Opinion: VCs are leaving money on the table. And it belongs to all of us

On Wednesday of SXSW Sydney I appeared on a panel alongside Alex Khor (Afterwork Ventures), Chris Gillings (5V Capital) and Gemma Clancy (Overnight Success) called Mythbusters: the Australian Startup Culture Edition.

We unpacked five myths covering areas such as: VCs are a good objective source of startup advice (myth); product-led growth means you won’t need a sales team (myth); you have to move to Silicon Valley if you want to be successful (myth); and the founder life is only for young people (spoiler alert – also a myth).

But the most controversial myth was that VCs make data driven decisions.

The panel was split two votes to one, and the audience was similarly conflicted, with a large chunk of the audience (40%) voting that they believed this to be true.

At a superficial level it’s clear that “data” (in terms of observable objective facts) plays a smaller part the earlier stage an investment decision is made.

For me as a pre-seed investor, I use a six-part criteria when making investment decisions: team, team, team, market, idea, traction.

Now, it is a bit tongue-in-cheek, but in truth this does reflect the weighting that I put on the ‘team’ element when selecting founders for pre-seed investment. I consider factors like:

• What is it about this problem that makes this founder so driven to solve it?
• What is it about their lived experience or work history that makes them uniquely qualified to be the one who will solve this problem? and
• How well will they be able to rally a team, customers and investors to their cause?

The other factors — market, idea and traction — play a much smaller role as experience shows most early-stage founders will pivot from their initial idea as they learn through building.

For Alex, investing at the seed stage the approach is similar, although there is a bit more triangulation of data points behind his investment decisions: how much money is the team looking to raise, how much dilution could the business handle, what is the resultant implied valuation, and is that justifiable based on the progress so far.

For Chris at Series A and B, the data plays a much greater role, with his due diligence considering everything from broad market dynamics through to granular company insights across growth, customer and financial performance.

But most VCs are still consistently ignoring one crucial piece of data.

And that is, the role that diversity within founder teams plays in influencing the likelihood that that company will go on to deliver outsized returns. And not by a small amount, either.

You would think that investors — whose job it is to invest other people’s money to generate outsized returns — would see this data and positively flock to invest into businesses founded by women and mixed gender teams.

Unfortunately, the data consistently shows otherwise. The latest Cut Through Ventures quarterly report found that 67% of pre-seed investments made last quarter in Australia went to all male teams, with the proportion increasing across Seed and Series A rounds to reach a shocking 97% of investments going to all male teams at Series B.

As the Gender Investment Gap report recently published in New Zealand so eloquently observed:

“Male only teams are the most funded and the worst performers.”

Source: supplied

Leaders and laggards

Proponents for gender equality in investment were celebrating earlier this year when a number of venture capital firms including Blackbird, Airtree, Giant Leap and Skalata committed to investing in more women founders, and to be held accountable to these commitments by publicly sharing their results.

In the time that has followed this headline-grabbing moment of support for women founders, we have been bombarded with stories of multimillion-dollar seed and pre-seed raises led by all male teams. 

Nowhere is this more painfully evident than Blackbird’s own investor notes published on its website. A five-minute analysis of the deals celebrated since the publication of its blog piece ‘Investing in More Women Founders‘ presents seven investments, not one of which have even a single woman founder. 

Source: supplied

I don’t point this out with the intention to single Blackbird out; I’m a long-time self-proclaimed Blackbird fangirl, and no group of people have done more for the Australian startup ecosystem than them. However, when our most staunch ecosystem leaders can deliver such a blatant disparity in funding immediately after promising greater equality, I shudder to think what must be happening in the investment committees of our less progressive VCs.

It’s the economics, stupid

Much of the resistance to discussion on gender diversity in investing centres around the idea that fluffy concepts like ‘diversity, equity and inclusion’ should have no place in investment decisions where the objective is simply to make money.

However, with such clear and consistent data showing women founders perform better, alongside such clear and consistent data showing vast underinvestment into women-founded businesses, there is a massive amount of money to be made by investors willing to bet on women founders.

Far from being a fluffy nice-to-have, this is a cold hard economic position, with global impact. The failure to invest in women entrepreneurs is estimated to be costing us between $5-6 trillion in global GDP.

Won’t somebody please think of the LPs

By continuing to invest predominantly in all-male founder teams, venture capitalists are leaving money on the table.

But whose money is it anyway?

Venture capitalists invest on behalf of their LPs (or limited partners) who may be high net worth individuals, corporations or institutional investors.

Before you dismiss this as a first world problem — I certainly find it hard to feel sorry for the high net worth individuals who may not be able to afford to buy their 17th investment property because of poor VC decisions — the largest investors into VC funds are actually superannuation funds.

And superannuation funds manage the money of tens of millions of hardworking Australians.

That means that each and every one of us is likely to be a LP of one of these venture capital funds through our superannuation. We all deserve to have them investing our money better, and we are all entitled to hold them to account.

Kirstin Hunter is the managing director (NSW) at Techstars, the world’s largest pre-seed investor.