How women (and men) invest in startups

A Roadmap to Unlocking Women’s Wealth As a Source of Startup Funding

A newly released report from How Women Invest, and commissioned by Ventureneer and CoreWoman shows that women are an untapped source of funding for startups and can lead to a stronger and more equitable economy.

Investing in startups as an asset class for high-net-worth individuals (HNWI) is in its nascent stage — only a
minuscule percentage of people who can invest do. If investing in startups becomes more accessible to HNWI, particularly women, it has the potential to become a major source of capital for women and Black, Indigenous, and people of color (BIPOC) founders, and the venture funds that invest in them. This capital pool will grow the US economy and create jobs while creating a fairer more innovative, competitive, inclusive, and resilient economy.

Women can leverage their wealth and passion for social responsibility to create a more robust, inclusive economy. How Women (and Men) Invest in Startups identifies ways to unlock women’s wealth as a source of startup funding.

Wealthy women’s style of investing is different than their male counterparts’. Women are more likely than men to invest for the long haul, spread risk by buying diversified funds instead of individual stocks, and make a social or environmental impact with their investments. Women are less likely than men to trade frequently and rely on their gut. These tendencies make them prime prospects to invest in small, emerging, and diverse managed funds.

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The market is growing: Women are poised to inherit a large share of the $30 trillion that will be passed down from Baby Boomers and older generations.

Obstacles to Funding Female VCs and Founders

Female venture fund managers and startup founders have a markedly harder time than their male counterparts raising capital from institutional investors. Startups founded solely by women raised only 2.4% of venture capital for the first half of 2022, according to PitchBook. Startups with at least one female founder received 17.2% of venture capital. As a result, they rely more on HNWI — also known as accredited investors, the term the U.S. Securities and Exchange Commission (SEC) uses. To tap into the accredited investor pool of capital, five obstacles to investment need to be overcome.

1. High investment requirement by most venture funds excludes most accredited investors: The minimum check sizes that most venture funds require are too high to attract most wealthy women resulting in a general belief that venture capital is only for the ultra-wealthy. Nearly three quarters of both male and female investors would write a check for $25,000 to invest in startups directly or as a limited partner (LP) in a venture fund. For those who said “no,” they wouldn’t invest for $25,000,” 39% of women and 10% of men said they would write a check for $10,000.

2. Most women don’t have time to do due diligence: There is a lack of research coverage of startups and small, emerging, and diverse managed funds making it more important that investors perform due diligence or find credible trustworthy sources who have the time it takes to conduct due diligence on startups and the venture funds that invest in them. Due diligence is time-consuming and a higher share of women (43%) compared to men (33%) do not have the time to do it.
3. Women have concerns about the time it takes to profit from startup investments: The illiquid nature of the investment means in general money is tied up for five to seven years for direct investments in startups, and 10 years for venture funds. Since women take the long view on investing, they (43%) are less concerned than men (56%). Still, a substantial minority of women are concerned about locking up their investments for a long period.
4. Lack of a track record in VC: The lack of consistent performance data can make raising capital for a first, second, or even third venture fund more difficult. It can take five to seven years before data is available on an emerging manager’s investment thesis — the strategy by which a venture capital fund makes money for the fund investors.
5. Investing in startups is risky: A substantial minority of women (41%) indicated investing in startups is risky. Interestingly, they were less likely than men (54%) to indicate investing in startups as risky. Women are risk-aware investors.

Addressing Barriers Through Policy

Lowering barriers requires recognizing the market opportunity and addressing systemic challenges through policy changes.

1. Raise the number of accredited investors allowed to invest in micro funds: The 99-accredited investor rule limits the amount of money diverse founders and fund managers can raise from HNWI who, while wealthy, make relatively small investments compared to institutional investors. The 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act enabled funds of $10 million or less to increase the number of accredited investors from 99 to 249. The number of women-led funds
   surged. Now, the number should be increased to 499.
2. Raise the value of micro funds: Lift the ceiling on funds that can raise money from more than 99 accredited investors, from $10 million to $50 million.

Women: A Missed Opportunity for Products and Services

Growing investment in startups as an asset class for HNWI requires a different approach for women than men and may require industry adaptation and even disruption.

1. Wealth management firms that meet affluent women’s wants will win their business: Wealth management firms currently have a reputation for underserving their female clients. Firms that meet affluent women’s wants will win their business. Even though men and women use financial advisors nearly equally, men are more likely to manage their portfolios themselves. Because women (45%) rely more on the advice of their financial advisors than men (31%) do, advisors have the potential to play an important role for women in shaping their investments in startups.

2. Communicating that investing in startups can have a meaningful societal effect: Wealthy women are socially conscious. They are more likely than their male counterparts to invest to make an impact aligned with their values, make the world a better place, and close gender gaps. Communicating clearly about how a fund’s investment thesis goes beyond delivering a return on investment (ROI) to making an impact on humankind is essential.

Using a four-point scale, respondents rated the importance of investing in startups to improve corporate diversity and support a more inclusive and equitable society. The gender equality rating is an average of the very important percentage for the following factors:

• Investing in women and achieving liquidity events is a way to close the wealth gap. A liquidity event — such as a merger, acquisition, or initial public offering — allows founders and early investors in a company to cash out some or all of their ownership shares.
• Funding female founders is a way to get more women into C-suite positions.
• Funding female founders is a way to ensure more women are on corporate boards.
• Funding female fund managers is a way to increase the flow of capital to female founders.
• Funding startups is a way to increase the flow of capital to females of color founders.
• Funding startups is a way to increase the flow of capital to immigrant female founders.
• Funding female founders is a way to have more products and services that improve women’s lives.
• Funding female founders is a way to support companies that positively impact the women they employ.
• Funding female founders is a way to support companies that improve women’s lives in their supply chain.

3. Appeal to women’s investing smarts: Women (37%) are more likely than men (18%) to invest in startups to diversify their portfolios to mitigate risk. Because funds invest across startups, venture funds will be more appealing than individual startups to women.

4. Fill information gaps: It’s not just wealth management firms that can fill information gaps, influential startup investors can, too. Investors who have evaluated small, emerging, and diverse fund managers and startups can share their insights.

Given these factors, financial services firms will win business by creating products or services in which they conduct diligence on female-founded startups and venture funds for a minimum investment size of $10,000 or $25,000.

Diversity Is a Market Opportunity

Demographics such as gender are one way to understand the investment habits of HNWI. Personas are another.

To engage wealthy women in investing in startups, it is important to understand the common traits that reveal different groups’ investment behavior, values, barriers, and expediating factors to investing in startups. Analyzing survey results using a human-centered design approach, functional and emotional needs were considered in developing four distinct female accredited investor personas, with different priorities. Their differences show that a multifaceted approach is needed to attract investors.

Self-reliant investors have deep expertise and are the most likely to be involved in investment groups. They can monetize their expertise by developing investor scorecards, forming and leading syndicates, becoming scouts for venture funds and crowdfunding platforms, or sharing the criteria they use for due diligence as part of their thought leadership. Self-reliant investors are a market opportunity for small, emerging, and diverse managers; investment groups; crowdfunding platforms; and Self-Directed IRAs (SDIRAs). Industry players can leverage these women’s influence through partnerships. To attract these women, emphasize ROI while also making an impact.

Collaborative investors rely on their own skills and others, including financial advisors and investment groups. They have a consultative investment style that blends outside advice with their own research and knowledge. Wealth management firms can tailor their value proposition to include offering vetted small, emerging, and diverse manager funds with a check size of $25,000 or less. They are also a market opportunity for crowdfunding platforms and SDIRAs, especially if the women are business owners. To attract these women, emphasize that investing in startups is a way to grow and diversify portfolios while getting female founders funding and closing the wealth gap for women.

Mission-driven investors are loyal to and rely heavily on their wealth management firms. Retired or nearing retirement, they are not likely to be interested in SDIRAs and doing follow-on investments on crowdfunding platforms. To continue to earn these investors’ loyalty, wealth management firms should emphasize that investing in startups is a way to complement their philanthropy and make money. Mission-driven investors can go beyond their donations to social causes to leverage the power of the markets to create change that is personalized to their values by investing in small, emerging, and diverse managers or individual startups.

Equality-focused investors are the most time-starved. They rely heavily on their financial advisors and express the most interest in being involved in investment groups or communities. Their interest in closing gender gaps makes investing in small, diverse-emerging managers and directly in startups very appealing. They are also a market opportunity for crowdfunding platforms and SDIRAs, especially if they are a business owner. To attract these women, emphasize:

• How the startup or fund closes gender gaps.
• The professional management of the investing process, which can be achieved through a wealth management firm.
• The value-add investment groups could play in vetting small, emerging, and diverse managers.

Conclusion: Tapping Women’s Wealth Requires a Multiprong Approach

Women investors are not monolithic. Their needs differ both functionally and emotionally by persona and demographics. The Report found three primary areas of opportunity:

Catering to women’s desire to do well by doing good:

The way to affluent women’s portfolios is to offer investment vehicles that blend ROI with making an impact, especially when that impact creates a fairer, more equitable world. By investing in startups, women can personalize their investment portfolios to reflect their specific values.

Making investing in venture funds affordable:

Women have a preference for investing in funds as opposed to picking individual companies. However, the minimum investment of most venture funds is in the hundreds of thousands of dollars, if not millions. As of 2018, venture funds of $10 million or less were permitted to increase the number of accredited investors they can raise from 99 to 249. Based on the success of the new law, raise the number of investors from 249 to 499 and increase the fund size to $50 million. This will enable more small, emerging, diverse funds to accept checks of $25,000 or less.

Filling the gap in information:

Women are savvy and sophisticated investors. Appeal to their investment smarts. Women are deliberative in their decision-making process, especially in the face of uncertain economic times. Their reluctance to invest is often due to a gap in information. Filling the gap in information is an opportunity for wealth management firms, online platforms, investment groups, and startup investment influencers. Once women have the data, they have high confidence in their ability to reach their investment goals.