Increasing investments in female-founded companies is not only an ethical decision to make in terms of improving gender parity—it is also financially prudent. Research confirms that increasing gender diversity results in better financial outcomes. Companies with greater gender diversity outperform those with less—often by as much as 30%. One study suggested companies with female-executive representation showed increased returns on investment of 66%, on equity of 53%, and on sales of 42%.1 Estimates indicate venture capital opportunity costs from withholding investment to diverse founders may be as high as US$4 trillion.
Women-owned businesses, entrepreneurs and financiers represent one of the most promising market opportunities of our generation. In the United States alone, women are projected to manage nearly US$30 trillion in assets by 2030.2 Despite this, only 15% of venture capital dollars are allocated to companies with at least one female founder, and less than 2% are allocated to companies with female-only teams.3
Women entrepreneurs and decision-makers are woefully under-represented in venture capital, specifically in terms of receiving funding and decision-making responsibility. This is in part due to several factors, including unconscious bias and the “network effect”.
IT’S NOT JUST EQUALITY, IT’S BUSINESS OPPORTUNITY
Increasing investments in female-founded companies is not only a principled decision to make in terms of gender parity, but also a prudent business decision. Female executive representation is correlated with increased profitability. An analysis by the Boston Consulting Group established that if women and men around the world participated equally as entrepreneurs, global gross domestic product (GDP) could rise by as much as 6%. This would boost the global economy by US$5 trillion annually.4 Similarly, a McKinsey Global Institute study estimated that if women play an identical role in labor markets to that of men, global annual GDP could rise 26% by 2025.5
According to one study, female-founded and female-executive representation increased return on investment by 66%, increased return on equity by 53% and increased return on sales by 42%.6 While survivorship bias could be a factor in these results, that is, the best women teams being compared to average male teams, at a minimum it indicates more diverse and inclusive teams do better than less diverse teams.
Female-founded or female executive team-represented startups’ company valuations were 63% better than all-male teams.7 In addition, teams of diverse founders (more than one gender and/or more than one race or ethnicity represented) create more innovation and better financial outcomes at venture-funded start-ups, on average. This includes 30% higher multiples on invested capital (MOIC) when companies are acquired or go public. For start-ups with at least one ethnically diverse team member reporting to the CEO, valuations were 65% better.8
Companies with at least one female founder also provide faster paths to exit,9 and the number of exits grow at a much faster rate than companies with only male founders. When the proportion of female partners in venture capital firms increased in the United States, companies benefited with 9.7% more profitable exits, and a 1.5% “spike” in overall fund returns annually.10
Clearly, if it is an investor’s fiduciary obligation to make the most prudent investment decisions, a massive opportunity is missed when female-founded companies only receive 2% of capital. Still, despite the difficulty accessing capital, 12% of the Forbes’ list of the best dealmakers in venture capital in 2019 were women.11
Author: Jenny Johnson, CEO, Franklin Templeton. If you want to find out more about Franklin Templeton solutions talk to your financial adviser
- Source: The New Economy, “Anita Borg report makes strong case for investing in women,” April 9, 2014.
- Source: Quartz, “US Women will Take Control of an Additional $20 Trillion in Wealth This Decade,” July 29, 2020.
- Source: Crunchbase news,“Q1 2019 Diversity Report. Female Founders Own 17% of Venture Dollars,” April 2019.
- Source: Boston Consulting Group, Want to Boost the Economy by $5 Trillion? Support Women as Entrepreneurs, July 30, 2019.
- Source: McKinsey Global Institute, How Advancing Women’s Equality Can Add $12 Trillion to Global Growth, September 1, 2015.
- Source: The New Economy, “Anita Borg report makes strong case for investing in women,” April 9, 2014.
- Source: Forbes, “The Value of Investing in Female Founders,” March 29, 2019.
- Source: Forbes, “Diversity As $uperpower: The (Well-Known) Data Against Homogeneous Teams In Venture Capital,” September 22, 2020.
- An exit strategy may be executed to exit a non-performing investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses. An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO).
- Source: Forbes, “Meet The Top Women Investors of the Midas List in 2019,” April 2, 2019.
WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. Endnotes 1. Source: The New Economy, “Anita Borg report makes strong case for investing in women,” April 9, 2014. 2. Source: Quartz, “US Women will Take Control of an Additional $20 Trillion in Wealth This Decade,” July 29, 2020. 3. Source: Crunchbase news, “Q1 2019 Diversity Report. Female Founders Own 17% of Venture Dollars,” April 2019. 4. Source: Boston Consulting Group, Want to Boost the Economy by $5 Trillion? Support Women as Entrepreneurs, July 30, 2019. 5. Source: McKinsey Global Institute, How Advancing Women’s Equality Can Add $12 Trillion to Global Growth, September 1, 2015. 6. Source: The New Economy, “Anita Borg report makes strong case for investing in women,” April 9, 2014. 7. Source: Forbes, “The Value of Investing in Female Founders,” March 29, 2019. 8. Source: Forbes, “Diversity As $uperpower: The (Well-Known) Data Against Homogeneous Teams In Venture Capital,” September 22, 2020. 9. An exit strategy may be executed to exit a non-performing investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses. An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO). 10. Ibid. 11. Source: Forbes, “Meet The Top Women Investors of the Midas List in 2019,” April 2, 2019. 12. Source: McKinsey & Company, Delivering through Diversity, January 2018. 13. Source: Padnos. C., High Performance Entrepreneurs: Women in High-Tech, Illuminate Ventures, 2010. 14. Source: Massachusetts Institute of Technology “Collective intelligence: Number of women in group linked to effectiveness in solving difficult problems,” October 2, 2010. 15. Source: Quartz, “US Women will Take Control of an Additional $20 Trillion in Wealth This Decade,” July 29, 2020. 16. Source: Forbes Women, “Why Products Designed by Women are the Next Big Thing,” December 22, 2017. 17. Ibid. 18. Source: PitchBook, “All Raise Report on Venture Financing in Female-Founded Startups Shows Progress, Yet Continued Gender Inequity,” November 12 , 2019 19. Source: World Economic Forum, “108 Years: Wait for Gender Equality Gets Longer as Women’s Share of Workforce,” Politics Drops,” December 19, 2018. 20. Source: WBENC, “Behind the Numbers: The State of Women-Owned Businesses in 2018,” October 10, 2018. 21. Source: Endeavor, “Upcoming Endeavor Insight Research on Women Entrepreneurs,” March 17, 2020. 22. Source: Inc, “New Research Finds Women Are Starting 1,821 New Businesses a Day,” August 22, 2018. 23. A unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over US$1 billion. 24. Source: Crunchbase, More Female-Founded Unicorns Were Born in 2019 Than Before, Data Shows, December 18, 2019. 25. Source: Endeavor, “Upcoming Endeavor Insight Research on Women Entrepreneurs,” March 17, 2020. 26. Source: World Economic Forum, Global Gender Gap Report, 2020. 27. Ibid. 28. Source: Padnos. C., High Performance Entrepreneurs: Women in High-Tech, Illuminate Ventures, 2010. 29. Source: Morgan Stanley, Beyond the VC Funding Gap, 23 October 2019. 30. Ibid. FEMQ1_AQ121_0321 IMPORTANT LEGAL INFORMATION This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. 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