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Jun 2007
14
June 14, 2007

Women Shortchanged on Venture Capital

The old adage "Nothing ventured, nothing gained" is especially true for women business owners in search of financial assistance.

Unfortunately, the connotation is anything but positive.

Although women entrepreneurs have seen great success over the past decade, they have also faced tremendous obstacles in accessing capital to grow their businesses. According to the Ewing Marion Kauffman Foundation, despite owning nearly 40 percent of all privately held businesses, women receive less than 5 percent of all venture capital funding.

In fact, according to the Committee of 200 Business Leadership Index, which measures women's progress in 10 key business areas and compares it to that of men, the venture capital benchmark currently stands at a 0.81 on a 10-point scale, with 10 indicating equality with men. That number is down 24 percent from the venture capital benchmark in 2004. Clearly, women are struggling to obtain the equity capital they need to grow their businesses aggressively and to achieve their potential business success.

The real question is: Why?

Many factors may play a role in why women have more difficulty obtaining the venture capital they need. According to a study completed by the Diana Project of the Kauffman Foundation, the supply side of venture capital poses significant obstacles for women. The study monitored women in the venture capital industry who were on a management track from 1995 through 2000. The results indicated that industry is "overwhelmingly male," with women representing only 10 percent of venture capitalists in 1995 and only 9 percent in 2000.

The numbers are similarly low for angel investing, with women making up no more than 8 percent of angel investors. The attrition rate of women was also considerably higher than that of men, as nearly 64 percent of women who were on the management track in 1995 had left the venture capital industry by 2000, as opposed to the 33 percent of men who had left by 2000.

Good Ol' Boys

Because most venture capital deals generally occur through established network connections and because women tend to know fewer people in the male-dominated venture capital community, women have less opportunity to pitch their business ideas to venture capital groups and obtain the equity capital that would accelerate the growth of their businesses.

Not only has the deficiency of women in the venture capital industry and the resulting lack of connections been cited as a barrier to women's access to venture capital, but so too have some demand side factors.

According to the Kauffman Foundation, many women have less financial education than men and may tend to believe that banks are less willing to lend them money. As a result, women entrepreneurs may forgo applying for certain types of financing. Some women may also have less steady credit and income histories because they may have worked more flexible hours than men. Although some have attributed the discrepancy in venture capital funding to the types of businesses that women typically become involved with, statistics from the 2002 Survey of Business Owners indicate that women-owned businesses require just as much capital as typical men-owned businesses.

Typically Stereotypical

Negative myths and stereotypes about women and business pose yet another hurdle for women entrepreneurs' access to venture capital.

The Diana Project investigated several myths surrounding women and equity capital and concluded that the perpetuation of myths and stereotypes potentially limits the ability of women to gain access to venture capital and creates a difficult business environment for women to grow their businesses. The myths examined included the following:

  • Women don't want to own high-growth businesses.
  • Women don't have the right educational backgrounds to build large ventures.
  • Women don't have the right types of experience to build large ventures.
  • Women aren't in the network and lack social contacts to build a credible venture.
  • Women don't have the financial savvy or resources to start high-growth businesses.
  • Women don't submit business plans to equity providers.
  • Women-owned ventures are in industries unattractive to venture capitalists.
  • Women are not a force in the venture capital industry.

The Diana Project concluded that the lack of equity for women-owned ventures has potentially detrimental effects on the economy, job creation, innovation and global competitiveness, and venture capitalists' returns on their investments.

Making Connections

With all of these barriers to capital access facing women entrepreneurs, what can be done to improve the situation?

Because networks are crucial in the venture capital industry, more women venture capitalists would likely mean more direct network connections for women entrepreneurs to get their foot in the door and to bring their plans to the table. With an increased number of women entrepreneurs pitching their business proposals to the venture capital industry, there is a greater likelihood that women-owned businesses will obtain the venture capital they need to grow to their fullest potential. And while entering such a male-dominated industry may be difficult for women who don't have the social connections within the industry, women need to be aggressive and take the initiative to break into the venture capital industry.

In addition to increasing the number of women venture capitalists, much can be done by women entrepreneurs to increase their access to venture capital. Women entrepreneurs should seek out education about the investment process so that they make the right financial decisions for their businesses. They should read about different sources of capital for their businesses and shouldn't be afraid to ask questions. Women should also take advantage of the experience and advice that other accomplished women business leaders have to offer by participating in the numerous mentoring programs that have been created to assist women entrepreneurs in making their businesses successful. Entrepreneurs should also get involved with forums, such as Springboard, that link women-business owners with potential investors.

Tips for Women to Obtain More Venture Capital

1. Understand the Industry: Be realistic in assessing the potential of your business and recognize that most venture capital funding is obtained by business with the potential to make more than $100 million in one year.

2. Float the Idea: Don't be worried about someone stealing your idea. The more you talk about it with people, the more polished your idea will become. Plus, people will get to know you and your idea before you ask for funding.

3. Build a Network Before You Need It: Go out and join organizations that are involved with what you want to do. Meet people in the business area and get your idea out.

4.  Build a Team:  Don't worry if you don't have all of the skills you need to make your idea a success. Partner with someone whose skills and experience complement your own.

Helpful Resources for Women Entrepreneurs

1. Springboard Enterprises: A nonprofit that is committed to helping women entrepreneurs access equity capital markets and grow their business. The organization provides advice on how to pitch your idea. Visit http://www.springboardenterprises.org

2. Make Mine a $Million Business Program: A program that gives women business owners the advice and resources to help increase their business revenues to beyond a million dollars. Visit http://www.makemineamillion.org

3. National Association of Women Business Owners: A nationwide business organization that represents the interests of women entrepreneurs in all industries. Visit http://www.nawbo.org

4. The Committee of 200: A group that capitalizes on the accomplishments of its members, some of the nation's most powerful businesswomen, by providing mentorship programs, scholarships and business advice to help women business leaders succeed. Visit http://www.c200.org

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