Episode 4: Levelling the funding playing field for startup investment

In a series of articles I wrote at the end of last year - spurred into action by Atomico’s State of the Tech Nation 2022 research – I explored how we help founders and investors find each other, the barriers to securing investment and how we develop solutions to help those who most need it get the investment they deserve.

I was really pleased to see that the series encouraged people to share from their experience and got some healthy debate going. I’m a firm believer that the more we talk, share and build connections the more likely it is we can help more people find each other (especially in the digital space), which could result in some interesting business collaborations and partnerships.

Some of those who got involved in the conversation pointed out that we need more data. And whilst I agree with business angels like Phil McSweeney who quite rightly pointed this out, I am concerned that just collecting data delays action that is desperately needed now. We need to keeping striving for data driven learning, but we need to also learn through action.

So, in this last post in the series, I wanted to share some of the things I heard and learned from those who shared some of their experiences with me and my community. The overall takeaway for me is stark – the problems are real.

1.   Many diverse founders (be that based on gender or ethnicity) shared how they have to come to terms with the fact that they will - most likely - be the only diverse founder in the room and they have to prepare themselves accordingly

As one founder put it: “I am from a generation where I often was the only female in the room - 99% of the time.”

Many echoed the idea that as diverse founders we have to “up our game”. But the reality is that even when diverse founders are performing at the top of their game, stereotypes and unconscious bias mean the response to diverse founders is fundamentally not the same as it might be for non-diverse founders.

>> So, what do we do? We cannot change for others, but we don’t have to apologise for who we are either. It is more important than ever to be true to ourselves, our vision and our approach to getting there. Part of doing this is about being confident, putting aside any imposter syndrome that may occur. Easier said than done sometimes, I know. But we can help each other build confidence, and with greater confidence and self-belief it is easier to ignore stereotyping and bias. I urge everyone to look for opportunities to affirm strong performance when we see it. Congratulate diverse founders on their pitch, publically acknowledge and celebrate strong business performance when you hear about it and be active in finding ways to build confidence rather than destroy it. Lead by example and encourage others to follow suit!         

2.   Diverse founders - and this is particularly experienced by female founders - are stereotyped as not capable of running successful businesses

This manifests itself in a number of ways including different questions being asked of female founders and male founders - something picked up in research carried out by Harvard Business Review that identified investors ask “promotion” questions of male founders and “prevention” questions of female founders.

Sadly, stereotypical judgements are also creeping into the way investors treat diverse founders too. A number of founders reported experiencing patronising behaviour, including directly questioning the skills/ability of a founder on preparing key documents, making founders feeling undermined in the way they were treated in vulnerable situations, such as when pitching.

I remember being introduced inappropriately at a pitch event, three weeks after giving birth to my daughter, with the fact I was pitching after “just” giving birth being the thing of note - rather than what I actually had to say. 

Other founders have reported similar experiences where they felt undermined.

>> So, what do we do? We need to make it culturally ok to publicly call out bad behavior where we see it in the investment industry. To do that we need to offer safe spaces (physical and digital) where founders can share their experiences to highlight issues - highlighting investors to avoid and sharing advice on how to handle bad behavior when it is experienced.         

3.   The problem of access continues to be an issue with deals still being done behind closed doors, where diverse founders find they aren’t invited into the room

Founders shared with me their experience of deals being done “behind closed doors” or of organisations set up to support founders promising support where - in effect - nothing materialises.

As one founder put it: “Barriers are based in access and communication in my humble opinion. I have experienced feeling invisible in the invisible middle..... My innovation is in market, I have happy customers. Being at Seed stage means you constantly get caught in the pipelining methods of VC's who advertise that they invest at Seed stage and yet mostly, they do not. They just want early sight of great businesses.”

Another said: “I think there are only two avenues. Build a business that is applicable for VC funding and get into the game and do it well. Or you can start with people and networking and relationships and build your own way to smaller funding and resist the ‘game’ and the way it’s rigged.”

There still seems to be an issue that investors have an idea of what they deem “good” and if the face doesn’t fit you don’t get a look in.  We need an Alternative perspective, to recognise that results can be achieved in different ways. Variety of approach should be embraced not treated with suspicion (at best) or - worse - disdain.

It is clear that diverse founder - and perhaps female founders in particular - do have a different approach

>> So, what do we do? We need to start by acknowledging there is a "glass door" that has to be smashed, just like the better known "glass ceiling". Whether you legislate to overcome this or use training and cultural awareness to drive behavioural change is open for debate.         

4.   Women are more cautious – but we need to recognize that isn’t a bad thing!

As one (male) observer (who is conducting more research into the topic in 2023) put it: “Most female only teams don't want investment unless they’re 110% sure that they can succeed. Men are more likely to commit cash with just 60% certainty.”

Being cautious and asking for less money doesn’t need to be positioned as “bad thing”. What is key is raising enough to deliver key milestones that then unlock the next round of funding.

It’s a different approach - by proving the model slowly, adapting and changing as required. Not going “hell for leather” with no proof or evidence that is the right approach. This is organic growth It’s a more female approach than male.

It may not chime with the world of VC investment who want an exponential ROI in 5-7 years - but that doesn’t make it wrong. We need to accept different working styles can deliver strong results – afterall, let’s not forget that The Boston Consulting Group reported that female led businesses deliver 2.5x more profit than male led businesses

>> So, what do we do? It’s time to acknowledge that VCs have an agenda – they make money when they build (and sell) unicorns. This agenda has influenced the way startup education has developed. VCs, Venture Builders and sponsored Accelerator programmes imply that raising investment is the only way to grow a business because it serves their purpose. As startup founders we have a choice. We can tag along with this line of thinking or we can plough our own furrow. By showcasing startups that succeed through organic growth (or non-equity funding) – there are good examples out there – we can not only make it obvious that there is another way to grow strong businesses, but make it more acceptable to choose this approach. Imagine a time when organic growth is as acceptable as VC funding is today!        

But there are signs of hope for change

One of the clear indications that a different approach is delivering signs of hope is the approach adopted by Capital Pilot .

Their #BoostFund is a sector-agnostic fund launched in June 2022 which uses Capital Pilot ’s pioneering Investability Rating System to select investment opportunities automatically. The rating system is based on submission of a long-form pitch deck, forecast and the answers to 31 questions which are then independently assess by three (non-conferring) assessors who provide an overall score for the opportunity and a detailed 24-page feedback report.

In less than 6 months the fund made 100 investments, making it the leading UK startup investment fund by volume. But, even more interestingly, initial results from the fund show that 50% of the investment made went to female founders, 30% to founders from an ethnic minority background, and an impressive 40% to businesses based outside of London.

Such an approach is changing the game in terms of the industry statistics documented by Atomico and leading change in the way we do things. I for one applaud the outcome, and hope those looking for more research see that when things are done differently, the data that comes out of it speaks for itself. 

👉 #startup #founders If you have questions about the best way to overcome barriers you face in raising startup funding, bring them along to a free, online Funding Strategy Workshop – and let’s get them answered!