The funding gap

Investors and female entrepreneurs

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Female entrepreneurs, globally, receive less funding than their male counterparts.

This reality is even more pronounced for women of color and those in developing countries, and comes at a great cost to gender parity efforts. As a result of this funding discrepancy, female entrepreneurs lack equal opportunities to innovate and build successful companies that can contribute to the global economy. Furthermore, there is an abundance of evidence to suggest that women entrepreneurs, who receive funding, develop businesses that perform as well, or even better, than their male counterparts, which suggests investors are missing out on attractive investment opportunities.

Why does this matter?

How funding affects the success of a start-up

Funding helps companies to take shape and become operational. It enables the founder of the company to fine-tune their business plans, hire talent, build a sales force and fund working capital. Funding is needed at different stages of a start-up in order to meet varying liquidity and investment needs during a business’s development.

Discrepancies in funding affect a business start-up’s likelihood of success and its potential for future growth. Greater access to resources/funding provides an advantage versus one’s competitors, particularly in the high growth VC funded space.

Without financial backing, start-ups are deprived of the means to grow, and their ability to innovate and capture market share is jeopardized. Based on a recent study of start-ups participating in accelerators two years after raising capital, funded companies achieved 30% more growth in revenue and 50% more growth in numbers of employees than those that didn’t get access to external funding.

 

Why should we be interested in this discrepancy?


Understanding why

The funding discrepancy cannot be attributed to differences in content or competence of founders. According to research, even when women and men presented and pitched with comparable content, investors preferred the male-led start-ups. This preference is even more pronounced for attractive males, whereas physical attractiveness did not affect the chances of female entrepreneurs receiving funding.

What could be behind this preference shown to male-led start-ups? What are investors typically looking for? In the case of VC funding, the answer is high earnings potential through aggressive growth, by taking advantage of a market opportunity at the right time. To evaluate the likelihood of success, particularly in the early stages of a start-up, investors have to elicit information, and decide on the basis of a short interview and pitching process. As a result, they rely heavily on gut feeling and the impression made during the short interview. This leaves plenty of room for biases to creep into the decisionmaking process.

USD 2.5-5 trillion

If women and men were to participate equally as entrepreneurs, global GDP could rise by 3-6%, boosting the world economy by USD 2.5-5 trillion.


Taking action: What can be done?


Key takeaways

  • Tackling the funding gap should not be seen as just a moral obligation, but also as a great untapped opportunity for investors and a potential boost for the economy. Every effort should be made to eliminate the bias that exists.
  • As a first step, a greater awareness of the funding gap needs to be established,
    and the shortcomings and opportunity costs involved need to be made clear. In this context, greater transparency around the funding gap is a key first step toward resolving the problem.
  • The next step is to identify and share remedies as to how this gap can be reduced, such as by better understanding the underlying reasons for its existence, and taking action to eliminate bias and level the playing field. Tackling the bias that exists during the VC funding process and encouraging VCs to hire more women investors seems key.
  • Because of differing degrees of access to networks, which is a key determinant of success in the funding process, it is also important to foster relationships between female entrepreneurs and investors, as well as other important stakeholders.
  • Media coverage plays an important role in showcasing successful business ventures, in particular when female entrepreneurs are able to inspire other women to embark on the entrepreneurial journey, and who help these women believe in their potential, while also helping to reduce the perceived association of entrepreneurship as a male-dominated activity.
  • Finally, all of us can reflect on how our conscious and unconscious bias propagates itself, and by recognizing our own failings, we can go some way to righting the wrongs and better support women in their entrepreneurial journey.

Investors and female entrepreneurs

This results in a lack of equal opportunities to innovate and build successful companies. We look in this report from our Chief Investment Office at the reasons behind this and illustrate how to narrow the funding gap.