So much for progress.
New data out this week from PitchBook indicates that the number of rounds raised by female-founded and co-founded companies fell year-over-year, with dollars invested in those rounds collapsing to 2017-era levels.
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It’s a disappointing quarter that comes after a few years in which female founders saw an increase in the amount of capital they were able to raise. In 2016, PitchBook data shows quarterly results for female founders totaling around 100 to 125 rounds, and between $300 and $400 million in value. By 2019, those figures rose to 150 to 200 rounds per quarter, worth between $700 million and $950 million.
To see Q3 2020 manage just 136 rounds worth just $434 million is a sharp disappointment.
The depressing results come not during a time of sharply lower aggregate venture capital results, notably. Recent data concerning Q3 2020 compiled by PwC indicates that the quarter was relatively rich. Certainly, overall deal volume in the United States is down slightly compared to year-ago periods, but female founders fared worse.
In short, a fear that well-known seed investor Charles Hudson discussed with TechCrunch during an Extra Crunch Live session back in April has come true. Let’s talk about it.
A diversity downturn?
Cards on the table, I think it’s better when venture capital is more diversely distributed. Why? Because when there’s more general access to funds, we’ll see a more varied set of products built to attack a more diverse set of issues and problems. Even more, venture capital can be a pathway to financial success for founders and employees, so investing it in all sorts of folks instead of one particular demographic set can spread the wealth around more equitably.
Thus, when venture capital becomes less diverse, I get twitchy. This latest data gives me tics.
We should not be surprised by the bad news: Back in April Hudson spoke with TechCrunch about a concern he had regarding what might happen to venture capital during the then-impending economic downturn. Please excuse the long quote and read what Hudson had to say (bolding: TechCrunch):
Oh my God, I’m so terrified right now, and I don’t want to be alarmist. If you just look at the numbers, even in probably the greatest bull market I’ve seen in my lifetime as an investor, people of color and female founders struggled to get access to capital. And they definitely struggle to get access to capital anywhere nearly close to their portion or representation in society.
So my fear is that two things are gonna happen. One is that as investors become more conservative and cautious, they will gravitate toward backgrounds and networks that they know well, and they will go back to the well at the schools that they went to, the people that they worked with before and those that they are already most comfortable with. And that is generally speaking not female founders and people of color. So I worry a lot that they will be a casualty of this sort of increased fear among investors.
I also worry that, you know, a disproportionate amount of the capital for those folks comes from women-led ventures and people of color-led venture funds, which also historically haven’t been very large and have been difficult to raise. I wonder what happens if those capital providers have a hard time raising their next funds, like who’s gonna write those checks?
So, I worry that we were just beginning to get into the groove of seeing real meaningful progress. Now we might just take a huge step back in the name of people being more conservative and cautious in terms of who they back. So that’s the big thing we talked about internally at Precursor is, we’re not going to change our risk tolerance, or risk profile for the people that we want to fund, but we will try to make sure that when we fund them we’re bringing enough capital to the table to help them get a little further down the road.
We don’t yet have data on other facets of the world of founders, but through the lens of gender it appears that Q3 2020 was a step back.
In percentage terms, this is what Q3 2020 looked like, again via the PitchBook data set:
- Q3 2020 U.S. VC rounds into female founded and co-founded companies: 136 deals worth $434 million
- Percent change compared to Q2 2020: +3%, -48%
- Percent change compared to Q3 2019: -15%, -36%
The only scrap of good news in that data is the fact that a few more rounds for female founders were managed in Q3 2020 compared to Q2 2020, but that modest bump is more than overshadowed by the huge dollar decline.
Precursor Ventures’ Charles Hudson on ‘the conversation no one has during an upmarket’
And this, during a period of relative wealth and stability in the VC market. Here’s PwC, discussing the third quarter:
Investments reach $36.5B in Q3’20: VC investments to U.S.-based, VC-backed companies hit a 7-quarter high in Q3’20 at $36.5B, up 22% year-over-year (YoY) and 30% from Q2’20.
1,461 VC deals take place in Q3’20, a 1% increase from 1,440 deals in Q2’20. While deal activity has shown small increases each quarter so far this year, Q3’20 deals are still down 11% YoY amid the pandemic.
While aggregate U.S. venture capital hit a seven-quarter high in the period, female founders saw their dollars raised fall. And compared to the year-ago period, rounds for female founders fell more sharply than rounds more generally. And venture dollars rose for all U.S. startups compared to Q3 2019, while for female founders they fell.
Not great.
Back in my Crunchbase News days I got to help compile and publish lots of data on female founders. Each quarter, I’d hope to be surprised by the results. I usually wasn’t. This time I was, but not in the manner I anticipated. What a letdown.
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