Gender gap still a big issue for start-ups

Women-owned firms represent an important segment of the business sector. According to the most recent estimates from the U.S. Census Bureau, there are approximately 9 million women-owned privately held firms in the U.S., employing about 7.8 million people and representing $1.4 trillion in sales. Despite the key role this sector plays in the U.S. economy, female entrepreneurs still need to close a wide gender gap that is inhibiting revenue growth.

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In fact, women account for about one third of all types of businesses in the U.S. Among employer firms, however, they represent just 16 percent of the total. Even more startling, their share of revenues and employees are in the single digits. Among high-growth firms, women usually account for less than 10 percent of founders

Research continually finds that women-owned entrepreneurs raise smaller amounts of capital than men to finance their firms, and are more reliant on personal rather than external sources of financing. Within the context of growth-oriented entrepreneurship, this distinction is important because growth-oriented firms typically require substantial amounts of external capital in the form of both debt and equity. If women entrepreneurs do not seek, or if they are not able to obtain, external capital, their prospects for growing their firms are diminished considerably.

What might be contributing to the low percentage of women represented among high-growth companies and the investors who back them? Some researchers attribute it to harder access to human resources and capital.

In a report released today that I coauthored, "Sources of Economic Hope: Women's Entrepreneurship," we investigated these issues in detail in a survey— conducted by Vivek Wadhwa and with the support of Women 2.0—of women founders, presidents, CTOs and technologists of start-ups founded between 2002 and 2012. One interesting thing to note about these responses is that a surprisingly low percentage of women cited a role model as their motivation for entering entrepreneurship.

Women entrepreneurs who have successfully grown their firms can also have an impact by serving as role models and mentors for other women contemplating entrepreneurship or attempting to launch their businesses. Mentorship is important for successful entrepreneurs and, while the sample in this report was limited, this finding could potentially indicate one reason behind the low share of women in growth entrepreneurship.

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In terms of challenges respondents faced with their business ventures, 72 percent cited a lack of availability of financial capital, and 48 percent cited a lack of available mentors or advisors. Lack of accessibility to financial capital was cited by nearly 31 percent as extremely challenging and cited by nearly 18 percent as a big challenge. Almost a quarter said it was somewhat of a challenge, while 15 percent said it was a small challenge. Only 7.6 percent said it was not a challenge at all.

In terms of sources of funds used by the businesses in this paper's survey, about 31 percent used angel investors, while about half that (14 percent) had venture capital financing. This clearly is not representative of businesses more generally, nor of high-tech firms specifically. A much higher percentage of these respondents rely on outside equity financing than firms more generally. Thus, it is interesting to note that such a high fraction of these respondents also cited the issue of financial capital as a critical challenge to launching their firms. Nearly one-third of the firms in the sample were currently trying to raise funds.

A sneak peak at a recent survey in the first quarter of 2014 of Inc. 500|5000 firms showed just how different financing strategies are for female founders and male founders of these high-growth firms. Male founders were more than three times as likely as female founders to access equity financing through angels or VCs (14.4 percent vs. 3.6 percent). Men were also more likely than women to tap networks of close friends (9.2 percent vs.1.8 percent), and business acquaintances (13.5 percent vs. 5.4 percent). More than half of each demographic (51.3 percent of men and 55.4 percent of women) used bank financing as a source of capital for their Inc. 5000 firm.

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These discrepancies, which actually widen at the higher end of the firm size spectrum, have implications for the growth trajectories of firms and appear to be one driver of the relatively smaller sizes of women-owned firms.

Encouraging more women to participate on the financing and investing side is definitely an avenue worth pursuing. Women areunderrepresented on the investor side as well. They make up about 20 percent ofangel investors, and just 6 percent of partners in venture capital firms.

A growing number of angel groups that specialize in funding women-owned ventures, such as Golden Seeds, Astia Angels, and the Pipeline Fellowship, are preparing women to become investors in this space. More is needed to overcome the gender imbalance on the funding side.

The good news is, progress has been made over the past 10 years in both the percentage of angel investors that are women, as well as the percentage of firms getting angel financing that are women-owned. Women entrepreneurs are now 20 percent of angel-funded companies, and women investors represent 19 percent of all angel investors, up from about 5 percent for each in 2004. That is progress.

Since 2005, Golden Seeds has invested more than $70 million in 64 companies. More than 2,400 companies have applied to Golden Seeds for funding. All companies are evaluated, and many proceed through due diligence and receive extensive guidance from the Golden Seeds investors, even if they don't end up getting funding through the group.

According to Loretta McCarthy, co-founder of Golden Seeds, many of the women investors (80 percent of Golden Seeds members) come from Wall Street. And while quite a few of the men (20 percent of members) come from Wall Street as well, they are more likely than the women to be former entrepreneurs. She believes the phenomenon of successful female entrepreneurs becoming involved in equity investing is the future.

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"These female investors can provide mentorship to women entrepreneurs," she said. "It is clear that women want an environment that works for them, and women are willing to step up to support them."

There is a need for more women role models in business. Never have we seen so many women in Congress in positions of power, such as the Secretary of State and Federal Reserve Chair. And in the private sector such as Mary Barra, the CEO of General Motors, and Marissa Mayer, the CEO of Yahoo. We now have women in these roles, and girls across the country are saying, "I can aspire to that."

We need to make sure we publicize and highlight the successes of female entrepreneurs as well—Arianna Huffington, Martha Stewart and Oprah Winfrey, to name a few. They are out there, and they are increasing in numbers.

—By Alicia M. Robb, Ph.D., special to Robb is a senior fellow of the Ewing Marion Kauffman Foundation.