"Complex factors" behind drop in funding female startups

While female-founded seed startups have taken more funding in 2022, the total amount has dropped due to a number of factors. 

Several investors have pointed to an array of factors for this dip in backing.

The second edition of The State of Australian Startup Funding report, published by Cut Through Venture and Folklore Ventures highlighted that female founders’ participation in deals reached an all-time high in 2022, however, their share of funding dropped to its lowest level in recent years.

Total funding dropped to 10 percent — from 21 percent in 2021 — and raised a median amount that was 39 percent lower than that raised by all-male teams, the report noted. 

Britt Boxall, investor at Folklore Ventures and co-founder of VC Women Down Under said this drop in funding is due to a number of “complex factors”.

“Starting at the top of the funnel with the number of women who pursue entrepreneurship. Part of it also comes down to a lack of representation on the investor side, which can drive unconscious biases,” she said.

“We’re starting to see more women in investing roles, which will hopefully drive greater diversity in our founder base.”

Ananya Sinha, investment analyst at Artesian said women have always faced significantly higher barriers to VC funding, however the disproportionate impact of the pandemic on women has extended beyond layoffs and women leaving the workforce to the venture capital landscape.

She explained, “While this is a multi-faceted issue, it is likely that key decision makers have ‘slid back’ into bad habits of pattern-matching during the pandemic, where the perceived patterns of success still do not include underrepresented groups like women or people of colour.

“General decline in the quantum of funding for women-led startups also probably relates to large late-stage rounds that occurred in 2021 (e.g. Canva and Airwallex) which in the more difficult funding environment of 2022, declined dramatically.”

In 2022, more capital went to women at the earlier stages, which Boxall said a positive signal for the future trajectory, despite the drop off they saw at Series B and later stages.

She said, “We also saw that 50 percent of women who received funding last year didn’t feel supported. Provided that female founders receive the right support from investors and the wider ecosystem, we should hopefully see these startups mature and raise large follow-on rounds of funding in the next two to three years.”

Change is needed

Critical factors that need to be addressed include improving gender diversity amongst investors (angels and VCs), board members and C-level management, Sinha said.

“In the short-term, limited partners (LPs) who want to lead change need to dig deeply into a fund’s data to determine whether gender-washing is occurring just as it does in the ‘green’ investment space. LPs need to ensure money is reaching women-founded startups because talent is equally distributed, but opportunity is not,” she explained.

“Venture capital investors have an obligation to their LPs to satisfy their fiduciary duty, and this includes diagnosing and resolving diversity issues within a startup. Requiring improvements as a prerequisite of investment can address gaps, and from what I’ve seen, investors can hold some power over this.”

Sinha said leaning on allies is also crucial to an underrepresented founder's success.

“Studies show that female founders that are funded solely by female VCs often face difficulties in raising future rounds. It is important for both founders and investors to be aware of this, as I’ve met many women founders who only target women investors, without realising that this could be to their detriment,” she explained.  

“Allies can be an underrepresented founder’s biggest advocate, which can hold more weight in rooms that can move the needle, such as investment committees.”

Positive outlook

While there is still a long way to go Boxall said she is optimistic that progress is being made through the work being done by accelerators, incubators and female-focused funds.

She said, “More women are investing, and we saw an increase in early-stage funding for female founders last year. It’s not a case of ‘time will tell’ but rather a matter of investors being intentional in making decisions to invest in and support women at every stage of their fundraising journeys.”

Sinha mirrored the same sentiment and said that LPs and VCs are becoming more aware of the problem.

“However, this is an issue that is multi-dimensional and needs to be addressed at every level of the ecosystem,” she said.

“The future looks better, but there are enormous adjustments and inequality issues to be tackled before anything even near to gender equality in the venture market is achieved.”