Why the Female Founders Fund isn’t betting big on AI

When the Female Founders Fund (FFF), a seed stage venture fund that invests exclusively in female-founded companies, was started in 2014, just 2% of venture capital dollars went towards women-led companies. That number hit a record high last year, with 22.8% of all VC money going to startups with at least one woman cofounder. We sat down with Anu Duggal, a founding partner of FFF at her firm’s annual gathering to learn about the current funding drought, deciding not to invest in AI, and whether things have gotten better for female founders. Read the conversation below or listen to this episode of Most Innovative Companies.

The Female Founders Fund just celebrated its 10th anniversary. Have things improved for female founders in that time?

There are a couple of different ways to answer that question. When I first started fundraising for fund one, we were at a point in time when you really had no female role models. It took us 700-plus meetings to raise $5.85 million. And I think a lot of that was due to the fact that we just didn’t have people that I could point to as stories of success. At a high level, you’ve seen that shift pretty significantly. So that’s one way. The second would be that we track Series A rounds in New York and San Francisco every year since 2013. In New York in 2013, there was one series A round led by a female founder. That was Shan Lyn Ma from Zola. Last year, there were 23 series A rounds led by female founders. [Between 2013 and 2021], there were less than 20 companies that were started by women that went public in the United States– in 2021 alone there were 7. So we’re starting to see real change.

Have you been following what’s going on with the Fearless Fund? The Black-owned venture capitalist firm was targeted by conservatives and blocked from awarding grants exclusively to Black women entrepreneurs.

We haven’t faced that directly. With Fearless Fund, [the activism] was more focused on a grant program that they had started. We’re aware of what’s happening, but we haven’t directly been impacted at all. There are so many other things to be concerned about that this is not top of mind. I’m looking at the macro environment, how that’s impacting our portfolio companies, and looking at our fundraising, which has been incredibly challenging just given market dynamics.

You’ve mentioned that we’re in a funding drought. How has that impacted your fund?

Typically when you are going through a recession or a recessionary period, it’s felt by everyone. In 2008, during the banking crisis, everyone knew that we were in that. What’s challenging here is that [the drought is] very specific to tech and venture. That’s due to a couple of reasons. The first is that interest rates are [high]. The second reason is that the IPO market has been frozen for an extended number of years now, which means that [investors] don’t have liquidity. Because of that, LPs are not investing in funds and growth investors are being incredibly cautious. They’re looking at their own investments and they’re saying, these companies are probably not valued at what we paid two years ago. So they’re not willing to move forward and put more capital into other companies because they’re just trying to manage their existing portfolio. That’s challenging because you now have not just six months or 12 months, but 18 months of a market that’s just frozen—that means you don’t have exits. There are many private unicorns that have not, and will not, go public.

So what does that mean for the Female Founders Fund?

It’s incredibly difficult to raise a growth round, and that means that founders have had to be much more disciplined and figure out ways to survive. We’re also seeing companies shut down. We have a company with 30 million in revenue; their debt financing got pulled, and it’s just over. These founders have spent eight to 10 years on a business, but because of these macro conditions, they are in the position that they’re in. And from a fundraising perspective, people are just not writing checks. If you’re a large multistage fund and you raise $2 billion instead of $20 billion, you can still survive and keep your team. When you’re a small fund though, that becomes more challenging.

It’s been a particularly difficult stretch for companies that make consumer-facing goods and products—especially DTC brands. Are you still investing in them?

Ten years back, DTC was what everyone in New York was looking at. But those companies that have gone public are trading at less than what they’ve raised. There’s still opportunity within the consumer, beauty, and personal care sectors because you have a very acquisitive base of corporate companies looking to acquire companies where repeat rates and margins are high.

These days everyone seems to be investing in AI. Are you?

I take the contrarian approach. I think a lot of money is going to be lost in AI. And I think there’s a lot of wraparound solutions that won’t be relevant when the next iteration of ChatGPT is released.

Can you give me an example?

I’m not going to name any companies, but look at the travel space, for example. A founder might say, We’re going to create a great tool that enables you to plan a trip. That’s going to be obsolete pretty soon. I don’t think you’re going to have multiple-point solutions for an AI experience. I think that the large players will win.

When you’re deciding whether to invest in a company, which do you care about more, the founder or the business model?

At the seed stage, we lean more heavily towards the founder. It’s important to recognize the total addressable market, the product, and the market opportunity, but you’re betting on people at the end of the day. We invested in Kate Ryder from Maven Clinic [a virtual clinic for women and families]. Prior to founding it, she had never worked in healthcare. The bet was very much on her.