The gap in labor force participation between American men and women has narrowed considerably over the last few decades. Women have entered the labor force en masse, and men have experienced steady declines. At the same time, women have made remarkable educational gains. Women now consistently outpace men in terms of college enrollment and receive 50 percent more master’s degrees than men do. Among the youngest workers, those ages 18 to 32, women are now far more likely to have bachelor’s degrees than men.
Overall, women-owned businesses account for about one-third of all types of businesses in the United States. Among employer firms, however, women-owned businesses are only about 16 percent of the total, and their share of revenues and employees are in the single digits. Among high-growth firms, moreover, women usually account for less than 10 percent of founders in any given sample.
Given slowing rates of business creation and long-term pessimism about growth in the United States, it makes little sense that half of our population – and more than half of our educated population – isn’t fully participating in the engine of growth and innovation. Yet is also seems clear that the future of American entrepreneurship and growth is in the hands of women.
To take advantage of this opportunity, we must identify why fewer women are represented among high-growth companies and the investors who back them. What, if anything, is different about women entrepreneurs, and what does this tell us about public policy and private programs?
Much of the answer, it seems, is financing.
While some researchers attribute women’s lower levels of participation in growth-oriented entrepreneurship to gender differences in human and social capital, an increasing number of studies have examined access to financial capital as a possible impediment to the growth of women-owned firms.
Recent studies indicate that women entrepreneurs raise smaller amounts of capital to finance their firms and are more reliant on personal rather than external sources of financing. Other research finds that women entrepreneurs also borrow smaller amounts than men do across all industries, including high tech. Within the context of growth-oriented entrepreneurship, these distinctions are important, because growth-oriented firms typically require substantial amounts of external capital in both debt and equity. If women entrepreneurs do not seek, or if they are not able to obtain, external capital, their prospects for growing their firms diminish considerably.
We investigated these issues in more detail through a survey, conducted by Vivek Wadhwa with the support of Women 2.0, of women who were founding CEOs, presidents, chief technology officers, or leading technologists of tech startups founded between 2002 and 2012. A high fraction of these survey respondents cited financial capital as a critical challenge to launching their firms (72 percent), and the majority (nearly 80 percent) used personal savings as their top funding source. Moreover, 49 percent said lack of accessibility to financial capital was “extremely challenging” or “a big challenge,” and only 7 percent said it was not a challenge at all.
An even more significant gap between women and men persists when it comes to securing sources of equity capital in the form of angel investments, venture capital (VC), or private equity. A recent survey in the first quarter of 2014 of Inc. 500|5000 firms (results forthcoming) found that male founders of these high-growth firms were more than three times as likely as female founders to access equity financing through angels or VCs (14 percent versus 3 percent). Men were also more likely than women to tap networks of close friends (9 percent versus a little less than 2 percent) and business acquaintances (13 percent versus 5.4 percent).
Since financing is one of the key inputs and resources required by a growth-oriented firm, this financing gap is clearly related to the size gap between men- and women-owned businesses. Growth-oriented firms generate jobs and economic impact, and female entrepreneurs are markedly unrepresented in this subset of firms. Only about 2 percent of women-owned firms generate more than a million dollars, and there are fewer than one million women-owned firms in the entire country that have any employees other than the owner herself. These are striking statistics that suggest women entrepreneurs represent a large and untapped resource for generating jobs and high-growth businesses.
Building the financial capabilities of women and ensuring access to bank financing and equity financing by venture capitalists and angel investors is paramount to having more high-growth entrepreneurship by women. Second, encouraging greater participation by women on the financing and investing side – where there is also a gender imbalance – is another avenue worth pursuing. Prior research documents the low level of representation of women as investors in angel investing and venture capital funds. And while a growing number of angel groups, such as Golden Seeds, Astia Angels, and the Pipeline Fellowship, are preparing women to become investors in this space, much more can be done.
The large-scale entry of women into the official labor force and their rising educational attainment served as huge economic tailwinds for the U.S. economy during the 20th century. Women’s entrepreneurship – if properly nurtured and grown – could serve as the tailwind for 21st-century growth.
Alicia Robb is a senior fellow at the Ewing Marion Kauffman Foundation and a visiting scholar with the University of California in Berkeley and the University of Colorado at Boulder.