Here’s why the numbers don’t stack up when in comes to creating diversity in venture capital

- November 9, 2023 7 MIN READ
woman in man's suit
Photo: AdobeStock

First, some caveats before we go on:

  • I know I’m using a niche example to make a very broad point. The point still stands, even if you want to get the world’s tiniest violin out for me.
  • I know that as a white woman, my struggles are not nearly as dire as that of women of colour. Take any point I make and triple it for women of colour.
  • I know the following example is one of privilege and doesn’t compare to having to put food on your table every night or worrying about how to pay the electricity bill. However I only write from experience and on topics I have some insight into, which is the systemic disadvantage women and other minorities in my industry face.
Last month, the report to the Government from the Women’s Economic Equality Taskforce (WEET) was released.

Led by Sam Mostyn, WEET has identified the barriers that women face in the Australian economy and provided the Government with practical advice on how to address these issues.

It was sobering reading. The taskforce noted that up to 30 percent of Australian men don’t believe gender inequality exists.

The report makes recommendations across seven key areas where economic inequality is prevalent: care, the workplace, education and skills, the tax and welfare system, and government processes. Interaction of the personal income tax and welfare systems mean that in many cases, people on lower incomes lose upwards of 90 cents for every dollar of income they earn. The taskforce found the current system was misaligned, trapping women in poverty and excluding them from fully participating in the economy.

I know a little of this, as the kid of migrants who accessed several types of welfare as I was growing up and parents who had to work double shifts to make ends meet. As a result, my mother was still working at 75 because she couldn’t afford to retire. I am also the greatest beneficiary of my parents’ hard work and sacrifices, with the help of the welfare and tertiary education systems, which gave me an opportunity to radically improve my financial security and that of my family.

On this same morning, I read an interview with the excellent Rayn Ong, now from Archangel VC, which was inspired by his ‘love letter’ to Rick Baker and Nicki Scevak — the founders of VC fund manager Blackbird, for making him “…a lot of money”.

Paul Smith from the AFR asked Rayn how he was able to cobble together the $250,000 needed to invest in Blackbird fund 1 and Rayn answered “I married rich”.

For the record, I am genuinely stoked he turned that initial investment into a return of $1M in cash already with the remainder still to pay out and I also appreciate his honesty.

Because while we as an industry often (well, I do) lament the lack of diversity in Australian VC (and the founders it invests in) what doesn’t get talked about much are the systemic barriers that prevent otherwise clever and talented people from accessing certain parts of our economic landscape which could change their circumstances. Like venture capital or entrepreneurship for that matter, but let’s stick with VC.

Adding up the costs

It’s expensive.

To spin up a VC fund from scratch, you need to establish a general partnership, a fund manager, and all the corporate structures and legal documentation required for that.

Let’s call that somewhere between $50-$70k depending on how complex it is. You need to gain an AFSL before you can even speak to investors about raising money, and if you access someone else’s AFSL as an authorised representative, that’s around $30K to get spun up, and a yearly fee of around $50K thereafter.

You also have to devote your time to developing the investment thesis, the investment memorandum, then you need lawyers to review it to make sure the disclosures are in line with your licence and you also need to develop deal flow in advance of raising capital which means attending events, doing cold outreach and evaluating deals in line with your thesis.

You also need, ideally to bring together a board or an investment committee of credible people who generally don’t do it our of the goodness of their hearts.

Critically, you need to have the money to cover your living expenses while you devote significant amounts of time to meet with investors, not to mention the travel costs to meet them face to face multiple times, to pitch, then go through their due diligence process and their asset allocators. And, let’s not forget to mention that fundraising at the moment can take anywhere from six months to two years.

The net result is to spin up a fund costs somewhere in the order of $200K — $300k, before you have even raised a dollar and that doesn’t account for your time (assumes you aren’t being paid a salary) and the opportunity costs of that time being devoted somewhere else.

The time requirement alone cuts out a large swathe of the talented, clever people who would otherwise make great venture capital fund managers because they can’t take a year or two out of their regular day job to do this (either full time or part time).

The capital requirement cuts out an even larger swathe of the already underrepresented minority groups of talented and clever people who are already disadvantaged by other economic challenges because they just don’t have the spare funds lying around.

The cost of gender inequality

To wit, the WEET report outlined the cost of gender inequality in Australia and explained about how the average 25 year old woman with one child will earn $2 million less over her lifetime than a 25 year old man with one child; that a 25 year old woman has a significantly lower chance of improving her economic future than that 25 year old man.

Given the costs required to be a VC fund manager and the economic disparity women face, perhaps it’s not surprising we have so few women VC managers, let alone women founding VC funds. This perpetuates the funding disparity of women entrepreneurs (who represent about 20–30% of founders but get 3–10 x less investment, proportionately).

But there are a few exceptions. I’ve been a VC for 17 years, successfully generating returns for investors. Obviously an example of the true meritocracy at work, right? (sarcasm font).

Elaine Stead

Elaine Stead

In my specific case, in the last 12 years alone, I have been involved in the investment decisions of over half a billion, I have raised over and managed $250m personally as a venture capitalist for a VC business I founded, have invested in unicorns and have a track record delivering double-digit realised returns (net of fees) compounding over more than a decade for investors.

I was lucky that my ‘startup costs’ of starting my venture business at my last venture fund were covered by my parent company — for a year. If I could turn that into a bona fide venture business which not only covered all costs but generated a profit for my parent company I was given enormous freedom to expand , if not, I would have been kicked to the curb.

Luckily, I turned that into four fund vintages and ~$230M under management at its height.

I say lucky, because while I am good at what I do, I was also lucky that I had the opportunity to have my ‘start up’ costs covered, lucky I had the benefit of some great mentors — men who saw my potential before I did and who lent me their networks of wealthy people I wouldn’t have had access to otherwise.

I certainly couldn’t have self funded my own venture fund — even as a childless woman — my family circumstances meant I didn’t have access to the necessary capital required to get started.

I was also unlucky. As has been well documented, after five years that parent company was destroyed by a false financial terrorism campaign and my VC subsidiary business sold off to new managers (but happily continuing now) as part of that administration process.

In that process, in addition to losing my carry, control of the VC business I founded, I lost half my superannuation and all my savings (in the destruction of the company).

So financially I lost 15–20 years and I’ve been working to get back to my chosen profession ever since. In some ways, at 48, I’m like that 25 year old woman with a kid in the WEET report.

Why bother?, one might ask. Well, because I firmly believe the only way to step change from disadvantage to a level playing field is compounding interest.

As a salaried employee I might be able to pay my mortgage and bills, but as a VC or an entrepreneur through carry or equity, I can change the economic future for my family and myself through compounding returns.

So I persist.

How to rebuild

To do this, I’ve had to rebuild sufficient resources to start a venture fund again, from scratch.

Let me explain a little about what that has entailed.

In the intervening period I have co-founded two VC funds businesses — one focussed on scale ups, one on seed stage companies.

I have also worked several day jobs to earn enough money to pay my bills and save enough to rebuild the venture funds. I have worked 70–80 hours a week, every week, seven days a week for the last three years. I don’t say this with pride — I abhor hustle culture. I say this with a ruefulness really, because this is what trying to overcome systemic disadvantage looks like if you want to operate and compete at the level you have earned the right to.

I don’t have rich parents, and I’ve never married so I don’t have another person to help carry the load financially. And so, in terms of where the buck stops for financial security, who will pay the bills and take care of my family (I don’t have kids but do have family responsibilities), in the words of Taylor Swift — Its me, I, I’m the problem it’s me.

And while I have been hit with different hurdle to most, financially where I am today is not too dissimilar to the situation faced by other women, and underrepresented minorities. And it’s bloody hard. I do believe this is one of the core reasons why we don’t have more VC funds founded by women.

However, if we remove the barriers to ensure we have more diverse investors, we will remove the barriers to investing in more diverse founders. This creates a flywheel of compounding wealth and hence, choices for a group which currently disproportionately don’t benefit from it, but who disproportionately use that wealth to benefit others when they do.

Recently the Queensland government launched a fund which provided management fee support to managers who would invest their capital in Queensland.

This is a great scheme, especially for emerging managers who lack the capital required to start a fund. If there was one thing I think would change the disproportionate allocation of capital to women and other underrepresented minority VCs, it would be a scheme that provided financial support for emerging managers of underrepresented minorities while raising capital. Even for a year. This would help to remove at least one systemic disadvantage that prevents many worthy individuals from being the decision makers on how capital is allocated and invested.

Right now, the family offices with a focus on diversity like Wollemi and Carol Schwartz are doing the heavy lifting to support underrepresented founders and investors, but it’s time our state and federal governments helped this initiative to move the dial, especially when they say they are focussed on initiatives to improve diversity in STEM and to reduce gender economic inequality.

So, Minister Husic, what do you think?