How Women Can Get More Venture Capital

What is it like today for women entrepreneurs in their quest for venture capital funding? In an interview, professor Myra M. Hart shares her latest research and ideas.
by Mallory Stark & Martha Lagace

Women-owned businesses are just as financially strong and creditworthy as the average U.S. firm, according to the Washington, D.C.-based Center for Women's Business Research. Yet women struggle more than men to acquire equity capital. Why? According to a 1999 survey, only 9 percent of institutional investment deals and 2.3 percent of dollars among the investors surveyed went to women-owned firms, the Center discovered.

HBS professor Myra M. Hart, an authority on entrepreneurship—especially the founding of high potential new ventures—is examining why this is so and what to do about it. Hart recently sat down with HBS Working Knowledge to share her latest thinking. Her new book, Clearing the Hurdles, co-written with Candida G. Brush, Nancy M. Carter, Elizabeth Gatewood, and Patricia G. Greene, will be out in May 2004 from Prentice Hall.

HBS Working Knowledge: What does the venture capital landscape look like for women?

Myra Hart: Let's start with, "Who do women entrepreneurs know and who knows them?" In spite of the fact that women are very good at networking, the reality is that they don't know many people in the financial community. My colleagues and I developed a hypothesis that if there were more women who were venture capitalists then there would be more points of intersection with women entrepreneurs. In our research using information from 1995 and 2000, we documented all the women in the venture capital industry who were on a management track. Our research indicated that the actual number of women in the industry grew by several hundred in that five-year period, but the percentage of women in the industry did not grow.

We also discovered that there was significant attrition of managerial women in that period of five years. What we found is that, for women, about 64 percent of the ones who were in the industry in 1995 were no longer in the industry in 2000. Only 33 percent of the male control group exited the industry in the same time frame.

There have been some efforts to introduce more women into the venture capital industry.

And we also found that when a firm actually disappeared from the directory from which we were drawing our data, the women were very likely to leave the industry (93 percent). When a firm disappeared from the industry, the men were more likely to relocate to another fund or another firm.

We then conducted some interviews with women who were partners for at least five years (listed as such in both 1995 and 2000). We believed that having a woman on the decision-making team would, 1) attract more deals from women entrepreneurs, and 2) might actually have some influence on how the members of the team evaluated deals and what kind of deals they made.

When we talked with female partners, the anecdotal evidence was mixed. They said, "We don't think we see any more business plans from women entrepreneurs than our male colleagues. But, we as a firm have done deals with women entrepreneurs." The women interviewed had not relaxed the standards, and in fact they said that, if anything, they had held women entrepreneurs to a higher standard because they did not want to be viewed as a weak link or an easy way into the firm. They did think that the dialogue in the partners' meetings was enhanced by having a woman member on the team, and that it sometimes made the male partners more thoughtful and willing to probe different issues.

It's brutally difficult to change an industry, and it's slow, and we don't have any proof for our hypothesis that having women in the industry would make it more receptive to women-led deals; but we have some indicators that change may be in the works—the effects are still small.

There have been some efforts to introduce more women into the industry, one by the Kauffman Foundation when they introduced the Kauffman Fellows Program back in the late 1990s. The goal was to provide a track for professionally trained VCs; the Kauffman Fellows program brought top flight MBAs, both men and women, together with sponsoring VC firms. Its primary goal was to provide a new avenue for recruiting and training young VCs, but there was a secondary goal of introducing more diversity into the industry. That program has begun to make a difference—especially among the junior ranks.

I am encouraged by these efforts, but I am also discouraged when I talk to senior women who continue to feel that it is not a female-friendly industry. These women often make a lot of money, so they have a lot of choices. They certainly don't have to work until they're sixty-five. And many of them have left.

Many women say, "I have enough money." I rarely hear a man say that. And it's because money is different to men and women. I think, for men, money is often a symbol of their power; it's not for what can they buy. For women, money is not usually how they measure their success. It's not that they don't want it; but they want it for the things that they can get with it. Of course, there are women—and men—who just love their work, so money is not the issue at all. But I know many women who will say, "You know what? All my personal needs and all my family's needs are taken care of, and if I'm no longer enjoying the environment or the work, I'm gone." If there are other demands on women that are really important, particularly family, they are going to leave.

Real success will depend on your organization and execution as well as the basic concept.

In the work that I'm doing with HBS alumni, I have found that women believe the greatest demand on their time—in terms of importance, rather than quantity—comes when their children are teenagers, not when the children are younger. Most of the women I have interviewed say, "The time that I most want flexibility in my work, the time I most want to be staying at home instead of traveling, is when my children are teenagers." And so you can see, many women in their forties feel that it is time to step out or at least step back from their intensive careers and for most, the timing coincides with the period when they're just getting to the top in their careers.

Women are far more likely than men to make this choice, partly because of the work environment and partly because of the draw of family. It's still true in our society that women are much more likely to take the primary responsibility for what's going on in their children's lives. We do have some wonderful examples of men who are the primary care givers, but there are not that many.

Q: What kinds of things can women entrepreneurs do to get venture money?

A: The vast majority of venture capital is allocated to technology-driven businesses: software, hardware, Internet-related spaces. There is also significant investment in the life sciences and biotech. There is some portion of venture money that goes into retail but only if the concept is very large scale. The lower-tech investments require a great plan from the very beginning to roll things out nationwide.

Understand the industry. The first thing that is important to understand is what venture capital is meant for. The general partners have a responsibility to invest in companies that have enormous potential, certainly potential to earn more than $100 million to $500 million a year in revenue. Entrepreneurs have to be realistic when assessing their own business's potential. Is the business concept one that can scale? Is the industry large and growing? Is the marketplace receptive? If not, there's not going to be sufficient returns to the investors. Assess your qualifications to lead the enterprise. Entrepreneurs don't actually have to be the techies, but they need to have an understanding and capability in the technology community. An undergraduate degree in technology, some business experience in the industry, and an MBA—that would be great. Education is an important ingredient, but experience is even more important. Almost no one gets venture capital money without actually having demonstrated in the business community that he or she can really perform.

Float the idea. A lot of people are very worried that someone is going to steal their idea. That's almost impossible. Yes, there are a lot of people competing for the same space in the marketplace, but an idea is not yet a business. The real success will depend on your organization and execution as well as the basic concept. And almost everyone who is willing to talk about the idea finds that it continually gets refined and better. It also gets people to buy into the idea and to understand you, your capabilities, and your business concept before you come asking for money.

Build a network before you need it. Begin talking with people who actually are connected to what you want to do, so if you think you want to start a business that is technology-driven, start going to the MIT Enterprise Forum which meets monthly and is open to anybody. The MIT Enterprise Forum is a free-standing entity; there are eighteen chapters around the United States. It's almost in every major city that has a lot of technology. And there are many similar organizations in most major research university environments. There's a group called WEST here in Boston, Women Entrepreneurs in Science and Technology—a super group! There are organizations that can provide important links in almost every major metropolitan area, so if a women really wants to raise venture capital, and she's in the right industry, she has the right education and the right experience, she should be floating the ideas, meeting people and getting it out. And then she should test the whole pitch thing with friendly investors before she takes it into the much harder arena.

Build a team. Don't despair if you don't have a tech degree and experience, because you can partner with someone. Almost every entrepreneurial venture is made up of a team, not of just one individual. So there are ways that you might put together a team that actually represents the whole basket of skills and experience needed while you are only a part of it.

Q: Are VC's anxieties about women entrepreneurs overly inflated?

A: I think there is a great deal of anxiety about how long women will stay with something. That's not unfounded, given the fact that we found women are more likely to leave. I know that every time a woman goes to raise venture money, especially a woman in her early thirties, the investors are looking at her and saying to themselves, "If you get married, you might move," or "If you get married, you might have children. If you have children, even though you say you've got a system that is going to make all this possible, the first time that child needs to go into the hospital, you're gone. And you know what, I can't afford to take that risk with my portfolio because I'm taking a risk as it is. You just put a new level of risk in this whole thing."

I have written a case called Zipcar, about how two women raised venture money. One of them, Robin Chase, had three children. She had a very good college and professional background. Her partner, Antje Danielson, was a PhD post-doc at Harvard. They had met at the nursery school where their children both went.

I put a couple of lines in the case that Danielson was about six-months pregnant while they attempted to raise money. Chase had just taken a year out of the workforce to try to get her family organized and in order. Do you think those were red flags for the VCs? Though the VCs didn't say it, they had to have been wondering, "If things go wrong at home, will you still be doing the work?" Now, there are certainly men who are very involved with their families and their children, and if anything went wrong they would be there too, but that question does not come up. And I don't mean it's not articulated; it's not even clicking in. VCs just don't think about the family demands when they're talking to men. So looking at a woman as the founder and entrepreneur, I think it is reasonable to assume a new dimension of risk—the risk being "What is going to be the commitment when there are strong family pulls?"

VCs just don't think about the family demands when they're talking to men.

Women entrepreneurs talking with a VC have to be realistic. They need to engage the investors in the excitement of the business concept, but they also need to convey their commitment to the enterprise. The good news is that Chase and Danielson did make a compelling case, were able to allay investors' fears, and raised the capital to launch Zipcar.

Women will continue to be the ones who have the babies, but we might be able to make changes in who is considered the primary caregiver. There certainly are some Scandinavian countries where there is a much more balanced point of view about who is in charge and who is going to respond. We might get there, but I don't think that's going to happen in my lifetime, though I do expect to see changes.

Right now women represent between 35 to 40 percent of the applicants to business schools. I think Harvard Business School does a great job of recruiting and getting women here. Our alumnae have made great contributions to venture capital and entrepreneurship—but we still need to make substantial changes in the way the business world works.

About the Author

Mallory Stark is the Career Information Librarian for Baker Library at Harvard Business School.

Martha Lagace is senior editor of Working Knowledge.