Why are female entrepreneurs still missing out on funding?

Access to funding is a challenge faced by most entrepreneurs, who need cash in order to get their ideas off the ground. But research shows that women, in particular, encounter extra hurdles when it comes to getting hold of money for their start-ups.

A report by the British Business Bank, commissioned by former chancellor Philip Hammond in 2017, shows female entrepreneurs are missing out on billions of pounds of investment every year. In 2017, start-ups comprising of only women received £32m ($42.1m), whereas male-only start-ups received more than £5bn over the same period.

For every £1 of venture capital investment in the UK, all-female founder teams get less than 1p ⁠— where all-male founder teams received 89p. Mixed-gender teams miss out too, receiving just 10p.

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Although venture capital investment in start-ups with female founders is on the rise, progress is slow. According to the research, it will take until 2045 for all-female teams to reach even 10% of all deals, at current rates.

The problem is mirrored in the US. Last year, research conducted by the London Business School and Columbia Business School found that female entrepreneurs in the States are 63% less likely than their male counterparts to secure the venture capital (VC) funding they need to get their new business off the ground.

The evidence is clear.

Why are women entrepreneurs missing out on crucial funding?

One of the key reasons is gender bias ⁠— both conscious and unconscious ⁠— and a lack of female representation among investors.

“If you're starting a company whose products or services cater to women (which is the linchpin of many female-led companies), you have to spend more time thinking about how to convince a potential investor ⁠— who is typically an older, white male ⁠— that you are solving a real and important problem,” says Georgene Huang, CEO and co-founder of Fairygodboss, a platform aimed at supporting women in the workplace.

“For example, if you were starting a makeup company, while men understand what makeup is and that many women wear it, it’s not solving a problem that they have experienced first hand. Therefore, the whole premise of your business is foreign to them.

“With Fairygodboss, my co-founder and I had to learn how to pitch to male investors and make them not only understand what we are doing with the platform, but make them understand why it’s so important.”

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According to the British Business Bank research, networking has a strong impact on subsequent venture capital investments. Start-up founders who are recommended to a VC firm by someone in the VC’s network, known as a “warm” introduction, are 13 times more likely to get funded than founders who apply without a recommendation.

Significantly, all-female teams are less likely to get a warm introduction to a VC firm ⁠— although when they do, they progress proportionately.

Another issue is the low number of women in sectors focused on by venture capital firms, including software, artificial intelligence, and medical tech ⁠— which partly explains their low representation in VC deals.

The gap in funding is particularly difficult to justify in light of the multiple studies that show women entrepreneurs are more than capable of launching businesses successfully. In both 2012 and 2019, research by the Harvard Business Review found women score higher than men on most leadership skills. Not only did they excel in taking initiative, acting with resilience, practicing self-development, and pushing forward for results, they also displayed high levels of integrity and honesty.

These qualities pay off when it comes to the bottom line. The social enterprise firm Womenable found that, when studying the growth trends of companies over eight years, the organisations owned by women generated higher revenues than those owned by men.

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“In addition, there aren't many women working in venture capital firms and using the recent lack of diversity in the Oscar nominations as a prime example, having diversity on both ends of the table is pivotal for success,” Huang says.

“So even if you aren't starting a company whose products or services cater to women, there are still biases at play that could negatively impact you and it's up to VC firms to make more of an effort to diversify.”