Investing in Women: Good for Business or Just Good?

Closing the Network Gap for Women and Minority owned businesses

First, the entrepreneur’s viewpoint on investing in women

Since women represent 50.8% of the population in the U.S., I never thought about investing in women as both necessary and as a gender equality approach. It was not until I was more seasoned in my career that I began to see why - there are very few women in senior positions in the world of investment management. I saw this need even more starkly when I launched my own investment management business.

Launching a business as a woman over a certain age is exhilarating and terrifying all at the same time. Exhilarating because you are fulfilling a life-long dream of being an entrepreneur and terrifying because you know so much more about what can go wrong. You are well versed in the risks and you are feeling more practical as you have watched others’ successes and failures.

Friends and family have asked “What can we do to help?”. I am often at a loss because other than hiring us to manage their investments, what can they do? Of course, we ask for help spreading the word – and it helps to a certain extent. Yet, as women entrepreneurs in the investment management business, we can be challenged by the network gap. I’ve written previously about the network gap for nonprofits, but how does it impact women business owners and entrepreneurs?

LinkedIn has described the network gap “as the advantage some have based on where they were born, where they went to school, or where they work.” But so far, LinkedIn has not been explicit about a gender or racial gap in networking.  A 2019 Study by Columbia Business School Assistant Professor Mabel Abraham found that “when women have access to the same professional networks as men, they're still falling behind in attaining equal opportunities to advance their business prospects and careers”. The study found that women in occupations that are male-dominated (Finance, Tech, Real Estate Development, Construction) received 27 percent fewer referrals, or connections to potential new clients from their network contacts, which similarly translates to 27 percent less in revenues.

“Women in occupations that are male-dominated received 27 percent fewer referrals, or connections to potential new clients from their network contacts, which similarly translates to 27 percent less in revenues.”

~Columbia Business School Research | Assistant Professor Mabel Abraham

What was particularly distressing to read was the study essentially found a presence of “audience-based bias” in networking – meaning that there was an expectation by the person doing the referring (client, family member, friend) that there was a preference for men over women.  Unfortunately, my business partner and I have found this to be true in our business as well. About 8 months ago we were introduced to an independent school’s chief financial officer through a mutual friend. We were excited to talk to her and find out how we might get networked into the Bay Area private schools with endowments or board-designated funds and tell them about Fairlight’s Nonprofit Financial Planning and Management Services. The CFO was gracious and even brought a list of examples of schools with endowments.

What she revealed next was frustrating and disheartening. She said most of the Bay Area independent schools rely on referrals from board members for outsourced advisory firms who can manage their endowments. She said most of the finance committee or investment committee chairs tend to be run by and staffed with men who come from the finance world (private equity, real estate investing, asset management, financial advisors). She said they tend to refer to their existing network of colleagues or even their own financial advisors. Most often, they do not conduct a full RFP or review and hire 1 of 2 firms they talk to based on these personal referrals.

So how does a female founded asset management firm get hired by a nonprofit board if the closed network of referrals are all men? This is where the concept of investing in women comes in.

“Firms owned by women and minorities manage a mere 1.3% of the investment industry’s $69 trillion in assets.”

~2019 Study by Bella Research Group and The Knight Foundation

There are “closed networks” that have historically only benefited white men. In the investment world, all major financial services firms were founded by and are still primarily run by white men (Penny Pennington, Managing Partner of Edward Jones, Inc is one of the exceptions). According to a 2019 study by the Bella Research Group and The Knight Foundation, firms owned by women and minorities manage a mere 1.3% of the investment industry’s $69 trillion in assets. We keep reading about studies from McKinsey and Harvard Business Review that the “Future is Female” in the investment management industry, yet women still only make up 23% of financial planners and 32% of financial advisors.

So how do women and people of color penetrate these closed networks? One approach is to build your own network and platform dedicated to your cohort. Sallie Krawchek is doing that by focusing her investment firm, Ellevest, on women investors and and her companion network, Ellevate. Venture Capital has been doing that for several years with organizations such as Astia Angels, Portfolia and which focus on women-founded early stage companies or women in the “c-suite”.

Another approach is to partner with a white, male ally who has access to investment capital and decision-making power. These powerful allies can open networks, make introductions and advocate for you when you are not in the room.

Next, the white male ally’s viewpoint

The title of our article asked if investing in women and minorities was good for business or just good business? Whether it was 2010, 2015 or 2020, as a male ally you might have started wondering why there were not more women and minority entrepreneurs, especially in fields where white men tend to dominate: finance, tech companies, real estate, construction. Many of you set out to help change this because you are married to a minority, the father of daughters or the sons of trail-blazing women. Other allies came to this viewpoint because you wanted to see the growing diversity of your client-based reflected in your senior leadership, salespeople, engineers, vendors and outsourced suppliers.

The question still lingers as to whether investing in women is good for business or just “doing good”.  We have been monitoring the research in this space for over 15 years, so there have been an increasing amount of research on both ethnic and gender diversity globally when it comes to business performance:

  1. A 2017 BCG study showed companies with the greatest gender diversity (8 out of every 20 managers were female) generated 9% higher innovation revenues in the most recent three-year period than companies with the least gender diversity.

  2. A follow-up study in 2018, showed companies with more diverse management teams reported 19% higher innovation revenues than companies with lower diversity —45% of total revenue versus just 26%.

  3. Similar results are found with vendor suppliers. The Hackett Group found that companies who allocated 20% or more of their spend to diverse suppliers, attribute 10-15% of their annual sales to supplier diversity programs.

  4. Brand impact: Donors and consumers alike are becoming increasingly aware when organizations have diversity and supplier diversity initiatives. A 2019 tracking survey for UPS found among those who were aware of the company’s supplier diversity initiatives,  86% were more likely to use UPS’s services than those who were not aware. Awareness of supplier diversity programs is still low, but increasing.

Now that we have made the business case, how can allies support and start investing in women? We have created a list your allies -- because we LOVE lists! This is not an exhaustive list and we will continue to write about this topic and add to the list.

  1. Open your network. Include a minority and women-owned business as part of your list each time you make a referral in your family, social or professional networks.

  2. Invest your money. If you have the means or opportunity to invest in minority and women-founded companies, do it. There are plenty of avenues to do this – accredited investors can work with, or and crowd-funding platforms like WeFunder or Republic.

  3. Evangelize. The real work of sponsorship and advisory to minority and women-founded startups happens when the ally is in the room and the women or minority is not. As my business partner wrote in a recent blog, “This is someone who doesn’t care about potential reputational blowback.”

  4. Lead Your Team / Your Board in Diversity Hires. Whether you work in a for-profit business and can push your leadership team on supplier diversity or you sit on a nonprofit board and you can ask your colleagues to consider adding a women or minority-owned business to the RFP list, do it.

While I was disheartened to hear from the nonprofit CFO that many independent schools hire from their existing networks, I was immensely heartened when 6 months later, a professional colleague strongly advocated for our woman-owned firm in an RFP for his nonprofit board. Our colleague was a traditional, white male financial advisor who had built his business with the same sweat equity that we all have. He could have easily stuck to his network and referred to his closed network.

Instead, he stepped outside his network, and recommended us – a relatively new and untested acquaintance. While we had the experience, credentials and references, he could have taken the safe route and recommended someone that came with built-in trust – someone that looked like, sounded like and presumably acted like him.

He chose us to refer us.

And guess what, we won the business and have never looked back!

Related: Why Are We Afraid to Talk About Money?