By Carolina Dams (Co-Founder & Managing Partner, A2C Advisors)
During the month of October, I was invited by the Inter Development Bank (IDB) to the “Poder mujer” conference in Lima to address issues related to financing vehicles for women-led startups. The panel discussion was moderated by Nancy Lee, General Manager of the Multilateral Investment Fund from the IDB.
I was asked to answer the following questions: Why do so few women-owned businesses receive venture capital (VC) funding? Do men and women have different funding objectives with respect to equity vs. debt? Is this a supply problem (investors avoid women-owned firms) or a demand problem (women-owned firm owners are less active in approaching VC funds)?
I would like to share with Women 2.0 the draft speech I prepared for the panel:
“First, I would like to thank the Inter Development Bank for giving me the opportunity to be part of this panel. I believe I should start by giving a brief explanation on venture capital, which is one of the equity early stage investments. Equity investments have different natures according to the stage of the businesses.
A typical entrepreneur would first invest their own savings, then seek friends and family funds. If things go well, s/he might need more money to continue his operations, so mainly through networks, s/he seeks angel investment and/or directly s/he seeks venture capital financing. Both can be considered the first formal ways to seek equity investment to third parties.
Generally, at this stage, angel investors as well as venture capitalists decide the whether to invest or not in a project, based on the founding team, a Powerpoint with the proposed business plan, and in the best of the cases, some beta product which is being tested by a client. There are no assets, no balance sheet, only the perception that the angel or the VC team has on the founders’ team and the business opportunity.
The amounts of investment differ among countries, however, for angel investment, from $25,000 to $50,000 and venture capital ranging from $500K to $5M. With this information, you will probably agree with me that this type of investments has high risk, statistics show that from every 10 investments, 8 investments have negative results, and 2 investments have high returns.
Another characteristic in this type of investment is that the angel investor or the management of the funds gets directly or indirectly involved in the definition of the strategy of the business with its knowledge, network and support. That´s why, some people talk about smart money investments.
I would also like to introduce the concept of accelerators, which appeared quite recently in the United States, and are starting to be developed in Latin America. Accelerators attract teams of entrepreneurs at an early stage (angel investment stage), and have programs that covers different aspects of starting a venture, generally giving the team investment readiness and, above all, access to future financing.
The breakdown of venture capital investment in the United States in H1 2012 (almost $2B) annual $5B: Software and IT (48%), Media and Entertainment (12%), Biotechnology (9%), Consumer Products (5%).
Now, let me share with you some characteristics of women entrepreneurs in general. According to GEM, the proportion of women entrepreneurs to total entrepreneurs varies significantly, however in the region it is around 30% to 45%. There are different studies about women entrepreneurs, and some important characteristics to bear in mind are:
- Women in less developed economies are more likely to start an endeavor by necessity (so called “necessity based entrepreneurs”), which fills in employment gaps.
- 75% of women-led ventures are in consumer sectors, whereas this represents 50% of men-led ventures.
- Women entrepreneurs tend to have less network, and tend to seek guidance from family, especially their spouses.
- Compared to men, women lack a positive attitude about their own personal capacities to start a business.
Now, regarding your question about why only 5% of capital goes to woman can be explained by some of the information I have shared, and also to the fact that women do not seek for venture capital funding. For example, in Argentina, during the last two years, three venture capital funds which invest both in Argentina and in the region received more than 1000 business plans, of which only 6% had women entrepreneurs. Of the 32 deals that these funds closed, only 1 of them had a woman in the team.
The same analysis of 4 accelerators in Argentina, Chile and Colombia shows quite different results. 25% of the almost 120 projects accelerated had in there team women entrepreneurs, and 8% of them were all women teams.
The higher participation of women in accelerator programs will probably increase the number of women-led companies applying to venture capital funding. This is my belief founded in the fact that most of the accelerators are oriented to software and IT projects (which comprise of almost 50% of the venture capital funds invested in 2012) and because the Accelerator programs will help increase women networks with the financing community, two aspects that can be driving the low percentage of women entrepreneurs financed by venture capitalists.”
Women 2.0 readers: How can we increase the number of women applying for venture capital to grow their businesses? Let us know in the comments.
About the guest blogger: Carolina Dams is a Co-Founder and Managing Partner at A2C Advisors She is also an angel investor and mentor at NXTLabs. Since October 2011, Carolina has led a group of angel investors, participating in seed rounds with a focus in technology, biotechnology and Internet companies. She holds an MBA from London Business School, where she participated in an exchange program with Kellog (Northwestern University). Follow her on Twitter at @cd3987.