This blog post was written by Deniz Temelli, Business Analyst at TechAlliance.
A recent study published by the US Small Business Administration, an organization which lobbies for small businesses, suggests that Venture Capital (VC) Firms that invest in more women-led businesses have better financial returns than those that don’t.
The study examined all US-based VC deals between 2000 and 2010 which gave them an impressive data set of 2,500 VCs, 18,900 companies, and 90,000 investment rounds.
Although the study does not qualitatively state that a VC’s returns will be X% higher if they invest in women-led businesses, they have shown a positive correlation between the per cent of women-led businesses in a VC’s portfolio and the portfolio’s overall performance. It is important to note that there is a difference between causation and correlation and this study is saying the data is simply correlated.
Although the numerous news outlets I’ve seen who have reported on this study let the reader take away the implied meaning that women are better at running companies than men, the study does attempt to explain this relationship in more detail.
The main possible explanation the study points to is that women led-businesses are stereotypically seen as higher risk investments from the VC perspective. Therefore, more rigorous due diligence is conducted before an investment is made.
The study also suggests that VCs very rarely invest in companies that are not referred to them by someone in their network. Studies have shown that the majority of individuals within a woman’s network are also women. Because there are very few female VCs, this lack of personal connection between a women-led business and VC firms also supports the idea that VCs see women-led businesses as higher risk, and again conduct more rigorous due diligence prior to investment.
Interestingly, the study also points to a 2003 study which showed a similar relationship between VC returns and investments in minority-led businesses supposedly for similar reasons.
So what does this mean for investors and new businesses? Lately I’ve been hearing more about a new trend of VCs and angels putting small investments in multiple companies with no due diligence as a way of playing of the odds. In contrast, this study promotes the merits of due diligence. It may be nearly impossible to identify a winning business idea, but it is possible to weed out the really bad businesses that have overlooked glaring cash flow issues or an existing better competitor.
For the female entrepreneurs out there, it may be easy to get discouraged and think that business is an ‘old boys club’. I think this study shows that whether male or female, your hard work and due diligence in your developing business will speak for itself.
