Why Startup Investors Should Be More Forward-Thinking

We’re officially in a bear market: a moment when investors tend to turn inward, doubling down on the same types of founders, fund managers, and sectors they’ve historically invested in, in the perception that it is safer to invest in what is already familiar and known.

For most investors, this means investing in companies and vehicles that mirror the market as it has been – in companies that are overwhelmingly white, male, and conservative on matters of people and planet – rather than looking to where it will be in the future.

But I would like to argue that now is actually the time to do the opposite. That a downturn is the moment to be looking forward instead of backwards, and make long term plays that will pay dividends for years and decades to come.

And that means – among other things – investing with a gender lens.

Here are four reasons why.

Literally. There is a growing body of evidence linking gender and other forms of diversity with improved financial performance – across businesses, funds, financial management and more. A 2019 study by KPMG of UK fintechs found that teams with a woman founder or co-founder delivered more than twice the rate of return than those founded by only men. Meanwhile, a 2020 analysis by Goldman Sachs found that all-woman and mixed-gender portfolio management teams outperform all-male teams amid coronavirus-related market swings.

This is partly because teams with a diversity of perspective and lived experience make better decisions, from both a risk and an opportunity standpoint. But it’s also because if you want strong financial returns, you need to be working with and investing in teams that look like and understand the market – whether you’re investing in a public company, a private markets fund, or choosing a team of asset managers to work with.

In a bear market, where the risks of every financial decision only feel more amplified, this is even more important. Research published in the Harvard Business Review in 2021 found that when women join the C Suite, businesses become both less risk seeking and more open to change – that is they “embraced transformation while seeking to reduce the risks associated with it.”

According to Parallelle Finance, an investment research firm focused on gender lens equity and fixed income investing, the recent performance of gender lens equity funds tends to be generally aligned with the broad market. The coverage universe includes 32 gender lens equity funds, which have criteria with at least one stated gender equality threshold, including 14 global equity funds and 18 regional offerings. Asserting that the asset class calls for an expanded investment universe, Parallelle believes that “continued advancement in corporate equality metrics will provide opportunities for gender lens funds and portfolios to demonstrate long-term outperformance.”

Arguably, if we’d had more diversity at the tables where investment decisions are made, we might have considered from more angles the impacts of decisions around the stimulus, investing or not in locally resilient supply chains and mainstreet businesses, the impact of a lack of a functioning care economy, the continued backing of mostly male entrepreneurs to the exclusion of women and especially women of colour, and the huge amount of money going into cryptocurrency instead of other, more real economy investments.

The most successful investors are able to anticipate market needs and identify solutions in real time. It’s hard to do that if you’re only drawing on the collective intelligence of half the population.

Women entrepreneurs are building scalable companies and driving innovation across every sector in the market, including healthcare, climate, agriculture, fintech, food, clean tech, consumer technology, the future of work, consumer products and services, renewable energy, water and sanitation, education, the care economy, and more. And in the private markets especially, there are creative and informed fund managers investing along every theme (see Project Sage 4.0 for an overview of the hundreds of investment options now available).

In a bear market, now is the time to be looking for smart long-term bets about what people will want and need on a five, ten, or twenty year timeline. No matter what your investment focus is, women are working on it. You may just need to look beyond your existing networks to find them.

According to a 2020 report from McKinsey, this decade will see an unprecedented transfer of wealth to women, with women in the United States expected to hold $30 trillion in capital by 2030. Much of this movement of wealth will be from ageing baby boomer men to their wives. But women are also holding more wealth as entrepreneurs, as high income earners, and as informed investors managing their families’ wealth and finances.

McKinsey argues that simply by retaining baby boomer women, wealth managers could see one-third more revenue. If they can also acquire and retain young women as clients, firms can expect to see up to four times faster revenue growth. This means that if you’re in the business of serving and working with investors or high net worth individuals, you should be paying attention to what women want, and building a team that is prepared to meet their needs.

Gender equity also matters when it comes to attracting and retaining employees. Millennials and Gen Zers are choosing where to work – and what to buy – based on how they perceive a company’s performance on social issues like gender equality, racial equity, and climate as much as they are by traditional metrics like price and remuneration.

A company’s bottom line is driven by its talent, so if you want to invest in companies that are likely to do well in the long haul, it makes sense to invest in businesses that perform well on key gender metrics like fair and equitable pay, leadership representation, and equitable policies around leave, healthcare, and flexible work.

Women and gender-diverse entrepreneurs build all sorts of businesses, including the fast-growing unicorns investors love in boom times.

But there are also many, many women entrepreneurs who are building normal-growth businesses, which are solving real problems that people have whether the market is good or bad – around health, education, job retraining, the care economy and more – but who are often underinvested in in favour of their shinier, higher growth cousins.

These businesses may not make you 10x returns, but they can make good long-term bets. In a bear market, now is a smart time to be looking at some of the investment vehicles that are being created to fund normal-growth businesses.

It’s also a good time to consider moving your cash to investments that are intentionally focused on impact and promising stable, single-digit returns. Where do you want your cash sitting, and how do you want it working? In the US, for example, the First Women’s Bank of Chicago allows you to put your cash in a savings account that will then be loaned on to women entrepreneurs, while CNote invests in underserved communities, and Calvert Impact Capital’s Community Investment Notes invest in organisations addressing inequality and climate change.

The conventional wisdom in a bear market is to stay the course. To that I would add, stay the course in the sense of keeping your money in the market, but now is also an opportune time to make some fundamental changes that are going to make your portfolio more resilient, sustainable, impactful, and profitable in the long term.

If you want to get the best results from bringing a gender and diversity lens to your portfolio, it pays to go deep: looking not just at who is managing the money (or leading the company), but what they’re investing in, the products they’re building, the composition of their employee and leadership base, their understanding of their target markets, supply chains, governance, and the whole picture. It’s not just a matter of “add a woman and stir.”

And if you’re already investing in this way, know that there will be ups and downs, but you’re on the right path. Gender-smart investing is the path of the future. And in investing, the future always wins.

This article was written by Suzanne Biegel and originlly appeared on Switch.