sure to further harm the diversity of Canada’s economy. Instead, now is our opportunity to rethink how entrepreneurial investment dollars are allocated – and to chart a new course toward a funding ecosystem that sets up a broader range of people to succeed.
Recently, the Women Entrepreneurship Knowledge Hub (WEKH) and the Brookfield Institute for Innovation + Entrepreneurship (BII+E) partnered to create an evidence-based toolkit for funders, supported by an advisory panel of funding and entrepreneurship experts from across Canada. The toolkit outlines specific actions that can be taken at every stage of the funding process to produce more equitable outcomes, from standardizing pitch-meeting questions and evaluation metrics to tracking and disclosing demographic data.
An important finding of the research is that one category of funders, in particular – limited partnerships (LPs) – is uniquely positioned to influence outcomes because of their position at the very front end of the investment pipeline.
LPs are institutional or individual lenders who provide financial backing to venture capital (VC) firms. As holders of the purse strings, LPs have the authority to review and restrict VC firms’ investment strategy and, as a result, to actively foster a more inclusive funding ecosystem.
This would especially benefit women entrepreneurs who are Black, Indigenous and people of colour (BIPOC).
In the entrepreneurial space, women-led businesses are half as likely as their counterparts run by men to seek out financing. When BIPOC women and non-binary founders do seek funding, they face barriers that include unconscious bias and systemic racism in boardrooms, pitch competitions, investment meetings and financial transactions.
Studies have found asset allocators are less likely to invest in Black-led funds, and women consistently receive less capital from angel investors. In pitch meetings, VC investors tend to ask male entrepreneurs promotion-focused questions (for example, “Do you plan to license the technology?”) and women entrepreneurs prevention-focused questions (for example, “What are the opportunities for leakage?”). Because it is easier to respond poorly to prevention-focused questions, women are further at a disadvantage.
LPs have the power to help shift this culture. A recent study by the International Finance Corp. (IFC) found nearly 60 per cent of surveyed LPs do not have investment goals related to gender diversity among their VC partners or portfolio companies. Creating defined targets that make entrepreneurship more equitable is ethically important, but it’s also crucial for fostering innovation and increasing returns on investment.
McKinsey & Co.’s 2020 Diversity Wins report found companies whose executive teams are more than 30 per cent women were more likely to outperform companies with fewer women leaders. Evidence further suggests the inclusion of more women-led startups in a funds’ portfolio can improve returns. Ethnically diverse teams also report higher success rates compared with teams with members who were ethnically similar. In short, fostering the success of women entrepreneurs from diverse cultural backgrounds can spark innovation in products, services and practices. It can also expose the funding community to new and creative ways of meeting the needs of underserved markets.
Setting hard targets, such as selecting VCs on the basis of gender statements, is one way LPs can demonstrate their commitment to intersectional gender equality. LPs can also require VCs to increase the amount of capital they invest in women entrepreneurs and commit to investing only in funds with gender-diverse investment teams, as well as diverse teams with expertise in sectors where women and BIPOC entrepreneurs are concentrated.
Most people don’t set out to discriminate. Members of the funding ecosystem inherit processes with built-in biases that perpetuate themselves. The systemic nature of discrimination makes it both more challenging and more crucial to identify unequal treatment, change behaviour and redesign processes that have become embedded in organizations.
A first step is for those making funding decisions, such as LPs, to acknowledge inequality and commit to changing their organizational cultures and their everyday work practices, lending their influence to the larger goal of a more prosperous, equitable and inclusive economy for Canada.
Kim de Laat is a postdoctoral fellow in the department of sociology at Brock University and a research collaborator with the Brookfield Institute for Innovation + Entrepreneurship (BII+E) at Ryerson University in Toronto.
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