Investing is strategic. You can’t diversify for the sake of diversifying, because that doesn’t employ a strategy. There’s also nothing savvy about mimicking another investor if you don’t know the motivation behind the moves you’re making.
When I advise people to invest in small businesses, that entails a lot of research and thoughtfulness. “Investing in business” does not provide any sort of road map or strategy, just a concept worthy of investigating and implementing. Next comes learning about the how, where, when and why of it all.
There are different ways investors can get involved in venture capitalism, from P2P lending sites to self-directed IRAs and angel investing. Whatever platform you choose, expect to do a fair amount of number crunching and strategizing. The more you know about the industry and business you’re looking to fund, the better your chances of success.
As someone who takes an active role in my own investing as well as that of my clients, I’ve spent a lot of time reading about and researching business trends and statistics. Over the last decade, the data keeps making one thing abundantly clear: every would-be venture capitalist should have an eye on female-founded businesses.
There are plenty of reasons why this is true, from the missions of the companies women are launching to the benefits of having a more diverse marketplace. While the number of women-led enterprises has shot up since the turn of the century, the venture backing split between men and women is still incredibly lopsided, with male founders getting somewhere around 85% of investor capital.
And now back to my opening point: investing is strategic. Every business investment is different, no matter who owns the company, so you need to get into the details and understand why one entrepreneur deserves your money over another. For that reason, I’m going to lay out some pretty telling statistics, offer a bit of analysis, and then you can go find the right woman-run business for your portfolio.
As we take small steps toward a more equal workforce, some barriers get broken down for good. Not so long ago, a female executive was a total rarity. Today, there’s nothing strange about women in leadership roles, which has more women motivated to start their own businesses and more financiers willing to help their cause.
Of course, this growth wouldn’t happen if the businesses founded by women weren’t succeeding at an impressive clip. Experienced female investors are launching second and third companies while also putting capital behind other female-founded ventures, keeping the momentum up even as the majority of investors still haven’t caught on with the women’s business movement.
When you get into venture capitalism, it’s a good idea to target a growing industry. While companies run by females don’t exactly constitute an industry, they certainly offer a force within the markets. And, since women are bringing innovation and new perspectives to every aspect of the economy, you can expect this growth to be sustainable for many years to come.
It’s very hard to start a business. Even after you make it through that grand opening, things don’t get easier for a while. Lots of startups don’t make it through the first year, and far fewer make it all the way to that five-year anniversary. However, according to a Boston Consulting Group study, women-led organizations have a better chance of going the distance and turning a profit during those early stages.
The reasoning behind this data leaves room for interpretation. A few studies show that female entrepreneurs maintain a more conservative business model during the first few years of operation, choosing to wait until cash flow is steady and growth is consistent before expanding. Every startup comes with a good deal of risk, but limiting unnecessary exposure can often be the difference between success and failure.
Women also have a more challenging path, generally speaking, en route to founding their own companies. Overcoming more hurdles on the way to entrepreneurship leaves one more prepared for the trials and tribulations that come with launching a startup. It stands to reason that those better equipped to handle adversity will have better odds of getting a new business up and running.
Whatever the truth behind numbers, an increase in cumulative revenue is very appealing to any business investor. That translates to more bang for your buck and more security as a startup uses your capital to transition from strong concept to profitable business. Venture capitalism usually doesn’t lead to rapid returns, so finding a business owner you trust to keep their operation going and growing for 5+ years is about as good as it gets.
Nothing moves faster than tech. Take the cryptocurrency rollercoaster as an example: walk into a room with 20 investors and you’ll hear 20 different takes on how exactly one should handle digital currency and where that market is headed.
Tech scares and confuses people for a couple reasons. First, the aforementioned rapidity with which the markets change. You never know when the winds will shift and a new piece of software will turn something seemingly brilliant into an obsolete and useless tool. The second reason many investors hesitate to put cash behind tech startups is a simple lack of understanding. When you can’t imagine how a service will work, it’s hard to confidently put your money behind that venture.
As more women launch tech startups, the issues of innovation and complication aren’t being solved, but in some ways they’re being countered. The digital markets thrive on novel ideas, and female entrepreneurs bring exceptional experience and intuition to the table that won’t come from a completely homogenous board of directors. Any company involved in this constantly evolving field should be able to adapt quickly, and diversity of management and ideas helps ensure that flexibility.
The other factor behind female success in tech is obvious but often overlooked - women are better at developing for and marketing to women. As giant conglomerates employ think tanks and focus groups to figure out how to promote a product, some of the most profitable businesses over the last decade have spawned in the living room, garage, or kitchen of a woman with an idea for how to deliver a useful product. With the omnipresence of the internet, a good concept can catch fire if given enough space to breathe.
With more and more women launching digital startups, more female consumers are finding and sharing services they use and appreciate. A relatively small initial investment can lead to significant returns as a young company grows, which is a big part of the reason why female-driven tech companies are delivering the highest returns.
Another statistic with a few interpretations, the doubled earnings of female-founded companies may give you pause. While the sample size is small for some of this research, the trend seems to hold true throughout most studies. When you put a give a dollar to a female entrepreneur instead of a male, the data suggests you’ll get $1.60 back instead of $1.30.
An undeniable factor in this is the dilution of male-led enterprises. More companies have male CEOs, males are more likely to launch a business, and, as noted earlier, the vast majority of venture backing still goes to companies run by men. Because of this, averages get weighted down by the many companies poorly managed by male entrepreneurs. However, while the volume of male-led businesses has bearing on the data, it doesn’t change the fact that people investing in female-led businesses are seeing a higher rate of return.
I believe this comes in part from the qualifications of female entrepreneurs. With women still playing from behind in the world of commerce, those who rise to the top prove their mettle on the way. The combination of fewer female owners and those owners bringing loads of experience, grit, and drive makes women-run organizations an appealing option.
Interestingly enough, a few studies concluded that female leaders have less interest in revenue, which you might think flies in the face of running a business twice as profitable as one headed by a man. However, if the focus of the CEO is on the what’s best for the consumer, the company culture, and the stability of the enterprise, as opposed to the fastest ways to drive up quarterly earnings, it won’t come as a surprise when that company does well. And if that CEO continues to make decisions based on the company’s success and not her own bank account, you would expect to see continued growth.
While risk takers often get rewarded in the business world, patience remains an important virtue. If we compare an organization run by a woman with self-restraint to a company led by a male who’s itching to break earnings records, I’m guessing the woman’s business will come out ahead. Looking at the numbers, that seems to be the case.
Diversity means different things in different regions, especially in a country as big as the United States. Nevertheless, with just over 10% of senior executives at the largest 500 companies being females, placing women in positions of power brings an element of diversity to almost any business. And studies show that’s a very good move.
Most of the time, turnover happens for one of two reasons:
● Poor company performance
● Low employee morale
These are both fairly big problems, and that’s why turnover is often a sign of significant underlying issues. On top of that, business owners want workers to stick around, getting better at the job, improving efficiency and helping the company to go. Hiring replacements wastes time and money that most managers don’t have to spare.
So what about diverse leadership leads to better retention? In my experience, a diverse team allows for more perspectives to be heard and increases employee engagement. Having team members with different backgrounds and experiences expands the conversation and leads to more inclusive business practices. If workers feel heard and respected, they tend to have a greater appreciation for their workplace.
Diversity also directly correlates to innovation. The wider a company’s collective breadth of knowledge and experience, the better prepared that business will be to adapt as circumstances dictate. If my company was staffed entirely with people who thought the same and had the same life experiences as myself, our strategies would get a little one-dimensional. My clients and I benefit very directly from working with a variety of people.
Female managers, in addition to bringing a level of diversity all on their own, tend to draw from dissimilar demographics when building a team. Each executive has his or her own reasons, but the companies assembled by female founders are statistically better balanced than those put together by men. All things being equal, this means you can expect women-led companies to experience less turnover and, presumably, more success.
This final data point makes the rest even more intriguing. While venture capitalists tend to back male-led enterprises with five times the capital that goes to women-led organizations, the few female-founded companies that do receive funding are outperforming the male competition by over 10%.
Investors are still more hesitant to back female entrepreneurs than males, even when the data tells them to do the opposite. Some of this is likely by-the-books financing, with lenders rejecting applications from women who have less business history than men in similar positions. For others, it’s simply conditioning, as men have had a firm monopoly as CEOs for a long time. Whatever the causes, the financiers breaking with tradition and backing women-led companies are being rewarded for those investments.
I expect this number will keep an upward trajectory until the playing field eventually starts to level out. Female founders continue to bring strong ideas and business models into the fold, making those companies work with less capital while often facing more adversity. With a little extra help, these businesses will do even better and the venture capitalists behind them will reap the rewards.
Naturally, this article says nothing about the successful male entrepreneurs, of which there are plenty. I’m just presenting the data which might prove useful as you compare different companies in different industries. And, if there was any doubt as to whether female business owners were changing the markets for better, let the data above put those questions to rest.