Four reasons VCs should focus on women-led start-ups

Ryaan Sharif, General Manager, Flat6Labs UAE.

The Middle East and North Africa region saw its highest ever level of VC funding in 2021. $2.6 billion flowed into the region and the UAE took $1.2 billion of it across 155 transactions, while neighbouring Saudi Arabia showed an impressive 270% VC growth to overtake Egypt for the number-two spot. Amid this surge, the UAE has made strides in closing the funding gap for women founders. Abu Dhabi’s Hub71 reported that 30% of its third cohort of start-ups in 2020 were founded by women.

In the broader ecosystem, gaps remain, so as it works towards diversifying its economy, the UAE government is encouraging VCs to back a highly diverse array of start-ups with no gender bias.

Here are some insights into how funding women-founders can be a massive opportunity for investors.

#1 Persistence

In the UAE, 12.6% of businesses are owned by women and 75% of them have expanded outside their domestic markets — an aspiration that features prominently in the guidelines of many of the government’s economic-diversification programs. And in Saudi Arabia, the rate is almost 50%. In fact, 29% of women-led businesses across the MENA region are global enterprises — a greater proportion than their male peers can claim.

The reason for this is largely understood to be that women founders, on average, do not give up at the same rate as men. This may be explained by the personal, legal, and professional obstacles that have routinely been faced by women in the workplace and society.

Mentoring systems and incubators should take the time to encourage women founders to launch before perfecting a product, as this may accelerate and quicken the process of access to funding. Once investors step in, access to more resources will enhance the iteration process.

Despite the persistence advantage, women may lose out to men, who are generally better at overselling their start-ups as they continue to focus on communicating metrics which highlight their growth and potential rather than communicating their state of affairs as of today.

#2 Risk

Historically, we see an incredible capacity in women founders to understand their numbers, compared with men, especially on reporting metrics and projections to their investors. Women founders also tend to be more resilient when it comes to raising capital, having encountered injustice, double standards, and other obstacles throughout their careers.

But that does not mean that these obstacles do not extend to the world of funding. According to a Wamda report, in MENA in the first half of 2021, male-led start-ups garnered 96% of funding agreements and women-led start-ups a mere 0.9%, with mixed teams getting the remainder. While there are signs that this imbalance is improving, we still have a distance to travel.

VCs are starting to see, either through anecdote or research, that women tend to be more mindful, collaborative and risk-averse — capable not only of strong cashflow management, but of building the kind of team rapport that boosts talent-retention ratios.

#3 Perspective

Women entrepreneurs are, on average, more likely to have business ideas that solve unique challenges. Recent research shows women are 20% more likely than men to found companies with a social or environmental purpose. This is of particular significance in light of the rise of ESG environment, social, governance as a source of concern among investors, shareholders, and private citizens.

Women’s unique perspectives also include a greater-than-average awareness of their target demographic. This may help to explain why a 2016 BNP Paribas Entrepreneur Report found that on average, women-led businesses make 13% more revenue than those owned by men.

#4 Diversification

Women investors are twice as likely to invest in companies with women on their leadership teams, and three times as likely to invest in women CEOs, according to a report by Diversity VC. This could be the beginning of a cycle of improvement if the relatively low women representations among global VCs’ decision makers are addressed.

But for now, men continue to have more opportunities in business than women. The Wamda report noted that in September 2021, out of the $338 million raised by MENA start-ups, only $100,000 went to women entrepreneurs and $313 million went to men.

The more things change, the more they will continue to change. Women-led companies are a great way to diversify VCs’ portfolios. And as cultural norms shift and we see more women-focused funds being set up, investment companies will likely bring more women decision makers on board to take advantage of yet more diversification.

Women VC partners invest in twice as many women-led founding teams at early stages of funding. Women-led businesses should leverage these findings and reach out to women-led VCs and VCs with a strong emphasis on investing in women entrepreneurs. Funds with specific industry mandates that match the founder’s core business are also an advantage, as their scope for diversification is more limited.

Women founders are certainly at a greater advantage than they were, say, a decade ago. Governments and investors are beginning to realise the economic implications of being less inclusive of women in the entrepreneurial ecosystem. Work remains to be done, particularly with regard to the level of investment into fully women founded teams but the mounting evidence of the above-average potential of women founders to lead successful start-ups, combined with the rise of women-led and women-focused VCs, is welcome.

Things are finally moving in the right direction. Now we must work together as stakeholders in the VC community to accelerate this momentum.

Key takeaways

Women entrepreneurs are, on average, more likely to have business ideas that solve unique challenges.
29% of women-led businesses across the MENA region are global enterprises, a greater proportion than their male peers can claim.
We see an incredible capacity in women founders to understand their numbers, compared with men, especially on reporting metrics and projections.
Women-led companies are a great way to diversify VCs’ portfolios.
Despite persistence advantage, women may lose out to men, who are generally better at overselling their start-ups.

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