Diverse startups need more investor dollars

High quality new businesses by women and minorities aren’t being equitably funded

By Cathy Connett

Surprise! It is not only white men investing in startup businesses these days! Women and minorities are becoming bigger factors in this investment landscape and early data indicates this will continue to change the type of business that are receiving funding. Just as diversity in the board room raises the performance of companies, diversity in the make-up of investors should change the types and performance of early-stage companies being funded. A case in point: First Round Capital, a seed and Series A round investor, has analyzed its own performance over the last ten years, including investments in 300 companies, and found that companies with female founders performed 63% better than its investments in all-male founding teams.  

The sad fact is that one funding component of high growth businesses, the venture capital community, has not made significant changes in how it operates. Since the mid 1990s, the venture capital community, which is primarily funded by institutional investors, has consistently been putting just 4-6% of its funds to work in women-led companies. (Limited new data for the 2010-2014 period indicates that this may have increased to 10% globally.) This is despite the fact that between 2000 and 2010 U.S. venture capital firms’ investment performances improved as the ratio of their investments in women-led companies increased, according to an April 2013 SBA report analyzing the factors that had a positive correlation to the performance of 2,500 VC firms and 18,900 portfolio companies. Why don’t VC firms, which thrive based on performance, want to invest in more women-led firms? One theory is that we all invest in what we are familiar with, and just 4-8% of venture capital partners during this entire period were women.  

The good news is that investments from angel investors in earlier-stage companies have been increasing and is reported to be ~$25B/ year. The number of women investors in this category is also increasing, according to the University of New Hampshire’s Center for Venture Research (CVR). While just 11% of angel investors in 2011 were women, that number has increased consistently to about 25% in the latest 2015 data. This is not a huge surprise as it is reported that women in the U.S. control more than 60% of all personal wealth, 48% of all estates over $5 million and represent 41% of the 3.3 million with income over $500,000.  One of the challenges, however, is that qualified women are not given the opportunity to participate.  

When the Sofia Fund recently started to seek investors to participate in our new fund, we made sure to specifically reach out to women and presented them the opportunity to learn more about angel investing. Based on our team’s own collective experience in angel investing and in helping start-ups raise money, we knew that the “quiet” network sharing potential investments did not often reach out to women. That was confirmed when many of the potential women investors we met with told us they had never been exposed to these types of investments by their network. They were quite interested in diversifying their investments to include this asset class.

So what is the picture for minority investors? Unfortunately, during the same 2011 to 2015 period, the national numbers from CVR for minority angel investors show they represent 4-5% of the total.  We need to do more to engage this community.

Switching to the funding of women- or minority-founded companies by angel investors, the number of these companies pitching angels tracks closely with the increasing number of diverse investors. Women-led companies represented 12% of the companies pitching angels in 2011 and 26% in 2015. The Sofia Fund, which four other women and I manage and which is focused on investing in disruptive, technology-based, women-led companies, has seen more and better deal flow in one year than we saw from 2006-2013. (See Erin Newkirk’s quote on opposite page for further perspective.)

Minority-led companies, however, still represent just 6-7% per year of all the pitches seen by angels.  

About 20% of all companies who pitch angel investors receive funding. However, the yield rate for women-led and minority-led companies, while significantly improved in the last five years, is still about 1-2% below this 20% overall yield. Increased diversity in the angel investment community has helped provide access to capital for diverse businesses at the seed and start-up phase of funding.  

This spring a group of Minnesota angels attended the Angel Capital Association’s annual summit, where we gathered with other angel investors to share best practices, market trends and build networks that will help us improve our co-investment opportunities.  I estimate 40% of the total attendees were either women or minorities.  

My hypothesis is that, while diversity in the investor pool is a plus for both investors and entrepreneurs seeking funding, awareness of the disparities and mindfulness of the value (not risk) of differences may be the real solution. I do not support funding businesses simply because they are minority- or women-led — as investors, we are looking for the best teams to deliver great results and data has shown that companies with diverse teams perform better because of the value gained from different perspectives.


Cathy Connett is CEO of the Sofia Fund, an angel fund that invests in women-led, disruptive technology businesses. She has been an angel investor for more than two decades and has a diverse operational background in a wide range of industries. Her experience includes roles at F100 companies as well as startup and small private companies.