The funding gap

Investors and female entrepreneurs

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.

People’s tendency to like people who look, and act like, or remind them of themselves is referred to as homophily. Such homophily frequently manifests itself in the venture funding world, where the overwhelming majority of investors are male (with 70% of these being white males). Indicatively, only
about 12% of decision-makers at US venture capital firms are women. Among UK VC investment teams, women hold 13% of senior roles. Female representation in emerging markets, excluding China, is only about 8%. China is a notable exception, with 15% female representation, which is above the percentage for developed countries.

VCs in general tend to be relatively homogeneous, with hires having quite similar backgrounds, such as similar educational degrees (economics, business or finance, MBAs) and work experience (investment banking, consulting, or large technology companies). Notably, among Black investors, who overall make up about 3% of VCs, over 50% attended Harvard or Stanford. In addition to a substantial gender gap, VCs suffer from a significant racial gap. Based on The Information’s VC Diversity Index, among 100 women surveyed at the 102 largest US venture capital firms, there was only one Hispanic female partner, one Native American female partner, and no African-American female partners.

There is evidence that women tend not to ask for financing as often as their male counterparts, and that they would, in general, rather ask in cases where they believe they have a high chance of approval. This in turn creates a vicious circle, as women expect the funding process to be onerous, the reality being that it frequently is, and they are faced with far greater rejection than their male counterparts. Furthermore, if women are not confident about their financial acumen, they will tend to refrain from asking. Therefore, self-perception and confidence are important parameters that affect how many women will pursue the journey of becoming entrepreneurs.

Furthermore, women typically feel less comfortable voicing their ambitions than men. As a result, it can be inferred that women are potentially more cautious in expressing their and their company’s ambitions, and therefore may lower their initial demands or expectations. Another factor that may affect investors’ perception is the motivation behind starting a company. Women, more than men, may be driven to build companies as a means of achieving greater control over their work/life balance, or after hitting a “glass ceiling” in their previous careers. Furthermore, women often set up companies with the objective of achieving positive social impact. This motivation may be viewed as less profit motivated and therefore less likely to be benefit from VC funding.

The majority of successful CEOs of start-ups are white men. Due to this representative bias, investors may perceive men to be more capable entrepreneurs, as male entrepreneurs are more similar to, and representative of, the existing pool of successful entrepreneurs. As a result, women entrepreneurs are often perceived as different and possibly less capable than their male counterparts. Therefore, investing in companies led by women may be perceived as riskier and restrict access to funding, despite otherwise similar and sometimes better risk/return profiles of ventures led by women. 

Existing gender stereotypes may also lead to biases that affect female entrepreneurs’ chances of obtaining funding. Based on wider gender role expectations, women, on average, are expected to display certain feminine behaviors, such as warmth,
emotional expressiveness and sensitivity. Similarly, men are expected to display assertiveness and dominance. Research suggests that demonstrating stereotypical feminine behavior during a pitch affects the outcome, as it negatively impacts the entrepreneur’s perceived business competence, preparedness and leadership.

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.

USD 50 million

Top female founders raise substantially less money than their male counterparts USD 50 million versus USD 226 million and achieve lower valuations for their companies USD 65.5 million versus USD 400.4 million. Moreover, 87% of top founders are on all male founding teams.

Taking action: What can be done?

In the context of obtaining VC financing, which observations could be taken that could help women navigate the pitching process more successfully?

An important consideration is, whether in an entrepreneurial context, women who do not conform to their gender-associated behavior are penalized. Some research suggests that gender role congruity may be more complex in entrepreneurship, and that there seems to be no penalty for women who display more masculine traits and therefore act inconsistently with their gender stereotype. Instead, both men and women who display more feminine stereotyped behaviors during the interview processes seem to have been penalized.

Ahead of the funding rounds, fundraisers should prepare thoroughly, search for resources through their contacts, arm themselves with as much knowledge as possible on the funding process, and optimize their way of communicating the company’s potential and responses to questions.

While individual women can try their best to manoeuvre the funding process in their favor, it would be more powerful and impactful if the entrepreneurial ecosystem played its part in narrowing the gap.

As mentioned earlier, the existence of a robust social network is a key determinant of future success. Gaining access to strong networks and networking opportunities, as well as having the chance to build relationships beyond conversations around financing is vital to the success of a venture. Formal events and networking platforms can facilitate the development of relationships and social networks that could support women entrepreneurs. 

Such support networks could help guide and motivate women who require finance to do so and help them work on delivering their ideas. Education around the financing process could potentially help reduce the bias and financing gap women often face. Equally, boosting women’s understanding of how they may be perceived, and what they can do to improve that perception, are key ingredients to success. Relevant know-how and tips can be shared within a network even more effectively so via formal events and mentorships. Last but not least, on the evidence presented, investors would benefit greatly from reviewing and debiasing their decision making processes, for example, by ensuring that they ask an equal amount of ‘growth’ compared with ‘prevention’
questions to all founders, irrespective of their gender, or through evaluating pitch decks through “blindfold” processes. In addition, it is useful to provide constructive, actionable feedback to founders.

Traditionally, venture capitalists have calculated that about two in 10 investments will generate most of a fund’s profits. If a fund hopes to achieve a 20% return, then those two in 10 winning investments must generate or return between 20-30 times the money invested into them. Investors in these companies eventually require an exit, to allow for monetization, either via an IPO or through a trade sale. Not all target companies fit this accelerated growth path. VC funding is appropriate for certain, but not all companies, as many of these do not fit this specific high-growth profile.

It is therefore worthwhile looking at how women founders and leaders of SMEs grow their companies. Research suggests that female founders often start their ventures with less capital and seek small and/or alternative sources of funding, which often comes at a greater cost.

They usually rely more heavily on family financing, which hurts those who come from low-income backgrounds. But even in cases where financing is obtained from family and friends, women face greater scrutiny than men. This also highlights that gender biases appear as well within family and friends’ circles. Raising traditional debt financing for start-ups is often challenging, given these typically neither have a previous track record, generate steady cashflow, nor own adequate collateral. Nevertheless, on occasion, advance customer cash payments can provide the necessary liquidity for growth and debt financing.
A further option sometimes used by start-ups is to monetize the value of the receivables from their customers, thereby allowing them to generate incremental liquidity. These alternative sources of funding have historically proven successful for entrepreneurs who choose to build their business
slowly and steadily.

Crowdfunding is another alternative source of funding that shows potential. Research indicates that women have better access to crowdfunding because they are viewed as more trustworthy than men. Furthermore, women investors seem to support and prefer women-led projects in an effort to support
their fellow entrepreneurs who face similar challenges.

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.