Venture capital equality: Discover the power of women-led investment firms

Venture capital radiates male dominance, but new data shows the number of women-led VC funds is on the rise. The number of women-led venture capital funds has climbed from about a dozen in 2010 to over 300 in 2020.

Venture Capital Journal, in a recent study of more than 160 women-led VCs (defined as firms where at least half of the founding partners are women), found the firms raised roughly $3.5 billion in 2023, $500 million more than they raised in 2022.

Women tend to make investments based on their social or environmental impact, especially women between the ages of 30 and 40. But why should women invest in venture capital, specifically women-led firms? The reasons go beyond wanting to close the gender gap.

VC firms that diversify their ranks and invest in more mixed-gender portfolio companies appear to yield better investments. The Small Business Administration after examining all U.S.-based VC investments from 2000 to 2010 found VC firms performed better as the ratio of investment in women-led businesses increased.

Where are women-led VCs investing?

Software still ranks as the top sector for investment by women-led VC firms. But firms are increasingly targeting health care, including women’s health and sexual health (which is growing at a faster rate than other targeted sectors) as well as blockchain and AI. Education and sustainable living are also popular investment sectors for women.

Another avenue for exploring venture capital is thematic investment. Long-term investments based on a theme (i.e., idea or trend) that you believe will grow in importance often have the potential to change society, the economy or technology.

Dapper Boi, an all-gender, body-inclusive, online apparel line, is an example of a thematic investment opportunity that aims to capitalize on a growing trend that’s especially popular among Gen Z buyers.

Or there’s Chiyo, a startup that intersects health care and consumer packaged goods. At Chiyo, Eastern food therapy meets nutritional science as the company delivers premade meals, broths and snacks aimed at mitigating postpartum depression.

Regardless of the sector you invest in, understanding the risks and rewards associated with venture capital is important. It can be thrilling to discover a women-led VC firm investing in companies that align with your values. However, be aware that investing in startups is a speculative arena, and loss is inevitable.

But it’s equally important to keep in mind that female-founded startups perform 24% worse when financed by all-male VCs compared to gender-diverse VCs, according to a recent Harvard study.

“Adding more women into the venture ecosystem – as investors, as founders and as leaders of portfolio companies – is thus an evidence-based way to increase returns across the whole industry,” the Harvard study states.

The takeaway: By investing in gender-diverse VCs, you better position yourself to turn a profit as an investor in women-led startups.

For accredited investors already dabbling in venture capital, now would be a good time to explore increasing your investment in women-led VC. For the rest of us, there are a few venture capital fundamentals to understand before getting started.

Understanding the VC landscape

Women investors can drive change and shape the future of the economy by placing their money in the hands of women-led VC firms. A clear understanding of the venture capital landscape is key when starting out.

So let’s touch on some basics.

• What is venture capital? Venture capital is money invested in startups that demonstrate growth potential but need financial backers to get up and running.
• What is seed funding? Seed funding is an initial investment in a startup, otherwise known as “angel investing.” It precedes additional rounds of funding known as Series A, B, and C.
• Who are GPs and LPs? General Partners (GPs) manage a venture fund and make the final call on how a fund’s capital is allocated. Limited Partners (LPs) invest in venture funds in the hopes of making a profit in the future.
• Who can invest in venture capital?  The bulk of venture capital investment is done by accredited investors and institutional investors.

Getting started investing

Understanding what category of investor you fall into is an important first step to start investing in venture capital.

Institutional investors are organizations with large amounts of capital, like endowments and pension funds.

Accredited investors include venture funds and high-net-worth individuals, as well as banks, trusts and insurance companies. Regulatory law requires they meet two financial criteria: (1) over $1 million in net worth, not including personal residence and (2) $200,000 or more in annual income over the last two years and currently (or $300,000 with a spouse).

For those who don’t qualify as an accredited investor, the easier way to get in the game is to invest in publicly traded companies managing venture capital money. Consulting a financial advisor is recommended to help identify possible venture capital investments.

[Read more: How to find a financial advisor you can have a strong relationship with]

Once again, the risks with venture capital are high. But the rewards can be towering, especially when you put your values to the test and witness a company that creates a positive impact growing with the help of your funding.

This article is part of Women’s Equality Day coverage.