Author
Elissa Markowitz
Reviewer
René Kladzyk
Although many gains have been made for gender equality in the past 50 years, the economics of business financing reveal just how unequal things still are. Women-led companies tend to generate higher returns on investment, yet women receive a small fraction of funding compared to their male counterparts. In 2021, women received just 2.4% of venture capital (VC) funding in the United States. For women of color, the statistics are even more horrifying; only 0.34% of U.S. VC funding in 2021 went to companies founded by Black women, even though there has been an over 150% increase in businesses with Black women founders since 2007.
The conversation surrounding investing in women has largely centered around equity—how diverse founding teams are important, and variance among lived experience cultivates new ideas. While that is absolutely true, solely focusing on equity misses a key component in incentivizing investors to fund women entrepreneurs: investing in women will make them more money.
Women Entrepreneurs Generate Higher Return On Investment
Investors see two times the return per dollar invested in women-founded startups when compared to companies founded by men. According to a 2018 survey of over 350 startups, VCs could have made an additional $85 million over five years had they invested equally in women- and men-founded startups. Not only do women founders tend to return greater profits per dollar invested, but their companies also perform better over time. Companies founded or co-founded by a woman were reported to generate 10% more revenue over a five-year period. Additionally, the number of women-owned businesses is growing: between 2007 and 2018, the number of women-owned firms increased by 58%. During that same time period, women-owned companies saw a 46% increase in revenue. Investing in companies led by women is a bet that will pay off in the long haul, across stages and sectors. This strong growth in revenue, coupled with the sheer increase in the number of women-led firms, demonstrates both opportunity and incentive to invest in companies with women on the founding team. Investing in women—and especially Black and Latinx women founders—may be the most profitable venture of all.
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The Financing Gap
The lack of funding for women entrepreneurs is just one component of a larger problem. When women do manage to secure funding, on average they raise less than men. Even when female founders get over the hurdle of securing funding, they are still at a disadvantage when it comes to capital allocation. In the U.S., for every $1 that men raise in venture capital funding, women raise $0.38 and even more abysmal—Black women raise $0.02. The vast difference in capital allocation can be attributed to numerous factors, some of which are clear biases from decisionmakers. Perhaps the most obvious place to start is to look at who exactly is deciding where the capital goes and how they’re making those decisions.
Less Than 5% of Partners at VCs are Women
Between 2015 and 2020, the number of women-led VC firms has nearly quadrupled. However, despite this remarkable progress, only 5.6% of VC funds in the United States are women-led, and only 4.9% of partners are women. Among them, the large majority are white; only 0.2% of VC partners are Latinx women and 0.2% are Black women. The obvious lack of diversity along both gender and racial lines has clear ramifications down to the founder-level, impacting who gets capital and how much they get. Investors who are women are twice as likely to fund other women founders and three times as likely to invest in women CEOs. Venture capital firms that increased their proportion of women partners by 10% saw nearly 10% more revenue for investors upon exiting the company (meaning, investors saw a positive return on their initial investment in the company).
Questions asked in pitches vary along gendered lines
The types of questions entrepreneurs get asked in pitch meetings directly impact how much money they raise, and these questions often vary significantly along gender lines. Seemingly benign questions have outsized impact. Women are more likely to be asked technical questions from potential investors than men. Additionally, men tend to make bolder claims and larger projections when pitching.
According to a 2017 study analyzing correspondences between 140 venture capitalists and 189 entrepreneurs, there was a remarkable differentiation between questions asked of men versus women founding teams. For companies founded by men, VCs focused on promotion oriented questions, whereas for women founders, VCs focused on prevention oriented questions. For example, when discussing market size, a question geared toward promotion such as, “Do you think that your target market is a growing one?” garnered a different response when compared to a prevention-oriented question like, “Is it a defensible business wherein other people can’t come into the space and take share? The questions founders receive in pitch meetings have clear ramifications on capital raised; the study found that entrepreneurs who answered mostly prevention oriented questions raised seven times less ($2.3 million) than those who fielded promotion oriented questions ($16.8 million).
Underfunding Women Entrepreneurs Limits Innovation and Output
Not surprisingly, men making investment decisions are often unfamiliar with the markets and products that women pitch. Women are more likely to develop companies and products based on personal experiences specific to women, of which men often cannot relate. The financing gap for women entrepreneurs across the globe is estimated at $300 billion. These gender finance gaps have macro consequences, affecting our gross domestic product (GDP). According to the International Labor Organization, a 25% reduction in the labor-participation gap in the U.S. would increase our GDP by 2%. Closing the gap completely would increase the GDP by 5%, as estimated by the International Monetary Fund. The numbers speak for themselves. Investing in women creates economic opportunity for individual investors, funds, and the U.S. economy at large.
