It is common knowledge that women often face gender discrimination at work and who hasn’t heard of the infamous gender pay gap. Women still earn 79 cents for every dollar their male counterparts earn. What’s less known is that gender discrimination also pervades the world of entrepreneurship. Female entrepreneurs often face discrimination and injustices that impact their businesses and their profitability. Studies have shown that male and female owned businesses have major differences when it comes to funding, market entry, and profitability. And what’s even less known is the gender investment gap. Despite giving better results on investment, companies founded by women do not receive similar financial support from investors as those founded by men. 

According to Harvard Business Review the gender based gap in venture capital funding in the US is huge. Despite owning 38% of the businesses, women entrepreneurs receive only 2% of venture funding. PitchBook Data revealed that women led businesses received only 4.4% of venture capital deals, making only 2% of all capital invested. Investors hesitate in funding women owned startups perceiving them to be risky even though research proves that gender does not impact the risk of failure for a business. A comparative study (Miles, 2013) about gender influences on entrepreneurial risk patterns proved that female owned business enterprises were no more risky investments or likely to fail as compared to male owned businesses. 

Statistics on women owned businesses

Before we look at the gender based investment gap let’s take a look at some interesting figures on businesses run by women in the United States.

• There are 12.3 million women-owned businesses in the United States making up 40% of all businesses, 
• Women owned businesses generate $1.8 trillion annually making up 4.3% of total private sector revenue.
• Women owned businesses employ 9.2 million people which is 8% of the total private workforce.
• 62% of women entrepreneurs depend on their business as their primary source of income.
• There are 114% more women entrepreneurs than there were 20 years ago. 
• Just 25% of women seek financing for their businesses compared to 34% of men.
• Private tech companies led by women achieve 35% higher ROI.
• Women-founded companies in First Round Capital’s portfolio outperformed companies founded by men by 63%.
• 88% of women-owned businesses generate less than $100,000 in revenue. 
• 1.7% of women-owned businesses generated more than $1 million in revenue, an increase of 46% over the past 11 years. 
• Female entrepreneurs ask for about $35,000 less funding than men.
• Overall, men receive an average loan size of $43,916 while women receive an average loan size of $38,942 – almost $5,000 less.

A clear gender gap in startup funding

A study conducted by Boston Consulting Group(BCG) with Mass Challenger (Abouzahr, Taplett, Krentz, & Hartorne, 2018) revealed that when women business owners apply for investment to gain early-stage capital, they get significantly lower funding than men, the difference averaging more than a million dollars. Yet businesses founded by women ultimately generate more than twice as much revenue for each dollar invested as compared to businesses founded by men, making them an overall better investment opportunity. 

The study analyzed five years’ data on investment and revenue and revealed the following key results which point to a clear gap in funding for women and men. Women owned startups received an average funding of $935,000 which was less than half of the average funding of $2.1 million received by startups led by men. At the same time startups founded by women fared better over time generating average revenue of $730,000 which is 10% more than the $662,000 generated by exclusively male founded startups. For every dollar of investment, women-founded startups raised 78 cents versus 31 cents generated by male-founded businesses. The results are statistically significant and the researchers ruled out other factors affecting funding such as levels of education and pitch quality. 

Reasons behind the funding disparity

The BCG and Mass Challenger study interviewed women startup founders and investors to understand the causes behind the gender based gap in investment. Three main reasons emerged.

1. Women and their business ideas face greater pushback from investors. Investors often presume that women founders do not have sufficient technical knowledge on managing a business. 
2. When men pitch their business ideas they tend to be more audacious in their projections, and often “overpitch” and “oversell”. In contrast women tend to be more conservative and often ask for less. 
3. A majority (92%) of investors in the US are men and they are not often familiar with the products and services that women-led startups offer, targeting other women customers. Women entrepreneurs struggle to convince male investors of the need and potential for their businesses particularly in the realm of childcare and beauty. 

The questions investors ask and funding implications

It is generally hoped that as more women become venture capitalists, the investment gap would shrink. However, the funding gap has only expanded despite an increase in the number of female venture capitalists in recent years. A study published in Harvard Business Review (Kanze, Huang, Conley, & Higgins, 2017) found a link between the type of questions venture capitalists ask male and female entrepreneurs and the funding they receive. The researchers studied Q&A interactions between venture capitalist and startup entrepreneurs and found that venture capitalists asked men and women different types of questions. Men were mostly (67%) asked questions about the potential for gains while women were mostly (66%) asked about potential for loss. The startups being of comparable quality and funding needs, the startups led by women received five times less funding than those led by men.

The regulatory focus theory explains the difference in questioning. Men were asked promotion oriented questions which focus on ideals and hopes while women were asked prevention oriented questions which focus on safety and vigilance. The difference in questions has significant consequences for funding. Entrepreneurs who were asked mainly prevention questions received 7 times less investment than those who were asked mainly promotion questions. For each prevention question the entrepreneur received $3.8 million less funding. The relationship between questions and investment gap was proved to be causal and the bias in questions was similar in both male and female venture capitalists.

Figure: The differences between promotion versus prevention oriented questions

Implications & recommendations 

Kanz et al. (2017) found that when entrepreneurs answer prevention questions with promotion oriented responses, they were able to raise $7.9 million compared to $563,000 raised by those who answered prevention questions with prevention answers. The researchers suggest that women entrepreneurs can fare better by framing their answers in a growth oriented more positive manner. Similarly, being mindful of this bias can help investors be fair in their interactions with entrepreneurs. 

Recommendations

Abouzahr et al. (2018) gave recommendations for three main stakeholder groups. 

Investors

• Understand the existing structural biases built into funding decisions that favour exaggerated pitches.
• Avoid the affinity bias by :
  • consulting with customers
  • Increasing the number of women in leadership positions
• Recognize that women-owned companies are better opportunity for investment typically making more revenue

Accelerators

• Ensure a balanced set of applicants:
  • Partner with local community organizations
  • Seek applicants in unconventional places
• Ensure sufficient number of women mentors and coaches
• Advocate for female founded startups and female friendly investors

Women Founders

• Ask for bigger investments, ask more frequently, and avoid underselling
• Understand the investor ecosystem. Know which VC are female friendly or are led by women and target those with your investment pitch

References

Abouzahr, K., Taplett, F. B., Krentz, M., & Harthorne, J. (2018). Why Women-Owned Startups Are a Better Bet. BBG The Boston Consulting Group.

Kanze, D., Huang, L., Conley, M. A., & Higgins, E. T. (2017). Male and female entrepreneurs get asked different questions by VCs–and it affects how much funding they get. Harvard Business Review, 27.

Miles, D. A. (2014). Racial differences in economic behavior patterns and market performance in business ventures: A comparative study of black-owned and white-owned business enterprises. Journal of Applied Economics and Business, 2(2), 51-80.

WBENC. Behind the Numbers: The State of Women-Owned Businesses in 2018. Retrieved from https://www.wbenc.org/blog-posts/2018/10/10/behind-the-numbers-the-state-of-women-owned-businesses-in-2018 

American Express. (2018). State of Women-Owned Business Report. Retreived from https://about.americanexpress.com/files/doc_library/file/2018-state-of-women-owned-businesses-report.pdf

The Megaphone of Main Street: Women’s Entrepreneurship, Spring 2018. Retrieved from https://www.score.org/resource/megaphone-main-street-women-entrepreneurs