Allison Rohe. Associate Director. IE Venture Lab Accelerator.
11 January 2017
There is still an enormous gap between the amount of funding given by risk capital funds to startups created by men and that given to startups created by women.
International Women’s Entrepreneurship Day was a good day for thinking about the current situation of women entrepreneurs and to examine where we are and what measures have to be taken (and why) to improve this situation.
Entrepreneurship is, in itself, considered positive for the economy, and you could deduce that having more women entrepreneurs would be good for the economy. In the U.S. the 2012 census shows that women owned 36% of America’s firms, 30% more than when the 2007 census came out. Nevertheless, during this time the U.S. economy did not see the corresponding improvement that should have occurred if it is indeed true that any kind of entrepreneurship is good for the economy. This dichotomy is partially due to the growth of “solo women entrepreneurs,” which is the name given to women who work for themselves without hiring employees, and also to a lack of business models aimed at promoting growth.
In its 2014 report on the dynamics of employment growth: New indices from 18 countries, the OECD stated that SMEs that have been operating for less than five years provided 17% of jobs, but they are also responsible for creating 42% of newly created employment. This does not explain the gap between women’s entrepreneurship and economic growth, but if we take a look at the sector made up of startups operating in hyper-growth markets, and at the venture capital funds that fuel their growth and scalability, we can see that it is men who receive the majority of venture capital funds received by startups in their early phases. Here is where we could discover one of the biggest obstacles that women face: that of obtaining funding.
According to a study published by Inc. magazine at the end of last year, among EU startups and venture capital funds and business angels, last year some 9.45 billion dollars were invested in startups launched by men, while only 1.75 billion dollars were invested in startups created by women. It is extremely difficult for a business to grow, regardless of whether it was created by a man or a woman, if it does not have the funding it needs.
Startups led by women and which receive money from a risk capital fund whose members are men, have an output rate (the metric used to measure the success of a startup) of 17% compared to a 27% output rate of startups headed by men financed by the same fund, according to a survey published by Harvard Business Review in July of last year. However, this gap closes when the investment is made by an investment fund with women in charge of evaluating and assessing startups led by women. The conclusion is that startups headed by women are less likely to be acquired or to be the subject of a takeover bid if they get their funding from funds run by men.
Fostering entrepreneurship is the cornerstone of everything we do at IE both inside and outside the classroom, and supporting and empowering women entrepreneurs forms part of our DNA. Hence, I would encourage all players in the sector, regardless of their gender, to take measures to support female entrepreneurs, and help them access funding. I would also encourage any risk capital firms to include female members in their management teams in order to improve the likelihood of success of startups headed by women which they invest in. And finally, I want to encourage women to create investment funds with a special focus on startups created by women. This is already happening in countries like the U.S., with very promising results, while I don’t know of any such firms in Spain. A fund run by and for women would not only be about performing the right thing socially speaking by helping women entrepreneurs, it would also appear to be a good business opportunity given that many startups led by women fail because of their financial situation and not necessarily due to a lack of potential of either the business or the skills of its management team.