'A lot of researchers have never set foot in a venture capital firm'

Not even impact investors are immune to gender bias. In a series of articles we look at why investors are missing opportunities and what it means for non-male entrepreneurs.

When Eva De Mol started fundraising for CapitalT together with co-founder Janneke Niessen, they were immediately labelled as impact investors. "We just wanted to set up a very successful investment fund." CapitalT

Judging purely from the numbers, ventures run by diverse founders and teams should be highly interesting to investors. Yet, the opposite is true. For the last piece in this series we talked to someone who operates in the academic as well as practical field of venture capital. With her investment fund CapitalT, Dutch Eva de Mol tries to put research findings into practice.

When she started fundraising for CapitalT together with co-founder Janneke Niessen, they were immediately labelled as impact investors.

"Potential investors said that our fund was a 'nice initiative' and they assumed that we were aiming for social impact over profit – just because we were women. It is bizarre that this happens right?" said De Mol, referring to a Harvard Business Review articleconfirming the pattern. "We just wanted to set up a very successful investment fund."

That said, CapitalT's diversity statistics are probably something an impact investor would be happy with. The €50mn technology fund has invested 53% of its capital in female-founded ventures and 60% in companies founded by people of colour.

"Doesn't make sense"

One might expect investors to consider academic research on what makes a successful startup. According to De Mol nothing could be farther from the truth.

"When I had written my PhD thesis (on the role of reason and passion in the success of over 1,000 American and Dutch founding teams, ed) I thought a lot of investors would read it – but in fact, nobody did," she recalls. The disconnect also goes the other way: "A lot of finance researchers have never set foot in a venture capital firm."

So why is it that female and diverse startups attract disproportionately little funding despite being more profitable? "If you view it rationally it doesn't make sense," De Mol said.

"But investing is still very much an old boys’ network. They simply don't believe that diversity is profitable for a company and they don't follow new research proving them wrong."

She continued: "A lot of investors just cannot picture a woman running a successful business. You hear a lot that there are no female-founded companies to invest in, which isn't true.

“We know from research that women are less active in those investor networks, since it is hard to break into homogenous groups. Then you get the classic case with investors finding their investees on the golf course."

Funder of funds

The underfunding of female-founded ventures has become even more pronounced during the Covid pandemic. According to De Mol, this is due to the logic of homophily: the phenomenon that humans best understand and relate to people they identify with.

Due to the same logic, the best way to break the trend is to get more female venture capitalists with check-writing power, according to De Mol.

"LPs (limited partnerships, ed) have the real power to change the situation. And it is possible, pension funds and big family offices could set up quotas for the share of female emerging managers they invest in."

This is what De Mol has been advocating for since 2019, when she set up #Fundright together with other Dutch VCs and startup network Techleap. The movement calls for all Dutch VCs to have at least 35% women in their management teams and portfolio companies by 2023.

Similar kind of passion

Then again, 35% women is a far cry from CapitalTs diversity score. That's because the fund doesn't base investment decisions on rounds on the golf course or intuition, according to De Mol. Her and other's academic research is the basis for a team evaluation method the fund uses to spot future successful startups.

The team scan consists of online assessment forms and interviews. The idea is to figure out if the founders of a potential portfolio company have enough complementary skills, if they are flexible enough to learn from failures and if they share the same kind of passion.

De Mol: "Some founders are passionate about developing products, others about growing the business. A study I co-conducted (on 107 Dutch new venture teams, ed) shows that founders need a similar kind and level of passion to be able to leverage their complementary skills."

Practical advice to investors

If founders have similar kinds of passion they will work more focussed and efficiently. And if their passions are at about the same level, the collaboration will run more smoothly, according to De Mol: "That makes a venture interesting to investors. If there are too many conflicting emotions and ambitions within a founding team, the venture is not going to be long lived."

In her PhD thesis De Mol gives practical investor advice based on her research findings. One is: Offer founding teams advice beyond the traditional lectures on balance sheets. Instead, teams should learn how to cope with differences in strategic vision and feelings of uncertainty.

Other stories in this series

'Never wear pink when pitching to investors'
Borski: Female venture capitalists are key to female innovation
Women who run 'nice' companies are better off with investors