Why Men Get Substantially More Venture Capital than Women Entrepreneurs, and How to Change It
Over the past 20 years, there has been a 114% increase in the number of women-owned businesses. Women entrepreneurs are on the rise for sure, with more and more popping up every year. One might assume that, along with this increase, there has been a correlating increase in the number of female entrepreneurs that are getting venture capital.
While there may have very well been an increase, it is sadly disproportional. According to Crunchbase, in 2018 women entrepreneurs only got 2.2% of the $130 billion of venture capital investments in the United States.
What is promising, is that in Q1 of 2019, Crunchbase reports that 17% of venture capital investments went to businesses that had at least one female founder. Of this, 2% went to firms founded by females only while 15% went to firms with both female and male founders. This 17% represents $8.1 billion.
The increase is both significant and promising, but when you consider that 83% of venture capital investments in Q1 of 2019 still went to firms founded by men alone, you can see there is still an issue.
What is Venture Capital?
Before we can delve into the reasons behind more males getting venture capital than women entrepreneurs, it can help to remind ourselves of what venture capital is. It’s an investment. It is a group of investors taking a chance on the next big thing in an effort to gain a profit. They believe in the idea and the entrepreneur, and they are willing to go out on a limb, but not too far out.
The more perceived risk, the less likely the funds are to flow. So, do investors see more risk with women than with men? Do they see men as more stable or more capable? Maybe they just have more men asking for their money than women. Which one is it? Probably a combination of all three.
Why Don’t Women Entrepreneurs Get More Venture Capital?
There are a few reasons why women entrepreneurs are not getting the venture capital funds. Aside from the obvious gender gap that exists in virtually all of the business world because of a sexist culture in general, there are some other forces at work here. By understanding exactly what these forces are, we can better combat them. It is hard to fight an enemy that you cannot see clearly.
Lack of Women Owned Venture Capital Firms
While gender shouldn’t matter on either side of the money, studies show that is does. Female investors are more likely to invest in women entrepreneurs. Since only 9% of U.S. venture capitalists are women, this poses a problem. Seventy four percent of U.S. venture capital firms are male only. This clearly does not bode well for female owned start-ups.
Stereotypes and Approach
It seems that investors approach men with questions related to how they plan to win, allowing them to play offense. Women, on the other hand, are given questions related to how they intend to not lose. They are inadvertently put on the defensive, which lends itself to negativity.
Research has shown that, despite the numbers, even male investors invest based on feelings as much as numbers. Its much easier to feel warm and fuzzy about an offensive presentation than one that is already playing defense. Even if you are discussing ways to avoid losing, the idea of losing is still being discussed and therefore pushed to the forefront of the presentation, and then the minds of the investors.
Competence vs. Confidence
Women entrepreneurs tend to be competence focused. They meticulously go over all the numbers and present them as is. In contrast, men tend to oversell, erring on the side of confidence. They may over exaggerate a bit, in anticipation of what could and what they believe will happen, while women will not typically go so far.
It’s not that men are being untruthful. They are just selling based on more than numbers. They are selling based on their gut. There is no doubt in their minds what they can do, even if the numbers do not necessarily show it yet. Women on the other hand, are selling based only what they can prove based on numbers alone. They may have confidence and believe they can do much more than what the numbers show, but their focus on competence trumps that and causes them not to let the belief they will do better seep through.
Can Women Entrepreneurs Change the System?
Not overnight, no. Probably not even in a decade. However, much progress can be made in that amount of time. The increase in just the first quarter of 2019 shows that change is happening. There is a lot of change needed however. What can women do?
They can do what many are already doing. As more and more women are making it across the lines and successfully nabbing venture capital funds, they are reaching over the fence to help others up. They are investing in women entrepreneurs, and training them in how to find and win venture capital funds themselves. The following are just a few women led venture capital firms working to turn the tide.
Of course, it shouldn’t be that women have to go to women to get venture capital. To really change the game, all genders need to be investing in businesses despite the gender of the founder. The facts in our world, however, lead us to believe that isn’t going to happen any time soon.
Still, women can begin to level the playing field somewhat by remembering to balance confidence with competence, and playing offense even if they are thrown into the defense.
What Does this Look Like Practically?
Knowing what the issues we can control actually are, means we can swing the pendulum in our favor by making those changes. While we do not want to lie to investors, women entrepreneurs could benefit from showing more confidence in their presentations to investors.
Also, take advantage of the training offers from those who have gone before you and found success. They can show you not only how to play the confidence game, but also how to ensure you can make a smooth transition from defense to offense, despite the approach of the investors.
How Can Women Entrepreneurs Fill the Gap in the Meantime?
Fight for the venture capital funds, but if they don’t come through, or if it isn’t enough, there are plenty of other options.
These are the common go to, and they can work well, if you have good personal credit. In fact, they are maybe the best option. That is, if it is an option that you have available. At least it may be the best option in the beginning.
The options are many, from regular secured loans to unsecured loans and lines-of-credit to SBA loans.
Secured financing offers lower interest rates. In addition, personal credit quality and revenue are not the sole determining factors for approval. Collateral can cover a multitude of sins. Some accepted types of collateral include:
– Account receivables and purchase orders
– 401k, IRA, stocks, and bonds
Of course, if you’re trying to start a business, you are likely only going to have personal assets to put up for collateral, not inventory or equipment.
Generally speaking, unsecured financing is a valid option for amounts up to $150,000. You can get an approval if you have decent personal credit, and get 0% introductory rates for 6-18 months even as a startup.
The Small Business Administration
The SBA Express is an option for women entrepreneurs in the startup phase. You can get approved for a loan up to $350,000. Rates of 4.5-6.5% are standard, and generally a line-of-credit good for 7 years. No collateral is needed for up to $25,000. There is a turnaround in 36 hours.
You can also access information, help, and support with the SBA’s Women’s Business Centers.
Grants are also a potential source of funding for women entrepreneurs, and they work well when combined with venture capital funds. A couple of popular ones include:
$1,000 to a different women-owned business each month. At the end of the year, one of the monthly grant winners gets $10,000 more. See: https://ambergrantsforwomen.com/get-an-amber-grant/.
Life after the Venture
What happens after you are up and running? Regardless of whether you snagged venture capital at the beginning, you will need to finance your business going forward. It really is best to do this with business credit rather than your personal credit. Business credit, in case you didn’t know, is credit in the name of your business that is not associated with your personal FICO. It doesn’t just happen however. You have to build business credit intentionally. Here’s how.
Separate Your Business from Yourself
Distinguish yourself from your small business. This means you can help your cause by incorporating or becoming a limited liability company (LLC). This is a distinct entity from the owner. You also will need an EIN from the IRS. That is an identifying number for your business, so you do not have to use your SSN when you apply for credit.
In addition, you will need a DUNS number from DUN and Bradstreet, a dedicated business telephone number, and a profession website and email address. The phone number needs to be toll free, and the email address needs to have the same URL as the website. A free email service will not suffice in this case.
Do Business with Starter Vendors
These are vendors that will offer net terms on invoices without a credit check. If you do business with them in your business name and not your personal name, when they report these payments to the credit reporting agencies, they will be reporting in your business name. This is how you can begin to build business credit. This is vendor credit.
Work Up to Retail Credit
Once there are 5 to 8 or more vendor credit accounts reporting to at least one of the business credit reporting agencies, you can move on to retail credit. These are businesses like Office Depot and Staples.
Move on Up to Fleet Credit
Are there 8 to 10 accounts reporting? Then progress to fleet credit. These include businesses such as BP and Conoco. Use this credit to purchase fuel, and to fix, and maintain vehicles.
Take the Leap to More Universal Cash Credit
Have you been responsibly handling the credit you’ve gotten up to this point? Then move to more universal cash credit. These are companies like Visa and MasterCard.
For all of these cards, be sure you only use your SSN and birth date for identity verification. Do not include them for credit checking purposes.
What’s the Verdict? Can Women Entrepreneurs Change a Sexists System?
I think it depends on the approach taken. You can’t change the mind of every sexist male in the world. There is a slow movement toward something better however. If women continue to break into the venture capital scene on the investment side, there is a real chance. If those that have broken through continue to train those coming behind them, and more women jump into the game both in their own firms and in joining firms with males, the ball is rolling in the right direction. With the understanding that women need to increase confidence and switch to offense when cornered into defense, the future looks bright for women entrepreneurs and venture capital.
In the meantime, all businesses, whether female owned or not, need to work on building business credit. This is the key to finding continual funding throughout the life of a business.
There will always be those with a sexist mindset, but if these things can continue to happen, we can likely continue to see the large annual increases in the amount of venture capital funds women entrepreneurs receive.