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Why Female Entrepreneurs are the Next Great Investment


In this featured guest piece, Lauren Howard addresses investment gender disparity and provides actionable steps to create gender parity among entrepreneurs

Lauren Howard is the Vice President of Client Success at FreightRover. This April, she accepted the TechPoint 2018 Mira Award for Best New Tech Startup on behalf of FreightRover.

 

Warren Buffett, CEO of Berkshire Hathaway, earned his moniker “Oracle of Omaha” for having an eye for under-valued companies and spotting trends on where the market would place future value. Buffett’s savvy and shrewd investment strategy has amassed more than $80 billion in personal wealth and is powerful enough to impact worldwide markets. So where is Buffett looking to invest next? Women-run companies, and you should be too.

The Growth Curve

The United States hosts 11.6 million women-owned businesses, worth $1.7 trillion in revenue, and employment for 9 million Americans. Companies owned by women account for 39% of the 28 million small businesses in the US – a number on the rise.

Across the last decade, businesses launched by women have grown 5 times faster than the national average. In fact, women launch 849 new businesses each day, a number increasing 3% annually. Women start businesses at a rate 1.5 times that of men. Since 1997, the number of women-owned businesses in the US has increased by 114%.

Female-led businesses may be a sound investment bet simply based on volumes. However, new research shows they also often outperform businesses owned or run by men. BNP Paribas conducted a study among 2600 entrepreneurs in 18 countries, including the US. They found that companies run by women generated 13% higher revenues than men.

First Round Capital (one of the earliest funders for Uber) studied its more than $4 billion in investments since 2005, which includes 300 businesses and 600 founders. The venture firm discovered that their investments in businesses with at least one female founder outperformed those with all male founders by 63%. Of their top 10 lifetime investments (excluding Uber) based on value created for investors, three include female founders.

Another study by Boston Consulting Group, in partnership with MassChallenge, reviewed business performance by gender across 1500 companies. They found that in a five-year period, female-founded start-ups generated 10% more cumulative revenue. For every dollar of funding, the female-led start-ups generated 39.7% more in revenue than the businesses founded by men.

The Funding Gap

Despite such strong growth and performance, women-owned businesses receive just a fraction of the investment dollars men receive. In fact, women-owned firms start with only 64% of the capital of their male counterparts. Broken down by stages, women will receive only 13% of early stage investments and 9% in the seed stage. These percentages contributed to a $63.4 billion venture capital funding gap favoring men in 2016, leaving women with just $1.5 billion of the awarded investment dollars.

The disparity exists in small business funding as well. Women represent just 16% of conventional small business loans and 17% of SBA loans. Women are 33% less likely to be approved for a small business loan than men, which results in only $1 of every $23 in conventional small business loans going toward woman-owned businesses.

Because of these funding disparities, women are more likely to self-finance their businesses using personal savings, investments from friends and family, or credit cards – all of which can significantly stymie growth. As a result, male-owned businesses are 3.5 times more likely to cross the elusive $1 million revenue threshold.

Crowdfunding sits as the one funding platform where women perform better. On Kickstarter, women are 13% more likely to meet their goals than men, especially in the areas of technology. Across multiple crowdfunding sites, women-led campaigns are 32% more successful than male-led campaigns and average 5% higher individual pledge amounts. Why? Women receive the benefit of a larger base of female backers. Where Angels, VCs, and banks predominately comprise male decisionmakers that disproportionately direct more funding toward men, female backers online direct their dollars toward women founders that have long been underrepresented.

Achieving 50/50

One in every 10 women in the US are becoming entrepreneurs, the highest rate for any developed economy on Earth. Yet, the number should be higher considering women represent 50% of the population, out-earn their male spouses 40% of the time, are 16% more likely to have earned a post-high school education, and control more than 60% of all personal wealth in the US.

So, what can be done to create gender parity among entrepreneurs? Finding the answers takes asking the right questions.

#1: Who should I know?

Simply put, mentoring equals money. Individuals with a mentor are 5 times more likely to launch a business than those going it alone. Mentoring reduces first-year business failure rates by 48%. Business owners receiving as little as three mentoring hours per month report higher earnings and employment growth. Mentoring also crosses gender lines, with no difference in satisfaction rates for entrepreneurs having mentors of the same sex. Far more important is time spent talking together.

Actions:

  • Create a memorable introduction and network. Attend events, take advantage of LinkedIn’s career advice platform, and leverage friends and colleagues to make new acquaintances. According to The National Foundation of Women, as many as two-thirds of seriously considered business proposals by institutional investors are referred by someone in the investor’s network.

  • Seek out mentors who are experts in your field, as well as those who can bridge the knowledge gap in non-core areas. Consider them your panel of advisors and leverage their expertise to make yourself and your business better.

  • Ask for five-minute favors. Most people want to help, especially aspiring female entrepreneurs. What’s your minimum ask for maximum gain, accomplished 5 minutes at a time? Making introductions, answering a targeted question, identifying resources – these are all quick asks of busy individuals that take minimal effort on their part, but provide tremendous help to you.

#2: Where is the money?

Securing funding for a woman-owned businesses requires creativity and perseverance. Unfortunately, funding specifically for women entrepreneurs goes unused each year. Women also tend to stay within businesses they know rather than pursuing an invention – either of themselves in a new industry or of their work products.

Actions:

  • Become a certified Woman-Owned Small Business (WOSB). The US government requires that at least 5% of government contracts go to WOSBs (a $4 billion annual goal it’s never met). Other local and state governments, along with many socially conscious corporations, set spend allocations for women- and minority-owned businesses as well.

  • Seek alternative avenues for funding, including special grants and loans for female entrepreneurs. A quick Google search of “grants for women entrepreneurs” yields more than 1 million results. Look for organizations like The Startup Ladies that provide access to both funding and training on how best to maximize every dollar. Women also perform well with crowdfunding, so pursue online forums where small investments add up to a valuable sum.

  • Explore new industries for starting a business. About 50% of all women-owned businesses fall within three industries: personal services including hair, nails and pets (23%); health care, child care and social assistance (15%); and professional services including lawyers, accountants and consultants (12%). While these are all great areas for female entrepreneurs, it increases competition and does little to create parity in other industries. Women are significantly underrepresented in the fields of IT, STEM, construction, warehousing, and logistics, which all are growing rapidly.

  • Pursue patents. Investors gravitate toward intellectual property and patents that limit competition. Yet, only 1 in 5 patents come from women inventors. Women who do receive a patent are less likely to maintain it or enforce its citation despite a Yale University study’s finding that the patents granted to women tend to be a higher quality than those of men. While attaining a patent isn’t easy, it does provide a significant advantage in receiving long-term business investments.

#3: How much do I want?

Women tend to be more conservative than men in their business growth projections and investment requests. Janet Kraus, CEO of Peach Inc. and Harvard Entrepreneur-in-Residence, said, “...[W]omen are often more conservative when forecasting financial goals and with raising significant rounds of capital. And, even if they have a big vision, they are less confident in declaring at the outset that their goal is to become a billion-dollar business.”

A study found that when asked, only 42% of female entrepreneurs say their business is thriving compared to 62% of men, despite the women showing higher pre-tax profits. To bridge the funding gap, women must bypass simply asking for the minimum they need and confidently request the funding they want.

Actions:

  • Ask, ask and ask again. Women average 15 requests before securing funding. Don’t take no for an answer and don’t get discouraged. The right funding and, just as important, the right funder are out there if you persist.

  • Negotiate as if someone else’s life depended on it. Yes, you read that correctly. Women tend to feel in violation of a social code when asking for money. However, in the book Give and Take, author Adam Grant cites an experiment in which male and female executives were asked to negotiate promotion compensation. The women settled for 4% less than the men. However, when the women were asked to negotiate as a mentor for another employee, they negotiated almost 15% higher than the men. If you don’t yet feel comfortable asking for yourself, advocate on behalf of someone else who depends on your business success.

  • Don’t undervalue yourself. A study of angel investors found they focus their investments around four main themes: passion and trustworthiness of the lead entrepreneur, quality of the management team, and existence of an exit strategy or liquidity potential. Women cite passion as a top reason for starting businesses and tend to be perceived as more trustworthy than men. Paired with women’s penchant for collaboration and steady growth metrics, they have the perfect recipe for securing investments if pitched correctly.

  • Think big, act small. Venture firms are looking for the next big thing. Worse than making a bad deal is knowing they passed on a big opportunity. Investors want a great vision from a nimble, financially responsible, scalable business. When you are ready to pitch, confidently know the answer to this question: What makes your business the next big thing?

#4: What if I fail?

You are going to fail along the way, and that’s okay. Starting a business is a long journey of really hard work, and you won’t be perfect. Openly discussing the possibility of failure takes away its power to hold you back. And, if embraced correctly, failures can be your best keys to success.

Actions:

  • Add more women to the ranks. Investment entities are woefully underrepresented by female partners and decisionmakers. Of the top 100 venture firms, only 8% of women are partners. Ignoring the female perspective can mean missing out on businesses that have the potential to drive significant returns, simply from lack of understanding of female products and interests. When a business or product isn’t compelling to an investor, chances are the investor isn’t the target consumer, not that the business lacks value.

  • Look for diversity – in the investment portfolio, in entrepreneurs, and with investors. Funders tend to have a soft bias toward the familiar, including products, companies, and the looks of people. Since 1997, businesses owned by women of color grew 467%. Minorities account for 46% of all women-owned businesses, with the potential of an additional $1.1 trillion in revenues. Minorities are projected to be the US population majority by 2043, and collectively Hispanics, African-Americans, and Asian-Americans control $2.9 trillion in purchasing power. The financial impact of an investment portfolio without a focus on minorities is enormous.

  • Check your stereotypes and outdated thinking at the door. Many investors still perceive women-owned companies as “lifestyle businesses,” thinking they just provide women extra part-time income while caring for their family. However, 62% of female entrepreneurs (compared to just 69% of men) depend on their business as a primary source of income. Therefore, women are in it for the long-haul and want to scale.

  • Recruit and train female entrepreneurs. Actively look to invest in women-owned businesses. When you find the ones that fit your mission, put in the extra effort to provide training and mentorships. The Ernst & Young North American Entrepreneurial Winning Women program found that women who receive training and support improve year one revenues by as much as 20%, with many achieving 50% gains in year two. Simply giving them a community of other entrepreneurs improved their growth goals by 76%.

The Future is Female

Women tend to create businesses that solve problems. They come with ample experience and an abundance of passion and commitment to their work. They embrace collaboration and learning. Their entrepreneurial drive, paired with exceptional abilities to multi-task and approach challenges methodically, makes them ideal investments. They deserve access to funding to make their ideas a reality. In the words of the Oracle of Omaha, “It’s one of the things that makes me optimistic about America, because when I look at what we have accomplished using half our talent for a couple of centuries, and now I think of doubling the talent…it makes me very optimistic about this country.”

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