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The business case for investing in female-led leadership teams
Acorn Capital | acorncapital.com.au
The business case for investing in women is supported by a compelling body of research that consistently tells the same story – companies with women in leadership roles perform materially better[i]. The financial outperformance associated with gender diversity has been established in studies conducted by academic, institutional and financial stakeholders. The data supports gender diversity as an investment thesis because of:
Higher financial performance: Experience higher return on sales, higher profit, higher return on invested capital[ii]
Better talent: More success at retaining talent and increasing productivity[iii]
Stronger group performance: Critical for innovative approaches in identifying new business opportunities, reduces group think while enhancing decision making[iv]
The conversation on inclusion and diversity has seen growing awareness, shifting from social justice, legal compliance and maintaining industry-standard employee environment protocols to a recognition that inclusion and diversity is a source of competitive advantage and a key enabler of growth[v]. According to the latest research by McKinsey, the relationship between diversity and financial outperformance has been shown to be statistically significant. Companies in the top quartile for gender diversity on executive teams were 21% more likely to outperform on profitability (as measured by average EBIT margin) and 27% more likely to have superior value creation (as measured by economic profit margin). What the studies also suggest is that there is a real financial penalty for companies that opt out of promoting diversity. In fact, companies in the bottom quartile for both gender and ethnic/cultural diversity were 29% less likely to achieve above-average profitability than all other companies. Despite this growing body of evidence by recognized institutions around the world, progress in the real world has been slow as this data has been largely overlooked.
Why investing in female entrepreneurs is the easiest way to access diversity driven out-performance
A growing number of companies have begun to understand the relationship between diversity, growth and value creationv. For many large companies, there is a struggle to materially implement and champion diversity in the workplace due to existing processes and behaviour. However, when a business is designed from the beginning to accommodate for diversity, then this is where the outperformance associated with gender diversity is likely to be the most evident.
Acorn Capital and Scale Investors believe now is the time to be backing early stage female-led businesses. Some of the best and smartest women are increasingly moving away from traditional roles into innovation, medicine and finance to create new and emerging businesses. This reflects the cumulative effects of structural changes to provide women equal opportunity over the last few generations and underscores a future where disruption, innovation and growth opportunities by women entrepreneurs will continue to become a more defined investment thematic.
Inefficiency creates opportunity
Acorn Capital and Scale Investors believe there is significant market potential for investors to back gender diverse early stage companies not only because of the compelling business case but because it is a highly inefficient market. Research has backed the personal experience of many female entrepreneurs, who have reported difficulties to accessing finance due to structural market inefficiencies, unconscious bias and implicit gender bias reflecting how current capital markets for these companies are relatively poorly developed and underserved [vi], [vii].
In terms of the global allocation of venture capital funding, approximately 90% [viii] [ix] of funds go towards all-male teams. This disproportionate allocation towards all-male founder teams creates a situation where many great female founders miss out on funding. Studies conducted by BCG studies suggest that whilst female founders only receive a fraction of the funding as compared to their male counterparts, they are able to generate higher revenue and higher profit with half the amount of invested capital [x]. These studies consistently point to the superior investment returns that come from backing what has been a largely overlooked investment thesis.
Introducing the Female Leaders Fund by Acorn Capital and Scale Investors
Acorn Capital and Scale Investors believe there is an opportunity to deliver attractive returns due to the highlighted structural market inefficiencies which result in limited access to finance for early stage companies, especially those led by women. It is for this reason that we have partnered to establish the Female Leaders Fund (the Fund).
The Fund will seek to invest in emerging Australian companies that advance women in leadership to capture attractive investment returns. The Fund provides investors with an opportunity to unlock economic value by addressing market inefficiencies in both Australian Venture Capital and female-led ventures. Acorn Capital and Scale also believe that the Fund will assist investors infulfilling diversity targets whilst supporting local job and wealth creation.
The Fund will leverage the relative strengths of Acorn Capital and Scale Investors through shared processes, networks and mutual collaboration. Acorn Capital is a boutique investment manager that has specialized and demonstrated capability in emerging companies since 1998. Scale Investors, established by a visionary group in 2013, will bring access to female-led and gender diverse investment opportunities. Together, they will create a portfolio of 8-12 unlisted, innovation driven companies that exhibit effective leadership and deliver outperformance to investors.
This Fund is the first of its kind in Australia to target high quality, tax effective returns from attractive innovation driven companies that support gender diverse leadership teams. It represents an opportunity to unlock economic value by addressing market inefficiencies affecting Australian venture capital.
[i] https://www.businessinsider.com.au/companies-with-women-in-leadership-roles-perform-better-2016-6?r=US&IR=T
[ii] https://www.catalyst.org/research/why-diversity-matters/
[iii] https://executive.mit.edu/blog/what-makes-a-high-performing-team-the-answer-may-surprise-you#.XJMpX6BxVEY
[iv] https://www.bcg.com/en-au/publications/2018/how-diverse-leadership-teams-boost-innovation.aspx
[v] https://www.mckinsey.com/~/media/mckinsey/business%20functions/organization/our%20insights/delivering%20through%20diversity/delivering-through-diversity_full-report.ashx
[vi] https://www.emeraldinsight.com/doi/abs/10.1108/13552551211201385
[vii] https://www.scientificamerican.com/article/why-female-entrepreneurs-have-a-harder-time-raising-venture-capital1/
[viii] https://pitchbook.com/news/articles/the-vc-female-founders-dashboard
[ix] https://news.crunchbase.com/news/2018-sets-all-time-high-for-investment-dollars-into-female-founded-startups/
[x] https://www.bcg.com/en-au/publications/2018/why-women-owned-startups-are-better-bet.aspx
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