Gender lens investing: The truth behind the hype

As we start the weekend with the International Women’s Day barely behind us, it is only fitting to reflect on the key developments – and those that still remain on the horizon – in the women-oriented landscape of gender lens investing.

To provide a quick overview to those unfamiliar with the term, the Global Impact Investing Network (GIIN) defines gender lens investing as investment strategies applied to an investment portfolio, in whole or in part, which:

1) seek to intentionally and measurably address gender disparities; and/or

2) examine gender dynamics to better inform investment decisions.

In a nutshell, gender lens investing attempts to address gender issues by applying a concerted investment strategy that seeks to drive gender equality and measures results in terms of socio-economic returns for women and girls, rather than financial returns alone. 

Why is gender-lens investing needed? 

Fact # 1:  Catch 22 – Female investors a rare breed & female investments not too common

Imagine this: Compared to men today, women are still stuck at the turn of the 19th century. A time so long ago, that it lies before the light bulb or the telephone were invented. The 2018 WEF Global Gender Gap Report notes as much, before estimating that it will take another 217 years to close the economic gender gap worldwide.The report goes on to highlight that the primary hurdle for women entrepreneurs remains access to funding, where women seem to be caught in a double bind: few female investors and few investments in female entrepreneurs. To make matters worse, the gender bias against female entrepreneurs is often so subtle that it is difficult to pinpoint, unless actively analysed. Take for example, the questions investors tend to ask men and women, as researchers from Harvard Business School highlighted. Analysing more than a hundred conversations at the large TechCrunch Disrupt New York conference, they found that investors' questions to male founders were more opportunity-driven (such as “What potential targets are you eying this year?"), while women are asked more defensive questions (such as "How consistent are your cash flows?"). No wonder then that male entrepreneurs of this sample raised five times more funds than women business owners.

Fact #2: Investing in women-owned and women-led enterprises makes business sense

In its 2017 edition of ‘Banking on Women’, the International Finance Corporation (IFC) notes that a third of small and medium enterprises in emerging economies are owned by women, and, in the same breath, a US$320 billion financing gap for female entrepreneurs in formal sector small and medium enterprises exists in developing countries. Now, according to the law of diminishing returns, returns on capital where it is scarce should generally be greater than where capital is plentiful. Boston Consulting Group and MassChallenge, a US-based global network of accelerators, cited that start-ups founded or co-founded by women generated 10% more revenue than male-founded start-ups over a five-year period, despite receiving significantly less than half as much investment. The revenue return on investment for female-founded start-ups exceeds that for male-founded start-ups by a whopping 350%. Thus, investing in women-owned and women-led enterprises is not only the right thing to do, but it also makes business sense. 

Fact #3: Women make purchase decisions, hence should have a voice in product creation

Next, a study in Harvard Business Review (‘The Female Economy’) observes that women make the majority of consumer decisions as the primary users of household appliances and accessories. Women not only take the lead on decisions about furniture, vacations and homes (94%, 92% and 91% respectively) but also cars and consumer electronics, albeit at lower rates of 60% and 51% each! However, without women at management, product innovation or product design levels, companies often fail to consider or analyse the specific needs of women in the products and services they create. It cannot be denied that women would have a greater voice in how products or services are designed – for other women to evaluate and consume — if they are allowed to participate more freely in the labour force.

Isn’t gender-lens investing making a difference?

While gender-lens investing as a term has been formally around since 2010 and investing based on gender-specific needs has existed since the start of this century, the fact that a strategy to focus on women entrepreneurs exists does not mean that it is indeed making the world of business any fairer to the fairer sex.

Indeed, 2019 data from PitchBook shows that the funds given out to women entrepreneurs are not only scarce but that they are actually decreasing. Sample this: From 14% of venture capital (VC) deals in 2017, the figure dropped to only 10.7% in 2018.

Not only this, female founders also seem to be getting smaller portions. Based on the data, the average deal size for women was almost 30% lower than the average across groups.

All this, despite a study conducted by the US Small Business Administration (SBA)showing that the performance of venture capital firms improves as the ratio of investment in women-led businesses (WLBs) increases, despite WLBs receiving less funding, being smaller, and being in slower growth industries.

So, what will it take to give women entrepreneurs a fair deal?

A white paper by Cambridge Associates has identified three primary pillars of gender lens investing: increased access to capital for women, workplace equity, and the development of products and services that benefit women and girls. 

The white paper goes on to recommend that investors who engage in gender lens investing must clearly set out the objective of such a strategy and outline which pillars are of greatest importance. The level of alignment can also vary between investment strategies and impact goals, generally taking one of three forms: focused, holistic, or neutral. 

Focused Impact: These strategies align closely with an investor’s gender lens goals and generate measurable impacts and outcomes. Thus, there is a targeted focus on gender lens investing with an active selection of women-owned and women-led enterprises for investment purposes.

Holistic Impact: These strategies align with gender lens goals to a lesser degree, but still have a positive effect on women and girls through indirect channels. Thus, there is a positive externality of investments that are not as focused on direct outcomes and impacts as under the previous category, but still affect women with spillover effects such as design of products and services with a women-centric mindset.

Neutral Impact: These strategies seek to avoid investments that conflict with an investor’s gender lens goals. Thus, impacting women and girls by elimination (of investments in weapons, pornography, women trafficking, among others) rather than selection (of investments in women-led/women-owned businesses or businesses that employ a substantial proportion of women) is the objective of this strategic approach to gender lens investing.

Some investors might use just one strategy, or a combination of multiple strategies in their efforts to meet their gender lens objectives as the investment universe develops.

Must women wait for their place in the work ranks? 

Only time will tell if women entrepreneurs will still need to wait for 217 years until the economic gender gap is closed.

Till then, we can only hope that as gender lens investing expands, it instills a culture that extends beyond counting women in the workplace toward one that views investing in women as a societal norm.