Investing in women makes sense

Spectator Business

July 2008

Edie G. Lush says women have a strong track record as entrepreneurs and managers, yet struggle to find support from Britain’s male-dominated venture capital community

Women are under-served by the venture capital community
Herta von Stiegel, executive chairman of Stargate Capital Investments

told me at a recent Pi Capital lunch. I’m not entirely surprised by her comment, but I’m intrigued enough to investigate further.

The figures back up von Stiegel’s statement. In the UK, according to Management Today, about 25 per cent of the top 100 entrepreneurs are women. Yet less than 2.5 per cent out of a total of €3.5 billion of VC funding in the UK and Europe is going to companies with a female chief executive. The numbers are little better in North America. Nearly half of all privately-owned US businesses are at least 50 per cent owned by women; four out of five start-ups in Canada are run by women; US businesses owned by women have a two-year success rate of 80 per cent, well over the national average of about 50 per cent. Yet just 5.7 per cent out of a total of more than $20 billion of VC funding in North America goes to companies with female bosses.

Von Stiegel’s colleague Gita Patel looked at these figures and saw an opportunity. She founded Stargate Capital’s Trapezia EIS Fund – the first Venture Capital programme in the UK dedicated to investing in women-focused businesses. Stargate closed Trapezia EIS at £4.5 million and Patel and von Stiegel are now half way through raising £50 million in funds for Trapezia II. All the companies Trapezia II will invest in are led, directed or substantially influenced by women, or provide a product or service primarily to women.

As I speak to von Stiegel, it’s clear that she isn’t in this business as a matter of philanthropy. Quite the contrary, she thinks investing in women makes good business sense. ‘Women in Europe represent an incredible market opportunity,’ she says. Some impressive facts and figures follow. European women have the highest GDP per capita worldwide, a life expectancy of 80 years, and are well educated. Furthermore, they drive 70 per cent of household spending decisions and 10 million of them are self-employed or run their own businesses.

And where they’re in business, women make an impact on the bottom line. A 2007 study by McKinsey, the management consultancy, looked at 89 top European companies and found that those with the most women on the board and at senior-management level outperformed others in their sector in return on equity, earnings before interest and tax and share-price growth.

But it isn’t just European women who drive performance. A study by the New York think-tank Catalyst ranked hundreds of Fortune 500 companies by the percentage of women on the board. They found that the top quartile outperformed the bottom quartile by 53 per cent in terms of return on equity.

If the business case exists, why isn’t there more interest in investing in women-owned businesses? I asked Margaret Manning, chief executive of independent digital media company Reading Room and this year’s winner of the Fast Growth Female Entrepreneur of the Year award. ‘To be honest, while it’s slowly changing, the venture capitalist world is still an old-boys’ network. The VC community has a certain style and people tend to support people that they get on with – many times, this is other men.’

She’s careful to point out that it isn’t impossible to raise money – she raised £1 million in funding from Octopus Private Equity last year to grow her business. ‘This was a VC that understood us implicitly – our first Octopus non-executive director got to know us well after interviewing us while studying for his MBA. And the current Octopus non-exec is female – and she’s lovely.’ If you apply either McKinsey or Catalyst’s analysis to Reading Room’s board and senior management team, Reading Room is destined for success – half of her executive directors and 56 per cent of her management team are female.

Judith Clegg runs Glasshouse, a club for entrepreneurs across all sectors that holds monthly events in London, New York, San Francisco – and soon Mumbai and Bangalore. She remembers the day she started at Arthur Anderson in 1993, when it was still a big deal that women in her division were allowed to wear trousers. She says, ‘I don’t think it’s the case that there are a lot of VCs out there saying they don’t want to fund women. Most of the investors I meet just want to fund the best businesses they can find and have absolutely no problem in backing talented women.’

Clegg is no stranger to entrepreneurship herself – she was a founding director of Moonfruit – a website building service – with another woman and two men, raising £8 million from VCs. ‘We benefited from of the some advantages of being female entrepreneurs. For example, we obtained a higher press profile because half of our founding team including the chief executive were women.’

While most venture capitalists would undoubtedly see themselves as modern investors, indifferent to the sex of the executives and teams in which they invest – the stories from the trenches tell a slightly different picture. Alison Kibble is the chief executive of Femeda, a company that makes a medical device for women who suffer from bladder weakness. Despite the fact that one in three women over the age of 18 have this problem and around $12 billion is spent every year on incontinence products, Kibble found it tough getting meetings with investors.

‘Men feel incredibly uncomfortable talking about this subject and even amongst women it is often a secret problem. We sent our materials to many potential VCs and we knew they were immediately put to one side because the men receiving them just didn’t understand the problem or what we were proposing to do about it. A few that we did manage to get meetings with said they couldn’t possibly take us on as an investment as our product was too unsavoury.’

Kibble and her team were persistent, sending news-letters to VCs who had said no, and last year raised £2 million to enter into clinical trials of their product. Stargate’s Trapezia Fund is one of the investors who said yes.

Alicia Navarro, chief executive of Skimbit, has a somewhat less extreme example of what happens when she presents her website business to venture capitalists. Skimbit is a tool to help people make decisions – if you are looking for bridesmaids’ shoes or villas in France you wander around the web, ‘skimming’ the relevant parts of the websites you’re browsing and compiling them with the help of Skimbit. Then you send the website location to your friends for them to add their comments to help you make a group decision. The problem is that this is primarily how women – rather than men – like to make decisions. ‘Women generally ‘get’ my company right away. But almost every single VC I’ve presented to has been male. As a result, part of my presentation incorporates an explicit description on how men make decisions – look at a few sites and choose a product – versus women, who look at many sites, canvas opinion, look at more sites, then make a decision.’ Navarro hasn’t yet raised money from the VC community.

Susie Willis is chief executive of Plum Baby, which makes organic baby food from ‘superfood’ ingredients. She spent most of last year trying to secure the business and admits she found the process grim. ‘I spent an incredible amount of time ensuring my presentation – and particularly the valuation of the business – was absolutely bulletproof so that when I presented to investors I had a completely sound story. So when I was grilled about the numbers I defended them vigorously. After one meeting someone called me emotional and suggested I shouldn’t be in these meetings. I was completely appalled. If I’d had balls I would have been called determined, bold and bullish. But because I’m a woman I get called emotional.’

Clearly her mettle paid off – Plum Baby raised £2 million from Octopus Ventures and Noble Fund Managers. Her product is now available in all major supermarkets and she expects her 2007 turnover of £3.5 million to double this year.

So if there’s a problem, what’s the solution? The government recently announced the creation of a £12.5 million fund which will be put aside to ‘specifically encourage more women entrepreneurs’. The proposed fund intends to give potential women entrepreneurs the basics of writing business plans, running a company and pitching for investment.

Money talks, but interesting examples of policy in action can be found in other countries. Norway is six years into its experiment in encouraging not only female entrepreneurship in small companies but also in large ones. In February 2002, trade and industry minister Ansgar Gabrielsen dropped a bombshell on Norwegian corporate life by stating that all companies listed on the Oslo stock exchange would be required to have 40 per cent of their boardroom positions held by women. If companies failed to address the gender imbalance, legislation would be introduced to enable companies to be prosecuted for non-compliance. In 2005 the percentage of women on company boards had risen – but not enough, to 24 per cent – so the threatened legislation was tabled. This spring the government announced full compliance.

While no study yet exists of the economic performance of these near-gender-equal companies by comparison with to their male-dominated predecessors, a recent survey of the new female board members showed that most of them have significantly higher educational and professional qualifications than many of the male colleagues they replaced, or now sit alongside.

In a recent interview with the Sunday Times, Ansgar Gabrielsen quoted the same McKinsey study used by Stargate Capital to justify his decision to bring women further towards the forefront of Norwegian entrepreneurial life. My bet is that we’ll be hearing a lot more in Britain about ‘investing in women’. Male chauvinists may be tempted lazily to dismiss it as Scandinavian-style political correctness, but the evidence says it makes remarkably sound business sense.