Monday, December 17, 2018

Women Are Undervalued

Women and underrepresented founders face a tremendous funding gap when compared to their male, and particularly white male, peers.   Consider just the 2016 statistics.   All-male firms raised $58.2 billion in venture capital funding while all-female firms raised only 1.46 billion.  The funding gap grows starker when we look at black-female-founded firms.  Startups founded by black women raised an average of $36,000.  In contrasts, white men pulled in an average of $1.3 million for business ventures that failed.  

Many people see how identity affects capital allocation.  Academic research has shown that otherwise identical pitches are more favorably received when voiced by a man.  Founders can see it and try to present themselves in ways that cater to investor preferences. Ann McGinley and I have written about the gap and the extraordinary measures founders take to contort themselves and their businesses to increase their access to capital. We even categorized relatively common techniques that founders use to raise capital.  We identified substitution as when a woman sends a man in her stead as a founder or co-founder because she believes that it's the right business decision to bypass investor bias.  We also identified something we called "manclusion" where a woman has to bring a bro to get that dough--essentially dragging men into meetings just because it makes the investors more manageable.

It seems as though everyone can see the problem.  Yet a new report from Morgan Stanley reveals that most investors still don't see the problem.  Their survey found that about "eight in ten investors say that multicultural and female entrepreneurs receive the right amount, or more, of capital than their business models deserve."  Morgan Stanley makes a business case for investing in women and underrepresented founders and highlights research showing that women-owned firms generate significantly more revenue than their all-male peers.  

Although market forces may cause smarter capital to flow toward women-owned businesses over time, slower shifts on this front may lead to lower overall economic efficiency and growth. As Ann and I highlighted, institutional investors may play a role in accelerating returns and broader economic equality by negotiating for commitments from venture capital firms to direct more capital to women-owned businesses.  The research on returns certainly supports targeting an increased allocation as consistent with an institutional allocator's fiduciary duties.  Setting targets for venture capital firms creates an incentive for investors to learn how to see past their blind spots and recognize value.

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In or around 1994, I assisted my wife – then a banker – with her MBA thesis. It was a study of the requirement for alternative financing methods for female owned businesses due to a lack of access to conventional financing. It was enlightening how many female owned businesses were financed and grown through the use of credit cards because traditional business lending for females was so elusive. Coming out of this prior decade of low interest, this statement – in itself - may not reflect the burden. However financing a small business at 16-18% was quite breathtaking at the time (even having observed the rates of the Carter Era). It was simply amazing that these businesses could service the debt, remain competitive and generate pretty legitimate profits.

In that same period, before escaping to the refreshing environment of the practice of law (absolutely true), I was eleven years into daily participation in my closely held ownership (all male owned) of a durable goods manufacturing business. For those who have never had the personal experience of pledging every asset you hold and “rolling the dice,” there is great incentive to succeed (or not “crap out” and start again from scratch). Absent equity (angel) investors (which has become more appealing in recent times), small business was left to navigate between the local/community banks, mid-sized banks and large banks. In succession, you dealt with personal service to absence of service. In succession, you weighed the higher interest in smaller banks with the lower rates of large banks. That is to say that start-ups generally aren’t easy regardless of sex.

It remains interesting that the sex of the principal still is the correlation to more readily available capital more than two decades later.

Posted by: Tom N. | Dec 18, 2018 7:07:46 AM

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