Finding innovative funding

How inspiring women founders and investors are turning the tide

Shifting capital towards women’s economic empowerment

Shifting capital towards women’s economic empowerment

Blog article by Jessica Espinoza, Vice President for Private Equity & Venture Capital Investments at DEG/KfW and Chair of 2X Challenge

The way we allocate capital and invest shapes the world we live in.

If we want to change the world, we must change the way we allocate capital.

And if only two per cent of venture capital goes to women-led startups, that tells you a lot about the future we’re currently building.

SDG 5, Gender Equality, is not only an extremely important goal in and of itself, but also a catalyst to achieve all other Sustainable Development Goals (SDGs). For example, there are important synergies between gender and climate. The business case for investing in women is equally strong: companies founded by women deliver twice as much revenue per dollar invested, yet they only receive a laughable fraction of investment capital. Similarly, gender balanced leadership teams in private equity generate a 20 per cent higher net IRR, yet women hold only eight per cent of all senior positions in venture capital and private equity firms in emerging markets (10 per cent in developed markets). Although the impact and business case for gender equality is well established, at the current rate of progress, it will still take 267 years to close the economic gender gap globally, according to the World Economic Forum’s Global Gender Gap Report 2021.

At the G7 Summit in 2018, we launched the 2X Challenge as a global call to action. We made a commitment among the Development Finance Institutions (DFIs) to mobilize at least US$ 3 billion of private sector investments that empower women in emerging markets by the end of 2020. At the time it really felt like a challenge. But by embarking together on a joint investing and learning journey, we were able to accelerate change very quickly. As of end-2020, the DFIs alone had invested close to US$ 7 billion of their own capital and mobilized other investors along the way, bringing the total of 2X capital invested to US$ 11.4 billion, more than three times our initial target. At the recent G7 Summit in June we announced a new ambitious target: US$ 15 billion in 2021-2022. And we’re inviting the full spectrum of investors globally to join us in the newly launched industry body, the 2X Collaborative, to seriously move the needle on shifting capital to gender-smart companies and underrepresented entrepreneurs.

Jessica Espinoza in Bolivia
The 2X Challenge mobilizes capital for women entrepreneurs in emerging markets.
Image provided by Jessica Espinoza

What we have learned on this journey is that one of the best ways to scale the impact of our capital is to invest in funds and intermediary platforms that in turn invest in women through gender-smart businesses. A great example is Alitheia Capital, a pan-African women-led gender lens investment fund. As part of our new 2X commitment, we are developing a portfolio of 2X Flagship Funds – venture capital, private equity and debt funds with a strong commitment at all levels: at the fund manager level to promote gender diversity in the investment industry, and at the portfolio level by investing with a gender lens in gender-smart companies and underrepresented founders. We have seen exciting progress among established fund managers who are keen to join the 2X Flagship Funds league.

In spite of all of these achievements, there is still a big blind spot in the industry that requires our attention: A growing number of women in the investment industry are venturing out of established firms to launch their own funds with an innovative, entrepreneur-centric investment strategy and a firm culture that embraces diversity and inclusion. These fund managers are on fire to tackle systemic barriers and biases that have historically prevented capital from flowing to underrepresented founders. In other words, these pioneer fund managers are solving for the big challenges we all want to see solved. Ironically, during fundraising, pioneer fund managers often face the same systemic biases and barriers as underrepresented founders.

My recent PhD research among pioneer funds across Sub-Saharan Africa found that gender bias is compounded by biases based on race, ethnicity, class and (perceived) motherhood. This leads to a paradox: Diverse fund managers start their own funds to transform investment culture and change the way capital is allocated through innovative investment strategies. These strategies take an entrepreneur-centric approach to investing, intentionally tackle biases, and design capital features and value creation approaches accordingly. However, because these fund managers themselves face gender bias, they are advised by investors to rigidly adopt the traditional private equity and venture capital model – perpetuating the problem they wanted to fix in the first place. Instead of ‘fixing’ innovative strategies, we must fix the capital. Our core partners at GenderSmart have just released an insightful practitioners guide to do that.

Anna Raptis, Founder and Managing Partner at the Latin American VC firm Amplifica Capital makes a great point about the importance of founding partners: “To address the systemic bias in capital formation we need more women as founding fund managers, so that the views and values of women are part of the DNA of the fund structure and vision.”

Putting more capital into the hands of women-led fund managers is key to unlock the ripple effects of gender equality. As Adesuwa Okunbo Rhodes, Founder and Managing Partner of Aruwa Capital Management, a private equity firm in Nigeria points out: “In order to accelerate closing the significant gender gaps in society, we have to fund women as capital allocators, there is a natural trickle down to women in our portfolio as founders, consumers, board members and active participants in value chains. Female fund managers have a natural competitive advantage to invest with a gender lens and can naturally generate strong financial returns whilst advancing gender equality and contributing to social impact.”

What is 2X doing about this? We recently spearheaded a design sprint bringing together the voices and brainpower of 120+ pioneer fund managers, investors, and venture capital and private equity associations across all emerging markets to tackle this complex problem. Our aim was to co-create an innovative solution that has the user-perspective at its core and early buy-in from investors and decision-makers. The outcome is the prototype of a three-legged solution: 1) capacity building and working capital; 2) a warehousing facility for early deal-making to demonstrate track record; and 3) an investment facility that acts as an anchor at first close. We call it the 2X Pioneer Funds Accelerator Facility. Our core sprint team is now collaborating on the detailed design and, having secured the first funding commitments, we are about to kick off our fundraising process. We’re inviting the spectrum of investors to join us in this endeavor!

Jessica Espinoza
Jessica Espinoza is Vice President for Private Equity & Venture Capital Investments at DEG/KfW and Chair of the 2X Challenge, a global initiative that has mobilized over $11 billion of gender lens investments since its launch at the G7 Summit in 2018. She has extensive experience originating, structuring and executing debt, mezzanine and equity deals in emerging and frontier markets with a strong focus on inclusive innovation. Jessica serves on the Board of Directors of AlphaMundi Foundation, the Mexican financial institution Mega, and on the Advisory Board of several Private Equity & VC Funds. As a mentor for Endeavor, she supports high impact companies as they scale up. Jessica is the Founder of XOCO, an inclusive edtech venture and a fellow at Columbia eLab. She was awarded the Digital Female Leadership Award #GlobalHero 2019. Jessica is a PhD candidate at University of Siegen, researching the transformative potential of gender lens investing. Prior to joining DEG, Jessica was Member of the Management Board at ProCredit Bank Nicaragua and part of the Group Funding team at ProCredit Holding. She managed the Africa Regional Office of MicroFinance Transparency and led a flagship program to promote financial inclusion across Latin America.


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