How to Begin Considering a Gender Lens Investing Strategy

Katharine Budd, co-founder of Accion Venture Lab portfolio company NOW Money, meets with her team in Dubai. Investors should consider investment leadership as one of four key levels in a gender lens investing strategy. (Photo courtesy of Accion Venture Lab)

More investment firms are considering how their investment decisions can better support economic and social well-being through gender lens investing (GLI). Firms investing with a gender lens raised $4.8 billion in capital in 2019, according to Wharton Social Impact Initiative’s Project Sage 3.0, more than double the amount raised in 2018. And this growth in GLI follows countless studies showing its manifold benefits, from higher profits and better returns on equity to more innovation. But GLI’s growth isn’t limited to impact investing. Mainstream venture capital has entered the conversation, with initiatives like the global community Women in VC and 500 Startups launching 500 Female Forces, which seeks to increase outreach, resources, and representation for female founders. Along with many new GLI funds, this surge presents a huge opportunity for incumbent players to consider how they can incorporate GLI approaches into their investing processes.

When we began exploring how to apply a gender lens to Accion Venture Lab's impact investing strategy, early last year, we quickly realized that there are many ways to do it. Some available resources discuss high-level considerations and others outline tactical ways to incorporate GLI. But if you are anything like us, you scoured the same resources and still struggled to know where to start.

To arrive at an effective and forward-looking GLI strategy, we needed to distill the most important lessons learned across eight years of investing, looking at thousands of companies, building a global team, and managing a portfolio of 50 companies around the world. Where had we excelled and where had we faltered? What was working, and what wasn’t? We couldn’t define a solution without fully understanding the problem, especially when the solution could take an infinite number of forms.

That’s why, before deciding on a strategy, we recommend that investors should begin with a deep understanding of the gender diversity of their current team and portfolio. This helps identify the strengths, weaknesses, and blind spots in how you operate, and creates a baseline of metrics to track moving forward. By looking at the data and discussing potential strategies at each of the four levels described below, rather than in aggregate, you can define a more nuanced and comprehensive approach.

1. The Fund Level

First and foremost, consider the “fund” level, or the gender composition of your own investment team.

The gender gap in the venture capital industry, at this level, is well documented, as any attendee of an industry conference has likely witnessed firsthand.

Despite ample research showing gender diverse funds have better returns—about 20 percent higher net internal rate of return—women account for just 21 percent of US-based investing roles and just 12 percent of decision-makers, and 65 percent of firms in the industry still have zero female partners. Yet that same study shows that female partners invested in almost twice the number of female entrepreneurs than male partners, highlighting the compounding effects a diverse investment team can have on the gender diversity of your broader portfolio.

Determine the gender make-up of your fund across the entire investments team, as well as discretely for each position, from the analysts up to the managing directors. Consider how diverse your team is today and the ability of that diverse talent to succeed up the ladder. Are you proud of the gender diversity you see? If not, what could be driving this disparity across talent recruitment, retention, and promotion?

2. Investment Leadership Level

Next, consider the “investment leadership” level, or the gender composition of the founders, CEOs, and boards of each of your investments.

Disparity at this level receives the most attention among the VC industry today, since only 2.2 percent of US VC funding went to all-female founding teams in the first half of 2020 (and just 13.2 percent went to teams with at least one female founder). When looking at other leadership types, a mere 11.2 percent of VC deals involved a female CEO in 2019, while only 7 percent of board seats were held by women across 200 of the most heavily venture-funded companies in the US.

The age-old venture capitalist strategy of “pattern recognition,” often lauded for its ability to identify winning companies at an early stage, perpetuates this disparity and investment in lookalike founders and leadership is hindering funds’ financial performance. Teams with women founders generate more revenue with less money, are more likely to be profitable, and see higher valuation increases round over round. Paired with gender-diverse boards—which lead to better decisions and more consistent returns—these teams may be some of your strongest performers.

To properly assess gender diversity in the investment leadership level, quantify the deals and total capital invested in all-male, mix-gendered, and all-female founding teams, as well as the same metrics by gender of CEO. Additionally, try looking at the board make-up of each of your companies, calculating the percentage of companies that have an all-male board, a board with just a single woman, or a board with multiple women present.

Understanding where your metrics fall in comparison with comparable funds is a great place to start. While not exhaustive, some useful benchmarks can be found in All Raise’s latest report. Based on where your numbers fall, reflect on where these discrepancies begin. Do they start with your sourcing processes? Or does the fall out occur in screening and diligence? Post-investment, how do you typically approach discussions on board composition?

3. The Investment Workforce Level

Next, review the “investment workforce” level, or the gender composition of your investments’ upper management and workforce, as well as the presence of diversity-enabling policies such as parental leave, flexible working policies, and equal pay policies.

Across all industries, women continue to hold just 38 percent of manager-level positions, and while women represent 47 percent of all employees across the US, they make up just 34.4 percent of the workforce for the five largest tech players. Male-dominated workplaces report higher rates of gender discrimination, a fact underlined by the recent backlash in some of Silicon Valley’s highest profile companies, such as Uber and Google.

Less evidence ties company diversity at this level directly with investors’ portfolio returns, but ample research links gender diversity to successful company characteristics, including more productive workforces, faster problem solving, improved hiring results, and even better financial performance.

Investors may feel a step removed from the workforces of their investments, but diversity make-up is imperative for investors to understand. To assess this level, consider both the gender composition of portfolio companies’ overall workforce and that of just senior management. Investors should also seek to understand the inclusivity of these workforces, which we measured by the presence of diversity-enabling policies, as described above. How do you engage on key talent hiring and retention at the board level? How do your companies handle ESOP allocations? What takeaways on workforce composition and inclusivity do you capture during due diligence?

4. The Customer Level

Finally, consider the “customer” level, or the gender composition of your companies’ end customers. Women make up half of the world population, drive 70 to 80 percent of consumer purchasing decisions in the US, and are growing their wealth faster than the market overall. Products and services that reach women tap into an often overlooked and underserved market opportunity.

The meaning of this lens will look different for every fund, as customer demographics skew differently depending on industry and product. In the fintech world, this end customer gender disparity is evidenced by the $30B credit gap facing women-owned SMEs and the $700B revenue opportunity associated with properly serving women with financial services. As inclusive fintech investors, we know that there is an 8.3 percent financial inclusion gap—or the gap in access to financial services—between men and women. Women-owned SMBs typically receive smaller loans at higher rates, and women in low- and middle-income countries are less likely to own a cellphone, a critical tool for accessing financial services.

To assess this level, analyze the gender diversity of your investments’ end customers. Depending on your level of engagement with your portfolio companies, this may not be something you can impact at an investment-by-investment level. But you can still consider how this gender split reflects on the industries, theses, and products you’ve pursued to date.

If you’re a healthtech investor, is women’s health represented in your portfolio? If you’re a D2C investor, have you explored both male- and female-tailored products? Or if you’re a fintech investor, like us, what about your companies’ acquisition, channel, or marketing strategies could be skewing the population they reach?

Moving Forward

There is no one-size-fits-all approach to gender lens investing, but this assessment strategy can equip investment leaders with the facts, figures, and initial questions they need to understand where they stand on gender equity today. After learning where you are most in need of growth, try overlaying these results with the steps of your investment process, from thesis-setting to post-investment support. Then reflect on the impact of each step on each level to best identify what may be causing the results you see today. To move forward, ask yourself: What do you want the future of your fund to look like? Which gender diversity metrics would you like to see change? And where are you well-positioned to make a difference?

Read more stories by Shannon Dwyer & Tahira Dosani.