The Struggles of Raising Capital for Female Founders (and Why Investors Are Missing Out)

Women-led businesses are the fastest growing segment of entrepreneurship in America. But there is a significant gap in funding. Currently 38% of businesses are owned by women, and yet, only 2 percent of venture capital funding goes to female-owned companies. This disparity shows a prevalent bias on the part of investors. Part of the reason could be that VC firms are composed mostly of male partners, with only 8% having female partners. Firms without female partners are less likely to invest in female owned businesses.

Even when a female-led company does get funded, they are likely to receive a significantly smaller investment than their male-led counterparts:

Source: Fortune

Some firms are making an effort to close the gap by re-evaluating how they choose an investment. A Washington, D.C.-based firm, Village Capital, eliminated the pitch process from their standard procedures, replacing it with an award winning peer-selection model, which led to a 10-fold increase in investments into women-led companies. Kerry Rupp, a female VC partner at a firm in Austin, TX says of Village Capital’s new model, “This points to the fact that yes, a lot of women-led companies are not getting funded through existing channels.”

Venture capital is not the only way to get funded. Other options include Reg D 506b and 506c equity raises, angel investors, bank loans, and government or foundation grants. And yet, a survey of female tech startup leaders reveals that 80% used their personal savings as their primary source of capital when starting their businesses.

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Despite the gap in funding, evidence suggests that Investors are missing out on potential returns by passing on female-led companies.

According to research from VC firm Illuminate Ventures, the average venture-backed female-run company has 12% higher revenues than male-run companies, with significantly less invested capital. But some firms are seeing an even greater difference in performance. First Round Capital recently performed an analysis of 300 companies they had invested in over the course of 10 years, which revealed that companies with at least one female founder performed 63% better than those with all-male founding teams. Even Fortune 1000 companies led by women generate nearly three-times higher equity returns than the S&P 500, comprised almost entirely of companies led by men.

It could be that it is exactly because of the scarcity in funding that female-led companies are able to perform so well. Without the safety net of invested capital, female founders must find more clever and efficient ways to make the most out of what they have.

While female entrepreneurs have proven that they can successfully start companies with half as much funding as men, there is no reason they should have to. Not only does this funding gap exclude a huge percentage of women without significant savings from entrepreneurship, but the known bias also discourages women from seeking funding that could jumpstart their companies. VC firms and individual investors alike may benefit from considering male and female-led companies in equal measure, and the increase in available funding for female founders would encourage more women to start companies of their own. 

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Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.