3 May 2021
Pension funds and government have role to play to close innovation gap
3 May 2021
Recently, the FD reported that the government no longer has a role in investing in start-ups, stating there is sufficient funding for all young companies. In this argument, the investment gap was unfortunately overlooked…
In the past decade, venture capital investment has indeed quadrupled and the number of companies started by women has grown to 35% of the total. However, the percentage of venture capital going to women-founded companies has barely changed since 2012. Currently, less than 2% of Dutch VC capital goes to female entrepreneurs. So little investment money goes to multicultural founders that they barely exist in the statistics. Why is this so skewed? The easy answer is: because we choose what we know and what we are used to. There are several reasons why this inequality persists, but there are also solutions. Inspired by an article from Harvard Business Review, I will attempt to translate solutions into the Dutch context here. And I hope that, along with me, several investors will take up their pens.
Who sits at the decision-making table?
Diversity impacts how businesses find and identify entrepreneurial talent, evaluate opportunities, and allocate capital. On the investor side, only 6% of partners at venture capital (VC) funds are women. In addition, 87% of VC funds have no female investors in the team at all. Of informal investors, 95% are men. And these informal investors and VC funds are precisely the ones who decide which innovations receive investment. For example, they invest in scooters and in 2e hands horloges en niet in fem-tech.
In the Netherlands, this is further compounded by the fact that a significant portion of the capital invested in VC funds comes from the government via the RVO (Netherlands Enterprise Agency), the ’Regional Development Companies’, the European Investment Fund, and Invest-NL. Private money mostly comes from family offices and tech entrepreneurs who have successfully sold their companies. Here too, diversity at the decision-making table remains a major point of attention.
Consequence of this investment gap is not only a wealth gap, but especially also a innovation gap. The solution lies in the fact that the entire investment chain can use its position to address the aforementioned gaps.
Venture capital not prioritising diversity despite performance
Research repeatedly shows that companies led by diverse teams perform significantly better. Diverse leadership leads to improved financial performance, and women working together, and women and men working together, develop different and sometimes even stronger innovations than all-male teams. Furthermore, these innovations are often also sustainable. Despite the compelling performance data, venture capital does not seize this opportunity. The cause lies in a number of well-documented reasons: gender stereotypes, unconscious bias, systemic economic barriers, and investors' preference for serial entrepreneurs.
Government actually lags behind in support for initiatives addressing status quo
We focus on TheNextWomenCrowd Fund and Borski Fund as venture capital funds specifically targeting technology and diversity. This is how we address the status quo. However, we also face barriers in doing so. At Borski Fund, private investors have committed 80% of the fund size, including all major banks, as well as several family offices and informal investors, of whom 70% are women. A very fine achievement. However, the government has only joined through RvO, LIOF and NOM. If a major party such as Invest-NL or the European Investment Fund were to invest, Borski Fund could make an even greater impact. The initiative #fundright, supported by Techleap, has brought more commitment from fund managers, but the initial results are limited. The government does not (yet) have a ‘gender lens investing’ policy.
Government and private parties in the US, England, and Canada To set a good example
In the United States, there are numerous networks and very large funds that specifically provide venture capital to female entrepreneurs and high-potential female founders. Examples include Female Founders Fund, Astia, and AmplifyHer. Banks such as Morgan Stanley, Bank of America, and Goldman Sachs, along with well-known investors like Andreessen Horowitz and the SoftBank funds, have joined these efforts to address the gap. Furthermore, there are super-angel investors like Melinda Gates, who has committed $1 billion to invest in female fund managers and female entrepreneurs. In England and Canada, the government plays a significant role in making companies and investments more diverse. They do have a specific Gender lens investing policy and investing in specific venture capital funds for this purpose.
Institutional investors can create urgency and momentum
Institutional investors – such as universities, pension funds, and insurance companies – are the lifeblood of venture capital in the USA, but are not (yet) participating in the Netherlands. Nevertheless, even in the Netherlands, pension fund board members and managers state that diversity and inclusion are important. Precisely from their positions, they can make a meaningful difference by financing specific venture capital funds and holding other funds accountable. Furthermore, they can adopt new guidelines that promote investment in venture capital funds committed to gender diversity.
Before climate, this was done
Institutional investors, whether working individually or collectively to force systemic change, have done so before. By mid-2020, nearly 450 institutional investors, representing more than $ $41 trillion in assets, had joined Climate Action 100+. They set specific goals for board representation and emissions reduction and pressured companies to make more climate-friendly choices. The positive outcome is increased transparency on a company's carbon footprint and better data on capital flow into companies based on climate-relevant activities. In a short amount of time, institutional investors created an urgency and momentum for climate action that previously did not exist on a large scale.
From the exception to the norm
If large amounts of venture capital are allocated to diversity, its economic impact will reach far and wide, and female entrepreneurs will utilise their talent, experience, and insights to grow start-ups into large, profitable businesses. And there will be more innovations that will improve society as a whole. But… this will only happen if we create a new capital paradigm and shift the funding of promising women and multicultural founders from the exception to the norm.
So we're not there yet, but we remain optimistic that the government will still play its part, just as the pension funds can. Thanks for reading to the end, that's a start.
On the photo, founders Simone Brummelhuis and Laura Rooseboom during the launch of the Borski Fund in Amsterdam. Photo by Desiree Engelage.
