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2018 State of Entrepreneurship Report

October 7, 2018

 

 

★ Summary of Findings ★

 

In order to create lasting impact through entrepreneurship, women must do more than merely start businesses. They must increase revenue and add employees. Lack of access to funding, however, places significant limits on growth. The disparity in funding between male and female entrepreneurs occurs due to lack of female investors, and biased questioning from both male and female investors, resulting in women entrepreneurs asking for less funds. According to Harvard Business Review, when women-led companies are funded, there is often a higher return on investment. In conclusion, (1) more women should invest, (2) all investors should eliminate bias when interviewing entrepreneurs, and (3) female founders should think big and ask for more funds, as discussed below.

 

INTRODUCTION

 

In order to help women entrepreneurs thrive rather than merely survive, Parazim delivers this report today. The information herein is based on data from the 7th Annual Report on the State of Women-Owned Businesses in the U.S. and examines the period between 1997 and 2017. In good news, entrepreneurship among women has been on the rise for two decades.

 

I.          SECTORS

 

Half of all women owned businesses fit into 3 sectors:

  • professional, scientific, and tech services such as lawyers, accountants, architects, and management consultants/12%

  • health care, social assistance, and childcare/15%

  • other services such as hair, nails, and pets/23%

       

II.        INDUSTRY GROWTH

 

Growth Rate increased the most for these three industries:

  •  construction/15%

  • arts, entertainment, and recreation/12%

  • other services/12%

Industries that average the highest revenue, however, attract few women entrepreneurs:

  • management consulting/.02% 

  • mining/.2%

  • manufacturing/1.2%

  • wholesale trade/1.4%

 

III.       ECONOMIC CLOUT

 

  • Economic clout, or growth in (a) number of firms and (b) employment and revenues, has increased the most among women owned businesses in Nevada, D.C., South Dakota, North Dakota, Georgia, Virginia, Utah, Wyoming, Texas, and Arizona. 

  • Riverside, CA scored very high on the economic clout index for metropolitan areas.

 

IV.       GROWTH

 

  • There are 11.6 million women owned businesses in the U.S. as of 2017

  • That number has grown 114% over the past 20 years, compared to the overall national growth rate of 44% of all businesses

  • average of 849 new women-owned businesses added every day to the economy since 1997

 

V.        EMPLOYMENT & REVENUE  

  • Women owned businesses employ nearly 9 million people and generate more than 1.7 trillion in revenue

  • The employment growth rate over the past 20 years was stronger for women-owned businesses than for all other businesses: 27% vs. 13%

  • The number of women-owned businesses has grown much faster than the growth of their employment and revenue, however.

  • On average, women-owned businesses employ .8 workers, while all businesses employ 3.9

  • Importantly, growth rate is strongest for companies with 50-99 employees

  • Employment vitality = a combined measurement of the average number of employees and the employment growth rate of women owned businesses. One of 5 cities w/ the lowest employment vitality is San Jose, CA.

  • Revenues among women-owned businesses have increased by 103% since 1997, compared to a 114% increase among all U.S. firms

  • Since 2016, revenues for women-owned businesses have increased 2.5% vs. 4.1% for all businesses

  • Closing the employment and revenue gaps in women owned businesses could create more jobs and strengthen the economy.

 

VI.       MINORITIES

 

  • While the number of women owned businesses grew 114% from 1997 to 2017, those owned by women of color grew at more than 4 times that rate at 467%

  • The underlying reasons WHY are concerning...

  • Higher unemployment rates, long-term unemployment, and a much greater pay gap led women of color to start businesses out of necessity and the need to survive

  • 71%  (609) of the new women-owned businesses launched each day are owned by women of color, compared to only 29% (240)  non-minority owned businesses.

  • As of 2017, minorities accounted for 46% of all women-owned businesses, employing 2,105,900 people and generating $361 billion in revenues.

  • If revenues generated by minority women-owned firms matched those currently generated by other women-owned businesses, they would add $1.1 trillion in revenues and 3.8 million new jobs to the U.S. economy.

 

VII.      GENDER GAP IN FUNDING

 

            Women led businesses are the fastest growing segment of entrepreneurship in the U.S. but they comprise a small % of the companies funded by venture capital. According to a Babson College study, most women-led businesses have been funded by the founder herself, by friends, or family. Fewer than 5% of all VC funded firms have women on their executive teams, and only 2.7% had a female CEO. As discussed above, business ownership among black women is the fastest growing among all women, yet these female entrepreneurs rarely receive any VC funding at all. In 2015, only .2% of VC funding went to companies founded by women of color. This lack of outside investment is a major barrier and it limits growth potential for aspiring female entrepreneurs, especially in the tech sector.

            First, we will discuss the statistics, then we will discuss why this gap in funding is occurring, including (a) lack of female investors and (b) gender bias from both male and female investors when interviewing entrepreneurs.

 

  • Men received $58.2 billion funding in 2016. Women received $1.46 billion (Pitchbook). The difference arises in number of deals AND average size of the deal.

  • 5,839 male-founded companies received VC funding in 2016, compared to 359 female founded companies.

  • In 1999, 5% of venture capital deals went to a startup with a woman on the executive team. It's taken nearly 20 years to increase that amount to 18%.

  • Numbers for female founders getting funded has worsened over the last year. While % of deals that went to women increased, women lost ground on the share of VC dollars. The average VC deal for women-led companies was $4.5 million, compared to $6.1 million in 2015 and $5.1 million in 2014. Companies led by men received 16 times more funding.

  • Male-run companies experienced the reverse trend: they saw fewer deals, but larger average investments: $10.9 million in 2016, $9.7 million in 2015 and $8.4 million in 2014.

  • Female founders have a better chance of securing funding deals when they partner with a male founder but even then, the statistics are still not as high as male-only businesses.

 

VIII.    GENDER GAP IN INVESTING

 

            Women have ALOT of money (view economic statistics here). They control over $20 trillion used toward worldwide spending. Wealthy "baby-boomer" women in America are the marquee players in our country’s culture and commerce. They are educated, have a high income, and make 95 percent of the purchase decisions for their households (The Women’s Congress). Unfortunately, however, there is still a gender gap in women who are investors. According to Golden Seeds, 26% of Angel investors are women. According to TechCrunch, 21% of partners at VC firms are women.

            Differences in gender can cause an emotional disconnect between investors and founders. VC firms tend to avoid risk, and therefore they invest in familiar social networks. VC firms are overwhelmingly male, with social networks filled with men. So, these firms fund those who look and act like them. Laboratory experiments show the impact of these homogenous social networks among VCs. Women seeking initial stage funding see a dramatic increase in investment when they had a social connection with a male VC. This social connection functioned to alleviate uncertainty about the female entrepreneur. The positive benefits of a social connection for the women were significantly higher that those for a male entrepreneur.

            There is still unconscious bias toward female entrepreneurs who do not fit the stereotype of the "traditional male in business." In order for change to occur, the business world will need to adjust its perception about what an ideal leader looks and acts like. For now, VC firms with a female partner are more than twice as likely as those without a female partner to invest in a company with a woman on the management team (34% vs 13%). They are 3 times as likely to invest in women CEOs (58% vs 15%).

            Currently, female entrepreneurs receive only about 2% of all venture funding, despite owning 38% of all businesses. The prevailing hope among academics, policy makers, and practitioners is that this gap will narrow as more women become VCs. However, it is notable that there has been an increase in female VCs but the gap in funding has actually widened.

 

IX.       INVESTORS MUST ELIMINATE GENDER BIAS

 

            An annual funding competition, Tech Crunch Disrupt New York, recently tracked statistics of startups of comparable quality and capital needs. Male led startups in the sample raised 5 times more funding than female led ones. According to the Harvard Business Review (HBR), male and female entrepreneurs get asked different questions by VCs and it impacts how much funding they get. Venture capitalists tend to ask men questions about the potential for gains. On the other hand, they ask women about the potential for losses.

            According to psychological theory of "Regulatory Focus," investors adopt a promotion orientation when quizzing male entrepreneurs, focusing on hopes, achievements, advancement, and ideals. When questioning female entrepreneurs they embraced a prevention orientation concerned with safety, responsibility, security, and vigilance. According to HBR, 67% of the questions posed to male entrepreneurs were promotion oriented, while 66% of those posed to female entrepreneurs were prevention oriented. Here are some examples to explain the differences:

 

1. How do you want to acquire customers? (promotion)

2. How many users do you have? (prevention)

 

1. How do you plan to monetize? (promotion)

2. How long will it take you to break even? (prevention)

 

1. Do you think your target market is growing? (promotion)

2. Is it a defensible business where others cannot enter the space? (prevention)

 

1. What major milestones are you targeting this year? (promotion)

2. How predictable are your cash flows? (prevention)

 

            Entrepreneurs who were asked mostly prevention questions went on to raise an average of $2.3 million, or 7 times less than the $16.8 million average raised by entrepreneurs who were asked mostly promotion questions. In fact, for every additional prevention question, the startup raised a staggering average of $3.8 million less. Controlling for factors that may influence funding outcomes like capital needs, quality, and past experience, HBR concluded that the prevalence of prevention questions "completely explained" the relationship between gender and funding.

            Notably, the majority of entrepreneurs (85%) responded to questions in a manner that matched the question's orientation. By responding to a promotion oriented question with a promotion oriented answer, male entrepreneurs reinforce their association with the favorable domain of gains while females who respond in kind to prevention questions penalize their startup by associating with the realm of losses.

            Further, entrepreneurs who were asked mostly prevention questions but who gave mostly promotion answers went on to raise an average of $7.9 million in total funding. Conversely, those who responded to mostly prevention questions with mostly prevention answers went on to raise an average of only $563,000. Thus, clearly entrepreneurs should change how they respond to prevention questions, in an attempt to raise more funds. For example, try to frame the response around the size and growth potential of the overall pie, rather than protecting your share. This will help entrepreneurs to convince investors of their home run potential.

            Both men and women investors who question startups appear to display the same kind of bias in questioning. By recognizing this tendency, addressing questioning with conscious awareness, and presenting a balance of promotion and prevention questions to both men and women entrepreneurs, investors can grant all startups an equal chance to get funded and improve their own decision making process.

 

X.         INCREASED ROI FOR FEMALE LED STARTUPS

 

            Having no female partners makes VC firms less likely to invest in female founded or female led firms, and this fact is likely hurting VC performance portfolios. According to Harvard Business Journal, female led firms may have a higher rate of return on investment than male led firms. Further, the Peterson Institute study from 2016 correlated female management and leadership to higher performing teams. Also, Zenger Folkman published results that indicate female leaders outperform men in nearly every category. According to First Round Capital's review of their own holdings, female founder's out-performed males by 63% in terms of creating value for investors. Overall, venture firms that invested in women-led businesses had more positive performances than firms that did not.

            The number of women Fortune 500 CEOs, however, still remains small. In total, there have only been 62 female CEOs in the history of Fortune 500. While there are significantly less women CEOs, the position of CEO at a Fortune 500 and S&P is a position where on average, such woman actually makes more than a man. In a very recent study performed with 11,000 publicly traded companies across the globe over the last 8 years, Nordea Bank found that women led companies performed better by about 25% annualized return since 2009, more than double the 11 percent delivered by the MSCI World Index. Unfortunately, according to Shields Meneley Partners, women in top leadership positions are still held to different standards as men. "The smart assertive woman who is willing to go nose to nose with others on tough issues is viewed as abrasive. A man exhibiting the same behavior is viewed as a strong business leader."

 

XI.       WOMEN SHOULD ASK FOR MORE

 

            The companies that are more comfortable spending a higher amount early on are usually rewarded with higher growth metrics. Unfortunately, as in other areas of business, women tend to ask for less and to start businesses with around 50% less capital than their male counterparts.

            Research shows that in business generally, women tend to be judged based on past performance, while men are judged based on their potential. Women are required to show hard proof while men are trusted to perform. The same is true in startup funding. Male founders raise capital based on their potential. As more women become investors and as both male and female investors eliminate gender bias in interviewing entrepreneurs, women entrepreneurs will enjoy more room to ask for an increased amount of funds for their startups in order to scale.

 

XII.      FUNDING RESOURCES 

 

Golden Seeds

Hera Angels

The Jump Fund

Pipeline Angels

Next Wave

37 Angels

Broadway Angels

True Wealth Ventures

Portfolia

Female Founders Fund

Belle Capital

SoGal Ventures

Plum Alley

Brava Investments

MILA Capital

DBL Partners

Perkins Fund

Aspect Ventures

Kiva

CNote

Indiegogo

         *Crowdfunding is the one form of financing in which women outperform men. Women can raise from a few thousand dollars to millions using this method.

 

     Arm yourself with data. Look around and take strong women with you up the ladder. Be supportive and persistently advocate for women leaders. If (1) more women invest, (2) all investors eliminate bias when interviewing entrepreneurs, and (3) female founders think big and ask for more funds, together we can create lasting impact through entrepreneurship.

 

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            Are you a female entrepreneur in need of legal solutions to launch or grow a successful business enterprise? Parazim can help! Our mission is to elevate and champion the most effective, extraordinary, and powerful women in the world. Our breakthrough habitude of "women helping women" leads to invaluable resource sharing and building strong allies so every female is 100% empowered to reach her highest potential. Get connected today - email harmony@parazim.com or visit www.parazim.com for more information. 

 

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            Harmony Oswald, Esq. is licensed to practice law in the state of California. She is the Founder and Managing Attorney at Parazim. To learn more about Harmony Oswald, Esq. and her 2017 leadership book for women click HERE. The above article does not create an attorney client relationship. It provides information only and should not and cannot be construed as legal advice. For more information, please contact harmony@parazim.com.

 

 

 

 

 

 

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