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Women in Business Series: The Funding Gap.
Welcome to our series: Women in Business. Over August, our four-part blog series will be delving into the current business environment and the state of female entrepreneurship. Examining the current landscape of female entrepreneurship and the challenges and setbacks faced by women who want to start their own ventures.
Our last blog explored the empowerment gap and a few ways to gain empowerment. Over this month, we are discussing the three key challenges faced by women: lack of empowerment, funding and time. This blog addresses the issues surrounding funding.
What is the Funding Gap?
Women-led and owned businesses secure less funding and funding opportunities than their counterparts. In 2021/22 the overall number of active female-led companies that secured all forms of external capital in the UK rose to 14.8%, compared to 61% of male-led companies.
Not only do women-led businesses secure less funding but when external funding is granted, they usually get given less. By analysing 100 startups in 2023, Business Leader reports that a female-founded business, on average, receives £763,000 compared to £4.7 million for a male-led organisation. This means male-led businesses receive 6.2 times more funding than an all-female organisation.
What causes the Funding Gap?
There are three key elements to the funding gap, risk-averse funding, lack of women decision-makers, and supply. These three individually affect the amount of funding given to women, but altogether they create the foundations of a systemic issue in funding.
Banks and Venture Capitalists perceived women-owned businesses are ‘risky’
There is no concrete data which qualifies a women-owned and led business as a greater risk than a male or mixed-gendered-owned business. Yet, this is the reality within funding. As the FT reports: banks and Venture Capitalists (VCs) label women-owned businesses as ‘high-risk’, despite evidence which proves otherwise. This may be due to the fact that women tend to have smaller businesses with less collateral. However, this perpetuates a cyclical system of underfunding: women need funds to grow their enterprises, banks deny funding as they are too small, and so on. It’s a self-fulfilling prophecy which has a huge systemic effect on women-owned and led ventures.
Data shows that women-led and owned businesses not only generate higher revenues but burn through funding less, which means they are the ‘safer’ option for funding. For example, both Pitchbook and Beyond the Billion state that female entrepreneurs burn cash slower than the market average. In fact, female-led and founder enterprises are so efficient at spending that they utilise a quarter of less capital compared to other businesses. Burning through cash or funding slower means that investment lasts longer. It shows that these businesses are being careful about when, where and how they are spending their funding. Making more meaningful decisions, and perhaps even making fewer vanity purchases and instead focusing on spending money in a resourceful way. Ultimately this data proves the exact opposite of the ‘high risk’ argument put out by financial institutions.
Even with the ‘low-risk’ profiles, female-owned businesses still have substantial economic rewards. McKinsey research shows that companies with a greater percentage of gender diversity on their c-suite and executive teams were 25% more likely to have above-average profits. Additionally, companies with more than 30% female executives were more likely to outperform. This confirms that female-owned ventures have a lot of value to add to the economy, but due to setbacks, they haven’t unleashed their full potential. Currently, female-led enterprises add £85 billion to the UK economy, with an additional £165 Billion to be added if more women started their own ventures.
Women-owned businesses have proved that they are less risky and generate value for their investors, yet Banks and VCs continue to underfund these ventures. There are many reasons why, but possible solutions could come from having more women on the other side of the funding table.
Not enough women sit on the other side of the funding table
Lack of funding for female-owned businesses also roots from a lack of women in funding. Whilst women may work for banks, in economics and investment firms, very few have leadership positions. The study ‘European Women in VC’ states that women make up 15% of general partners in VC firms, compared to 85% of male GPs. In the UK, Forbes highlights that 48% of investment teams do not include a single woman, meaning around half the time women pitch for funding they may find that they are the only woman in the room.
There are two ways a lack of women can impact funding for female-founded businesses. Firstly, an all-male team may be less understanding of a women-led business and their business goals. This can translate into the example above, where men have doubts about the business’ capabilities and label it ‘high-risk’. Or it can also be affected by an unconscious bias in regard to the products or services being created by the business. A women-owned business may have the perfect product or service for its audience but an all-male investment team chooses to discredit certain innovations as redundant as it doesn’t suit their personal reality. Things such as the dishwasher, disposable diapers and paper shopping bags were invented by women, but they may have been overlooked by men simply because men were not (in the past) in need of these ‘domestic’ solutions. In a similar sense, an all-male investment group may misjudge a female entrepreneur’s business and capabilities because of a gap in their experiences and requirements.
Secondly, an all or heavily-male investment team can be intimidating for some, particularly if an entrepreneur is home-grown with little experience in situations where you are required to formally pitch. Female entrepreneurs already are perceived to lack skills or have a less diverse skill set compared to male entrepreneurs and this bias is held in funding circles. When there are fewer women on the other side of the table the space becomes more intimidating and dismissive. In these spaces, female entrepreneurs may under-promise and underplay their hand and may lose the pitch, as the FT reports, early bets are taken on showmanship and confidence, the same traits that women are discouraged from following. Essentially, funding spaces become inaccessible due to the lack of women. Which in turn means fewer women-led ventures get funded.
This is an issue that exists both in the UK and worldwide, in the US Female Founders Fund reported that in 2022, female-owned businesses represented 18.4% of all the capital deployed. In the UK, The Rose Review and YouGov collected data which showed that 50% of female business leaders and entrepreneurs found it difficult to access funding in the last year (2022) compared to 40% of male entrepreneurs and founders. The pandemic and economic downturn have affected everyone, but the gap between women and male-led enterprises remains explicit.
Women and pitching
As mentioned above, early funding bets are taken on showmanship and confidence, think of successful businesses from Dragon’s Den, or The Apprentice. Men are more likely to feel comfortable embodying the confidence needed as they’ve been taught, from a young age, which allows them to naturally take on the needed entrepreneurial traits. Whereas women are socialised to be comfortable in supportive roles, to not brag and be modest and more unassuming about their achievements.This kind of socialisation results in women being less likely to bargain successfully for higher wages which also translates into funding spaces. Women are not used to and are less likely to successfully pitch.
Women can and do avoid this socialisation but they can still be negatively affected by the bias of others. If women act like men and show their confidence and command of their business they are perceived as ‘bigheaded’, ‘aggressive’, ‘assertive’ or ‘bossy’. Women entrepreneurs are more likely to be heavily interrogated about their business plans, selves, and projections, which implies that their abilities are being doubted. For example, Michelle Kennedy, Founder of Peanut, a social networking app for women, was told she would not ‘raise capital without a male co-founder’ despite having extensive experience in a previous position as deputy CEO of Badoo, a similar social networking app. If women founders are more likely to be questioned in this sense then it can cause a general lack of confidence and enthusiasm for pitching to these institutions.
Essentially, funding for women becomes a supply and demand issue. Women are not pitching as well, due to intimidation and impact on confidence and funding institutions are not offering funding. One affects the other and continues to add to the funding gap between men and women.
How to combat the Funding Gap
Needless to say, 14.8% of female-owned businesses have received funding and continue to do so as the number slowly rises. There are ways for female entrepreneurs to work around the funding gap and make sure their business receives the capital it needs.
An alternative route for funding is crowdfunding. Approaching financial institutions may not be for everyone, it may not even suit most businesses. However, crowdfunding is an alternative route which has been hugely successful for many entrepreneurs.
Crowdfunding is when a venture raises a large amount of money through smaller investments through a large number of people. This is typically done on the internet through sites like Seedrs, Kickstarter, Crowdcude and more.
Crowdfunding has a huge amount of benefits that are unique to this form of funding. Most of the people choosing to invest in a business through crowdfunding are often existing clients or future clients. Due to this, a business receives a fairly accurate snapshot of its market and clientele. This allows for businesses to ask for real-time feedback, which is particularly useful if a business is pre-launch. Furthermore, a crowdfunding campaign aids in marketing as you can understand who your consumer is, what age they are, gender etc. which can allow for targeted marketing.
However, raising funds through crowdfunding can take a while, and there are many businesses attempting to do the same. In order to have a successful crowdfunding campaign entrepreneurs need to stand out. If your business already has a following, tap into that audience, build a recognisable and informative campaign, and if you can afford to do so provide enticing incentives to your investors. Anything from merch to a free product/service.
Ultimately, marketing makes or breaks the success of a crowdfunding campaign, a business may have the best unique selling point or product but it needs to be seen. Crowdfunding for this reason can take a lot of time and trial and error till the total funding goal is met.
However, there is no reason why all funding options can not be explored. For example, Annabel Thomas, owner and founder of Nc’nean, a sustainable small-batch whiskey distillery in the Scottish Highlands raised an initial among of funding in four years on Seedrs. Which then attracted other private funders. Both avenues of funding allowed them to create and sell their first whiskey bottle (they had already sold whiskey by the barrel to private buyers before they bottled their first one). Their Seedr campaign is still viewable to understand the details of how a million-pound crowd-funding campaign is launched.
Confidence and Connections
Secondly, in order to address the funding gap from a personal level, female entrepreneurs may want to work on personal skill building in order to pitch better, even in intimidating conditions. There are many ways to do this, from practising pitching with a friend or family member, to seeking out a mentor who can help with skill development and business planning. Women entrepreneurs need to believe in their work and selves and also use the time to build impeccable business plans and projections which back up their drive and confidence in success.
Of course, empowerment plays a huge role in building confidence, which, as discussed in ‘The Empowerment Gap’, can be built on through education, networking and self-empowerment.
Luckily, the funding gap is being addressed by organisations. Not only is it recognised by the media, NGOs and governments but in the UK many financial institutions have made a commitment to reduce the gap. Most notably, in response to addressing the gap many female entrepreneurs own and lead funding or investment firms too, such as Female Founders Fund or Peanut startHER.
A female-specific funding route means that issues such as being the only woman in the room, or unconscious bias are lessened. These organisations are either purpose-built to fund and nurture female entrepreneurship or have signed a commitment to do so, .which makes the environment more equal and welcoming for entrepreneurs in any stage of business.
In the UK, thanks to the Rose Review the government has organised ‘The Investing in Women Code’ which is a growing list of 200 organisations. All of these organisations are funding institutions, from banks to angel investors to VCs which have committed to equalising the funding gap. This allows female entrepreneurs to access a number of institutions that have made a commitment to funding more women, it levels the playing field for them and reduces the initial feelings of intimidation and doubt.
Receiving funding can be a game-changer for business, and female entrepreneurs should wholeheartedly pursue funding without feeling as if bias is holding them back. In the UK organisations are making commitments to equalise the field but there is still a lot to be done. However, women-led businesses that receive funding are slowly on the rise, and doubts about existing biases and abilities should not hold female entrepreneurs back.
Over this month, our four-part series covers these three main setbacks and look at ways to approach and address them. The next blog will focus on time, exploring why time, or lack thereof, is another challenge for female entrepreneurs.