Women and underrepresented founders face a tremendous funding gap when compared to their male, and particularly white male, peers.   Consider just the 2016 statistics.   All-male firms raised $58.2 billion in venture capital funding while all-female firms raised only 1.46 billion.  The funding gap grows starker when we look at black-female-founded firms.  Startups founded by black women raised an average of $36,000.  In contrasts, white men pulled in an average of $1.3 million for business ventures that failed.  

Many people see how identity affects capital allocation.  Academic research has shown that otherwise identical pitches are more favorably received when voiced by a man.  Founders can see it and try to present themselves in ways that cater to investor preferences. Ann McGinley and I have written about the gap and the extraordinary measures founders take to contort themselves and their businesses to increase their access to capital. We even categorized relatively common techniques that founders use to raise capital.  We identified substitution as when a woman sends a man in her stead as a founder or co-founder because she believes that it’s the right business decision to bypass investor bias.  We also identified something we called “manclusion” where a woman has to bring a bro to get that dough–essentially dragging men into meetings just because it makes the investors more manageable.

It seems as though everyone can see the problem.  Yet a new report from Morgan Stanley reveals that most investors still don’t see the problem.  Their survey found that about “eight in ten investors say that multicultural and female entrepreneurs receive the right amount, or more, of capital than their business models deserve.”  Morgan Stanley makes a business case for investing in women and underrepresented founders and highlights research showing that women-owned firms generate significantly more revenue than their all-male peers.  

Although market forces may cause smarter capital to flow toward women-owned businesses over time, slower shifts on this front may lead to lower overall economic efficiency and growth. As Ann and I highlighted, institutional investors may play a role in accelerating returns and broader economic equality by negotiating for commitments from venture capital firms to direct more capital to women-owned businesses.  The research on returns certainly supports targeting an increased allocation as consistent with an institutional allocator’s fiduciary duties.  Setting targets for venture capital firms creates an incentive for investors to learn how to see past their blind spots and recognize value.