The venture capital landscape is experiencing a significant shift, with increasing recognition of the importance of diversity. Recent developments highlight both the progress and the persistent challenges faced by women in venture capital. Fearless Fund’s grant program for Black Women entrepreneurs was recently suspended by a US federal court of appeals. Women led funds are on track to raise $2B in 2024, according to Venture Capital Journal. This is far less than the $3.4 Billion raised in 2023. This is significant, for three quarters of Venture Capital firms in the US do not have a female partner, and that impacts their bottom line directly.

Current landscape of women-led venture capital

The current landscape for women in venture capital is both promising and challenging. Women led funds are gaining traction, with new, smaller funds set up like Type Capital and notable large funds like Kirsten Green’s Forerunner Ventures, which closed $1B for its sixth fund in 2022 and Bond, led by Mary Meeker, which closed $2.5B for Bond’s third fund. Despite these successes, most women managers still raise significantly smaller funds.

Monique Woodard’s experience exemplifies the challenges women face in venture capital. When she announced her $17 million early-stage venture capital fund, Cake Ventures, in January 2023, she described raising a fund as a Black woman as “like crawling through glass with no clothes on, and then they pour fire ants all over you.” Her vivid description illuminates the systemic barriers women, particularly women of color, face in the industry.

The untapped potential and performance

Despite these challenges, women-led funds show significant potential and performance. Women in VC’s “The Untapped Potential of Women-led Funds” report in October 2020 highlighted that 73% of women-led funds had been founded in the preceding five years, with a substantial number raising their first funds. Data shows that first time funds outperform established funds and firms with female partners see an average of 1.5% spike each year and 9.7% more profitable exits.

And yet, women still face additional barriers in raising funds. Women have to work 10 times as hard to obtain access to the same assets as their male counterparts. This underinvestment in diverse founders results in missed opportunities for substantial returns.

Structural barriers and biases

The biggest challenges for women managers raising venture funds come up in the closed nature of access to information, mentorship, and networks within the limited partner community. This network includes high net worth individuals, family offices, fund of funds, endowments or pension funds, and other institutional investors. Investors name not seeing as many diverse funds that meet their criteria as their biggest challenge. They fail to realize how their over-reliance on traditional metrics and unconscious biases perpetuate these barriers.

Research shows those investors struggle with unconscious bias and are more willing to bet on male rather than female first-time managers, or managers that look like them or went to the same school. Those same investors tend to favor making commitments to funds on an unscientific “feel” or “first degree network connections”.

Morgan Stanley identifies a difference in risk perception, where investors perceive women-run businesses as riskier than those run by men. Investors often cite the labor-intensive due diligence required for smaller funds as a reason to avoid investing in female emerging managers. Consequently, fewer women than men in the PE and VC industries choose to establish their own funds. Those who do face structural inequalities that hinder their success.

Steps towards inclusivity and support

Despite these challenges, some limited partners and institutions are beginning to change the flow of capital towards underrepresented founders. For example, Cendana Capital and Screendoor Partners are supporting diverse entrepreneurs. Bank of America has announced investments of about $150 million in 40 private funds focused on diverse entrepreneurs and has doubled this commitment to $350 million.

Melinda French Gates’ Family Office Pivotal Ventures has been instrumental in its backing of numerous female emerging managers. Other funds like mPowered Capital, which launched its debut $110 million fund to back underrepresented fund managers and Recast Capital, which supports emerging managers and recently welcomed its 8th cohort, are changing the structure of the investment landscape from top down.

Recommendations for improving inclusivity include building diverse selection teams, being aware of tokenism, and supporting alternative assessment methods. Erin Harless Moore, Investment Director at Pivotal Ventures emphasizes looking for an “edge” and “value add” of founders especially as it relates to their area of expertise.

The road ahead: A call for inclusive investment practices

The importance of supporting women-led venture capital cannot be overstated. By adopting more inclusive practices and recognizing the value of diverse founders, investors can unlock substantial economic potential and drive more equitable growth. The ongoing initiatives and changes within the industry provide a hopeful outlook for the future, signaling that the time has come for investors to overhaul internal structures that prevent them from noticing, investigating, and allocating inclusively. The venture capital landscape is poised for transformation, and the commitment to inclusive and equitable representation will be a key driver of its success.