Why do start-ups led by women get lower funding as compared to those led by men?

Women underrepresentation in the political and business scenario is a mystery given the fact that men and women have almost equal representation at the population level. Even in the start-up space, we see similar trends (Thurik & Verheul, 1996). One of the major reasons that women are said to get lower funding is because of the lower participation of women in this arena. According to an Economic Times article (Contributors, 2020), women are known to have a lower risk-taking ability and higher humility levels that affect their engagement in the cut-throat entrepreneurship space. Various other barriers challenge the entry of women to this space, like the social structure, financial barrier, and pushback from their male counterparts. The financial barrier was analyzed by BCG (Abouzahr, Krentz, Harthorne, & Taplett, 2020) which said that even though start-ups founded by women generated higher revenues as compared to those started by men, yet the investment gap was considerable (nearly $1 million per founder). ?This analysis took into consideration the education and the quality of pitches of the founders, and it was statistically significant that the investment gap was solely due to the gender factor.

Start-ups usually start with the founders' own saved-up capital. According to a study done by the Center for Global Development (Buvinic & Jaluka, 2018), women have a higher propensity to save as compared to men. This would result in more women trying to keep the start-up functional using saved-up capital as compared to debt capital. This affects the size of the start-up resulting in a lower interest by the investors, but at the same time, some investors view higher confidence of the founder in the start-up if the founder has personal stakes in the game. The risk-averse nature of women (ENSR, 1996) could also affect the size of the start-up resulting in a lower interest of the financiers. Many pieces of research also suggest that men have higher access to financing as compared to females just because of the social structure. The research done by Verheul and Thurik (Thurik & Verheul, 1996) mentions multiple aspects because of which females would get lower financing as compared to males. The major factors are education, networking opportunities, sector of choice, size of the firm, and characteristics of the gender. Men usually have a higher tendency towards perseverance as compared to women. Moreover, women in general value their tendencies for these aspects lower than men resulting in a lack of confidence and negative self-perception.

Few of the other reasons that this is prevalent in the entrepreneurial field is that women founders are asked different questions as compared to men. Men are judged based on forward-looking characteristics like goals, growth potential, etc., whereas women are judges based on retrospective analysis. The nature of these questions would severely affect the funding opportunities in both cases since the second set of questions might raise a negative and prohibitive perception in the minds of the investors. An HBR research (Tinkler, Whittington, Ku, & Davies, 2015) found out that while looking at similar companies’ entrepreneurs who were faced with promotion-type of questions raised 7x the amount as compared to the other set of questions. The education factor also kicks in here, since women are seen as less technical as compared to men, investors are skeptical about the capabilities of the founder. At the same time, men without technical capabilities are seen as changemakers, someone who would sail through or “manage” when any difficulty is faced. One other reason that was attributed to such behavior is the lack of presence of women in the VC space. Only 10% of the decision-makers in this space are women, and more surprisingly, 74% of the VC firms in the US do not have a woman on board at all (Huang, 2020). Hence, we come to the same problem that we started with, lower representation of women in the business field.?According to research by Harvard (Raina, 2016) into the gender gap in start-up success, it was found that women-led VC firms were better able to improve the success rates of women-led start-ups. It is a proven fact that the type of VC financing impacts the performance of a start-up. The performance of female-led start-ups was considerably lower than that of male-led start-ups unless they were funded by a VC with a female presence. So, if we want to improve the funding of women-led start-ups, then we need not only to improve the female presence in the VC space. This results in bringing about structural changes globally, and the question remains if national parliaments were not able to do it, then how will companies be able to do this?

References:

Abouzahr, K., Krentz, M., Harthorne, J., & Taplett, F. (2020, July 31). Why Women-Owned Start-ups Are a Better Bet. Retrieved November 24, 2020, from https://www.bcg.com/en-us/publications/2018/why-women-owned-startups-are-better-bet

Buvinic, M., & Jaluka, T. (2018, March). MINDFUL SAVING. Retrieved November 24, 2020, from https://www.cgdev.org/sites/default/files/mindful-saving-exploring-power-savings-women.pdf

Contributors, E. (2020, March 06). Why women are less likely to start new ventures than men. Retrieved November 24, 2020, from https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/why-women-are-less-likely-to-start-new-ventures-than-men/articleshow/74503787.cms

ENSR, E. (1996). ENSR - EUROPEAN NETWORK FOR SME RESEARCH. Retrieved November 24, 2020, from https://ec.europa.eu/docsroom/documents/3122/attachments/1/translations/en/renditions/native

Huang, L. (2020, August 31). Why women get less funding: Exploring the gender gap in venture capital investing. Retrieved November 24, 2020, from https://carta.com/blog/why-women-get-less-funding/

Raina, S. (2016, July 19). Research: The Gender Gap in Startup Success Disappears When Women Fund Women. Retrieved November 24, 2020, from https://hbr.org/2016/07/research-the-gender-gap-in-startup-success-disappears-when-women-fund-women

Thurik, A., & Verheul, I. (1996, January 01). Start-Up Capital: “Does Gender Matter?” Retrieved November 24, 2020, from https://link.springer.com/article/10.1023/A:1011178629240

Tinkler, J., Whittington, K., Ku, M., & Davies, A. (2015). Gender and venture capital decision-making: The effects of technical background and social capital on entrepreneurial evaluations. Retrieved November 24, 2020, from https://gap.hks.harvard.edu/gender-and-venture-capital-decision-making-effects%E2%80%A8-technical-background-and-social-capital