Women Entrepreneurs Are Hitting a Funding Wall

For women starting new businesses, early funding from venture capital firms led by other women is vital. But few are large enough to lead subsequent rounds of financing.

When Oriana Papin-Zoghbi was looking for venture capital funding to develop a new type of test for ovarian cancer, she found her pitch did best with women investors. “They were able to resonate with the problem we are trying to solve,” she said.

Avestria Ventures, a fund focused on women-founded start-ups, led an early investment of $5 million in Ms. Papin-Zoghbi’s company, AOA Dx. And two years later, Good Growth Capital, a firm founded by women, led an additional $17 million investment.

Ms. Papin-Zoghbi expects raising the next round of funding to be more difficult. Medical devices are expensive to develop, and AOA Dx is looking for an additional $30 million to bring its first product to market. “Most women-led funds cannot lead a round that size,” she said.

More than 100 women-led venture capital funds, many specifically focused on investing in companies started by women, have been founded in the last decade, a trend that has contributed to a gain in fund-raising by women who are just starting their businesses. Female-founded start-ups received 7 percent of pre-seed and seed funding, the earliest funding a start-up raises, in 2023, up from 5 percent in 2015, according to the data platform Crunchbase.

But women-led funds tend to be small, limiting their influence to early funding rounds. More mature companies led by women have not seen the same increase in funding. For women-founded businesses seeking investments past a Series B round, typically the third funding round, the share of venture capital dollars contracted to 1 percent from 2 percent over the same period, according to Crunchbase.

Founders like Ms. Papin-Zoghbi are hitting — or fear hitting — a funding wall, an obstacle they say has been heightened by a rollback in diversity, equity and inclusion efforts and a general downturn in start-up investing.

“There are so few female-led companies that are actually making it beyond series B,” said Amy Divaraniya, a co-founder of the fertility start-up Oova. Women investors led Oova’s first two rounds of funding, but Ms. Divaraniya doesn’t anticipate that such investors will be able to play the same role for her next fund-raising effort. “That keeps me up at night,” she said.

Jenny Abramson, the founder of the venture capital firm Rethink Impact, refers to the dearth of funding for women-led start-ups at the growth stage as “the valley of death.”

Rethink Impact is one of the few women-led firms with the deep pockets required to be effective in later stage funding rounds. It has raised more than $500 million, making it the largest venture capital fund focused on investing in women-led companies.

In 2023, the average size of women-led venture funds was $41 million, compared with $244 million for all venture funds, according to The Venture Capital Journal, an industry publication.

“Women-led fund sizes are smaller, so their check sizes are smaller,” said Angela Lee, a professor at Columbia Business School and the founder of 37 Angels, a network that connects women founders with women investors. “They aren’t moving the needle in terms of dollars.”

Those already relatively small funds have been hit by a broader downturn in start-up investing. Venture capital firms across the board are struggling to raise new funds from their limited partners, with the number of new funds created in 2024 on track to be the lowest since 2015, according to the database Pitchbook.

At the same time, firms focused on investing in women are contending with a backlash to D.E.I. investments. In June, the U.S. Court of Appeals for the 11th Circuit halted a competition by the venture capital firm Fearless Fund, which offered grants to businesses owned by Black women. The court ruled that the grant most likely constituted unlawful racial discrimination.

Ciara Imani May, the chief executive of Rebundle, a sustainable hair braiding company, says the marketwide retreat from D.E.I. efforts has “decreased funding for Black women founders” like her. After raising $1.4 million in seed funding in 2021, including from diversity-focused investors, she struggled to raise additional venture money and has since sought other funding sources, including debt funding.

“I have chatted with many fund mangers who have some focus on diversity, and they’re tweaking the language on their publicly facing content to prevent the possibility of a lawsuit or backlash,” said Ms. Lee, the Columbia professor.

That’s been the case for Karen Cahn, founder of IFundWomen, a crowdfunding platform for women entrepreneurs. “IFundWomen has to rebrand, or we will die,” Ms. Cahn wrote in a post on LinkedIn. “The word ‘WOMEN’ in our name deters corporations from partnering with us,” she wrote.

Not all big investors are pulling back from women-led start-ups. Erin Harkless Moore, who leads for-profit investing at Pivotal Ventures, the organization started by Melinda French Gates to advance gender equality and social progress, said that it planned to expand its investments in women-led funds and businesses. “We’re at a party where some folks have left, but we know the party’s not over,” Ms. Moore said. “It’s just getting started.”

But some question whether more women check-writers would be enough to bridge the “valley of death.” A study conducted by researchers at INSEAD, the French business school, found that exclusive backing from female investors may inadvertently signal to other investors that a start-up is being funded based on a founder’s gender rather than on merit, making it harder for its founders to raise additional money.

The study’s authors warn that women entrepreneurs should be aware of potential biases from future funders and, if possible, seek financing for their first round from mixed-gender investors. “As a woman, don’t just approach women,” said Kaisa Snellman, a professor at INSEAD and a co-author of the study.

Venture capital firms led by men have a responsibility to support women founders and address bias, she said, adding, “It shouldn’t just be up to the women investors to even the playing field.”

A correction was made on Sept. 21, 2024 . An earlier version of this article misspelled the surname of the founder of IFundWomen. She is Karen Cahn, not Cohn.

Nell Gallogly, in the article “Women Entrepreneurs Are Hitting a Funding Wall,” discusses the barriers women entrepreneurs face in securing funding and the impact this has on their businesses. To learn more about these challenges, you can read Nell Gallogly’s full article on Women Entrepreneurs Are Hitting a Funding Wall – The New York Times (nytimes.com)