by Lionesses of Africa Operations Department
The VC numbers for Africa in 2023 were released a few weeks ago and, as usual, the dial for women just doesn’t seem to be moving. As the brilliant data crunchers at ‘Africa: The Big Deal’ show (here), male and all male funding teams in 2023 as with other years, continued to raise around 85% of the entire funding, that’s not only equity but also debt and grants. Women and all women founding teams raised a rounding error, 2.3% to be exact, with only 13% going to gender diverse ones. Their article is headed: “2023 Deep-rooted gender imbalance” and deep-rooted it is. We just can’t seem to shake off these 2% levels.
Rather than as usual moan and groan about the injustice, the iniquity of finance, this year we shall try something different. Instead, we shall look at the industry itself and suggest why diversification will not only be beneficial to the industry as a whole, but also how the status quo is simply not serving their own investors, shareholders and lenders. As the Boston Consulting Group say: “The people who write the checks have the greatest power to make change.” (here)
Somehow we need to help them dig up and shake off these deep roots!
Whilst we wait politely for the 286 years before equality arrives (UN Women report here), our membership continues to quietly bootstrap their way to profitable growth. As they know, and have proven countless times, bootstrapping does work (although as students of the ‘Survivorship Bias’ will recognise - we only see the successful ones, many great female owned and run businesses will be failing through lack of funding), but the fact remains investment/finance is essential for accelerating growth - “…young companies that access outside financing are able to grow up to 30% faster than those that do not”, from the IFC and WeFi (here). This we call the steroid effect of finance, but unlike in sport, there is no regulation here and so male founded businesses exponentially pull away.
Noting the headline 2.3% number also includes Debt, it is interesting to note, as the IFC say here “Women-owned SME (‘W-SME’) loan portfolios consistently exhibit lower NPLs [(non-performing loans)] than total SME portfolios”, by a significant 3.6% vs average of 4.7%!
The report also highlights that “Loans to W-SMEs accounted for 18% of the overall value of SME loan books…”, with no sense of irony, the IFC then point out that “[w]omen customers provided a reliable source of liquidity for the financial institutions…contributing 35% of the overall volume of retail deposits.” Hmmm. Are banks missing a trick here?
They conclude: “The persistent gender financing gap cannot be easily attributed to differences in the quality of the startups, suggesting that investor bias and risk perception may play a role…interventions will need to be more holistic, reaching beyond addressing startup behaviors and focusing on influencing the behavior of investors…”.
So let us look at the diversification of funds and banks, perhaps that is where the conversation should go, and rather than stamp our feet and demand, find a good reason that will allow the Fund and Banking industries to move faster by themselves.
Whilst the IFC show that “Women are heavily underrepresented in private equity and venture capital. In emerging markets, only 11 percent of senior investment professionals are women and only 7 percent of private equity and venture capital is invested in women-led businesses.”, they add that “[t]he performance of gender balanced investment teams is correlated with higher returns…This difference in performance is about 20 percent of the median net internal rate of return in emerging markets…Gender balanced teams have higher valuation increases, 64% vs. 55%” (here). So for those who say that there should be greater diversity, this is not about having diversity for diversity’s sake - this simply makes good business sense, that clearly female partners at VC firms see: “Female partners invested in almost 2X female entrepreneurs than male partners”. One wonders why the investors in the funds (the Limited Partners) are not making more of a fuss at the returns being left on the table…They are the ones writing the cheques into the funds.
But sadly, not enough women are entering the fund industry: “Only 15 percent of senior investment teams are gender balanced and nearly 70 percent are all male.” (IFC)
Once in, not enough women are then being kept: “…Junior female respondents are 50 percent less likely than junior men to believe men and women have an equal opportunity to become partner.” And this is reflected in the numbers leaving, as the report entitled: “European VCs see exodus of women investors” (here) shows, quoting Dama Sathianathan, partner at Bethnal Green Ventures: “…Often women in VC are implicitly tasked with finding female founders to back but still have to jump through numerous hurdles to secure investment for them, if they are given any opportunity at all.”
The Aspen Network of Development Entrepreneurs (ANDE) (2023) (here) found that “…representation of women across these [investor] organizations stands at 38%. This figure sees a decline when scrutinizing key leadership roles, with women occupying 25% of positions in the C-suite, 19% on the investment committee, and a mere 12% on the board of directors.”
…19% on the investment committee.
Bringing women into the VC world does make a difference, but until they also have representation where it counts - in the investment committee (or for the banks, the risk and credit committees), i.e. the team they have to persuade to sign off on investment, nothing truly meaningful is going to change. No one is asking for an easy route through these committees - just for them to be looked at through a different lens, recognising that decades of male dominated rules and precedents have driven the direction of such committees. Think this is not so? School/University is something that has very deep roots, as ‘Africa: The Big Deal’ show here and taking it one stage further to compare a link between investor and investee, the paper: ‘Alumni Networks in Venture Capital Financing’ by Garfinkel, Mayer, Strebulaev and Yimfor (here) concluded that: “…roughly one third of VC investments involve a shared university connection between a founder and investor…VCs tilt their portfolios toward startups run by founders from their alma mater, even relative to observably similar startups in the same state-industry-year. This effect occurs at both the extensive margin (deal selection) and the intensive margin (deal size).” (Oh, and it’s harder for women to get into the Ivy League Universities according to the Washington Post here, although as an aside, quite easy to get sacked from one it seems.)
In addition, if you are looking for the next unicorn, the fact that: “…male founders are more likely to make bold projections and assumptions in their pitches” (here), will certainly concentrate the mind.
Diversity in the banking world is unsurprisingly no different from the Fund world. “If you are a man on an ExCo [(Executive Committee)], there’s a five-in-six chance that you will be running a major division or business line”, according to the huge survey by OMFIF (here).
Rather than just being grumpy at the iniquity of it all, looking at lost or ignored returns, or greater risk from NPLs perhaps might be the way forward. We must change the discussion by asking the right questions, backed up by data, and through this highlight the deep roots that are holding back greater returns, and so instead create a route forward through increased diversification towards broader investment/funding that will at last fairly include women’s businesses which in turn will build the communities for future growth in the nations they serve.
Those surely are better roots worth putting down.
Stay safe.