Why do women-owned businesses still struggle to get funding?

According to the American Express 2019 State of Women-Owned Businesses Report, businesses owned by women have grown by 21% since 2014, while all businesses increased by only 9%.

However, a study by Crunchbase found that only 2.3% of venture capital funding went to women-led startups in 2020. This number fell from 2.8% of funding in 2019.

In terms of dollars, their study showed that female-founded companies received $4.9 billion in funding in 2020, which is a 27% decrease from 2019.

If women-owned businesses are growing so rapidly, why do they still struggle to obtain VC funding?

The pandemic’s affect on women in business

One reason, theorized by Harvard Business Review, is that women in the workplace have been disproportionately affected by the pandemic. A study by McKinsey found that one in four women have considered leaving the workforce or downshifting their careers during the pandemic, compared to one in five men.

This statistic affected three major groups the most: working mothers, Black women, and women in senior management positions. Women’s roles were also found to be almost twice as likely to be laid off due to the pandemic. 

If no changes are made and this impact is not addressed, McKinsey expects that the global GDP in 2030 will be $1 trillion below where it would be if COVID-19 affected both men and women equally.

Gender bias among investors

Another reason for lack of funding may be due to a bias among venture capitalists. A survey by HSBC Private Banking found that globally, more than a third of female entrepreneurs experienced gender bias when pitching investors.

It found that British and American women encountered this the most, with 54% and 46% reporting having faced bias while raising capital, respectively. 

They reported that this bias often came with questions about their personal life, rather than their business idea, such as family circumstances and the women’s credibility as a business leader.

Other underlying biases among investors consist of what a founder’s ideal previous academic achievement, business experience, and technical expertise should look like.

Lack of women in investment roles

2019 research by the Innovation Finance Advisory for The European Commission discovering sobering statistics about women in the VC industry. 

Four out of five venture capital firms have never employed a woman into a senior investment role, and just 10% of new hires are women. Less than 9% of venture capitalists are women.

Another gap in the VC industry is the lack of equity owned by women, even if they are on the founding team for a company. Although women make up 35% of equity-holding employees in Silicon Valley, they own only 20% of the equity. Even worse, female founders make up 13% of start-up founders, but have only 6% of founder equity.

This gap of women in charge of investment decisions drive a significant portion of the funding gap. Investors are most likely to invest in people that look and act like them – which are most often male-founded and managed companies.

If we need more funding for female entrepreneurs, more women need to be making investment decisions – VC firms with female partners are more than twice as likely to invest in women-led businesses.

Higher risk-aversion among female entrepreneurs

According to the same study by the Innovation Finance Advisory, interviews show that some women have higher risk aversion and are less likely to pursue external funding. 

At the start of a new business, it seems that some women prefer to self-fund, even if they’re aware of the opportunity to obtain external financing. There can be many reasons for this, including the belief that they won’t be able to obtain funding. Women might want to maintain control of their own companies and focus on building a profitable, sustainable, and responsible business.

In conclusion

Although women-owned enterprises are growing at a rapid pace in recent years, lack of funding continues to be a common challenge, with less VC funding going to female entrepreneurs in 2020. While this is a complex and multi-faceted dilemma, it’s important for funding to be more readily available for women going forward to help propel their businesses and the economy.

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