Venture capitalists slowly starting to trust women-led businesses

By Janet Forgrieve and Erika Gonzalez, News Staff Writers

Linda Bush started a business in her basement -- but the resemblance to a cottage industry ends there.

Bush already had about $5 million in capital when she launched the Denver-based tenant-screening company SafeRent Inc. in 1998, mostly from former McKinsey & Co. colleagues turned venture capital investors.

Today, with 80 employees, a downtown office and two more rounds of cash totaling almost $30 million, Bush has proved herself in the business world well beyond her basement origins -- making her still somewhat unusual among the world of female-led businesses.

Women are starting businesses faster than any other demographic group, according to data from the U.S. Census and the U.S. Small Business Administration. But they're doing it with less private equity investment.

A survey done last year, when venture capital dollars were flowing in record numbers, revealed that women-led businesses garnered about 9 percent of the U.S. venture capital funding awarded. The survey by the Washington, D.C.-based Center for Women's Business Research also showed that only 2.3 percent of all the institutional investment dollars went to women-owned ventures.

Numbers from Venture One, a company that tracks U.S. venture capital investment, show that the percentage of venture-backed companies headed by women rose from 4.62 percent in 1997 to 6.02 percent in 2000, a 30 percent jump but still a relatively small piece of the total pie.

Area entrepreneurs and venture capital investors offer several possible explanations for the disparity, mostly based on history and tradition.

Outside the box

Historically, women haven't started the kinds of companies likely to catch the eye of venture investors.

As of 1997, 55 percent of women-owned businesses were in the service sector and 17 percent were in retail, according to an SBA report released in October. Finance, insurance and real estate comprised 9 percent of the total.

Meanwhile, during most of the past decade, venture capital investors focused on investing in technology-related companies.

"I don't know if fewer women are bitten by the entrepreneurial bug or if it's a function of there not being as many women role models to make women feel comfortable doing it," says Mark Soane, managing partner of Quest Capital Partnership.

"I know if we looked at the statistics, there are fewer women engineers out there, and that may have something to do with it in terms of technology investing."

When women do start technology-related companies, those firms often grow differently than male-led enterprises.

Studies, including the one from the SBA, show that women tend to start their companies with less money than men, and to grow organically rather than searching out investors or lenders early on. They're also more likely to use loans from family and personal credit than equity investment.

Andrea Mudd has self-funded her startup, Getamom.com, since she started it last year. The Internet-based recruiting company matches working mothers with family-friendly companies, in search of a long-term fit that makes both sides happy, she says.

Mudd, herself a mother of two small children, worked with the Forum for Women Entrepreneurs Springboard program, an intensive series of sessions aimed at grooming women entrepreneurs to be able to successfully pitch their enterprises to potential investors.

"I went with primarily companies that needed $15 million-plus," she says. "There was no way I (myself) needed that much -- all my employees work from home office, and I just didn't need a huge outlay of capital."

Mudd is also currently part of another forum class, called CEO 101, which has helped her define her business goals and hone her presentation. She'll likely need those skills, she says, when she approaches lenders in the future -- she probably won't try to attract venture capital investors now.

"I think, often, women try to make do with what they have around them," she says. "We look at the big picture but try to figure out how to get there with what we have at hand. Maybe that's just the way our minds work."

Another Denver-based company, Blue Ink Solutions, decided the slow growth route was probably the best way to go.

Melissa Edison-Barnes, one of three co-founders of the e-mail marketing consulting company, says she and her two male partners considered what they wanted out of their new venture, both in terms of rewards and work/life balance.

They wanted to set their own hours and their own pace, without answering to investors. So, the company started small and turned down about $1 million offered by private investors.

"All of us wanted to have control over our destiny," Edison-Barnes says. "We decided to build our model around a low-funding scenario."

Been there, done that

There's evidence that another oft-given reason for the disparity in money raised is changing, as women gain more experience and take more leadership positions in the corporate world.

"The mantra for most (venture capitalists) is 'management, management, management,' " says Catharine Merigold, a principal at Boulder-based Vista Ventures. "VCs love that 'been there, done that' person. And there are more men, in general, that can say they've been there and done that."

But, both national studies and local examples indicate that, slowly but surely, women are getting there and doing that.

In 1999, 9.4 million women were in executive, administrative and managerial occupations in corporate America, or 46 percent of the total, the October SBA report says. They still tend to make less money than men do, but they are apparently getting the experience they'll need to succeed on their own.

Denver-based MD-IT is the first tech startup that Laurie Wagner co-founded, but she cut her management teeth at three others before that. Wagner and partner Tom Carson formed the company last year, then merged it with a Boulder-based company that had invented some voice recognition technology.

The company makes technology marketed to medical practices. The software allows doctors to keep and access patient records, using the voice technology.

Earlier this year, Wagner was one of two women CEO's to pitch her company to potential investors at an event put on by the Rockies Venture Club.

The other, Cate Lawrence, is president and CEO of Boulder-based Warrior Solutions Inc., a company that makes software that lets the military condense reams of paper into databases that can be stored, organized and shared on pocket-size personal data assistants.

For Lawrence, entrepreneurship was a legacy, passed down by her father and his father before him, and she began earning her experience points early.

"I kind of grew up hearing the agony and the ecstasy of it all," she laughs. "And I got to try out mistakes early on. My father had me working at his business when I was 16, and I screwed up quite a bit."

Sue Wilson was already running one business, family-owned Denver Pottery Co. in Denver, when she and four friends developed the concept for her second company, Tomboy Tools Inc.

The women, who had played basketball together for about 10 years, were all in different stages of learning to do home improvement tasks.

The women also shared a frustration with the tools that were available -- and a disgust at the useless pink hammers and such marketed to women. They created the concept of finding sturdy, well-made tools, then bundling them together for specific jobs and selling them on the Internet.

Three male angel investors kicked in startup money, and the concept has taken off, Wilson says. In fact, business is so good that the company will soon need to attract venture capital investment if it's to grow.

Instead of trying to do it on their own, they've found a woman who is experienced with VC fund-raising and plan to hire her, either as a consultant or a coach, to help the entrepreneurs maneuver through the venture capital world.

Vista Ventures' Merigold also coaches women entrepreneurs on the ins and outs of pitching to VC firms, mostly stressing communication issues.

"Women go into a venture capital firm not understanding the audience," Merigold says. "VCs are smart and quick and confident and short on time. We sometimes give entrepreneurs as little as 20 minutes to make their case. But women are more about connecting -- they say phrases that give space. Sometimes they move around from subject to subject."

SafeRent CEO Bush and her presentation gained final polish thanks to the experienced coaches at the Springboard program, who gave powerful tips on communication.

"I tended to give long explanations, like 20 reasons why we're better than the next competitor," she says. "The coaches would say 'Boil this down to two sentences.'"

Crashing male networks

Over centuries, male communication styles have shaped the way much of business gets done -- and helped create the mostly male networks that lead to deals. Like it or not, entrepreneurs need a network of contacts to get to the people who have the money and expertise they need.

Historically, women haven't been plugged in to those networks.

"There was a phenomenon, particularly during the dot-com era, when one of the really big character traits investors looked for was an aggressive CEO," Wagner says. "So, right away, by definition, what does business aggressiveness look like?

"Also, they expect to work closely with management -- they need to feel comfortable. They would say it's not gender-oriented, but that's open to interpretation."

However, Wagner also says she has never felt that potential investors discounted working with her company because a woman leads it.

"The fact that they're looking for people running good companies gets beyond the gender issue."

Another area entrepreneur, Gretchen Jahn of Aegis Analytical Corp., spent more than 20 years in the information technology and software arena, most recently leading the turnaround of a floundering software company.

Her experience and the management team she heads have been attractive to investors, she says, and her manufacturing software company has raised more than $20 million.

"The goal is for them to provide the fuel and help us with the creative and strategic thinking and a network of connections," she says.

It's too early to find numbers that show how women-led ventures fared during the dot-com bomb that followed the boom.

During the height of venture capital investment in dot-coms, more than 90 percent of the deals were with male-led companies, hundreds of which are now defunct after burning through millions.

For much of this year, venture capital investors have been preaching a "back to basics" approach -- the importance of tight spending controls, having a product and people who want to buy it -- that has replaced the well-publicized excesses of the past few years.

In other words, it would seem that investors are looking for qualities that have existed for years in successful women-led ventures.

"In my ideal world, I think that if 95 percent of the money in the last three years went to guys and so few of the dot-coms are still living, I'm curious to see what the change (in attitude) is going to be," says Getamom.com CEO Mudd.

Rooted historical biases

Few female entrepreneurs and investors chalk the disparity in VC investing up to simple bias -- indeed, that often seems an uncomfortable topic.

Most either acknowledge but don't dwell on possible biases or say they haven't experienced them, at least not solely based on gender.

"I don't think it's a gender issue," says Merigold. "VCs don't have that bias. It's more about risk. The primary thing an investor does is try to reduce risk."

Says Jahn: "The vast majority of venture capital investors are male. A large number of them are most comfortable speaking with another male. We have strategized and, where appropriate, 'Justin-ed' (her male partner) the guy.

"You can't change the culture, and our goal is to get the funding."

The situation doesn't anger Jahn; she's too busy for that. But she admits to disappointed resignation.

"Human nature is what it is," she says. "I can't change centuries of history and culture. I can only change the culture of my company. And that's almost 50 percent women."

Others say they see bias, but the best way around it is to prove your case.

And some numbers indicate that the more women prove themselves, the more money will be available for others trying to do the same thing.

Last year's women and venture capital survey revealed two significant points: One, that women investors are more likely than their male counterparts to invest in women-led companies; and two, that firms that have previously made an investment in women-owned firms are twice as likely to make new ones.

Bush says that raising the capital for SafeRent was a huge step forward for her as an entrepreneur and an executive.

"I think what happened is, the fact that I could get this money solidified in the board members' minds that 'Hey, Linda's a real CEO.' "

December 15, 2001