What role does funding play in the size of women-owned businesses? Is lack of financing the reason women-owned businesses tend to be smaller than men-owned business? What should women know about finding investors for their startup?
Stephanie Newby, former Managing Director of the finding investors and valuing companies.® network of angel investors, shed light on these and related questions a recent interview. In Part 1 (below), Stephanie discusses funding issues affecting women-owned business. In Part 2, she talks about
Women-owned businesses are a major contributor to the U.S. economy. A 2019 study by American Express Open reports that there are nearly 13 million women-owned businesses in the U.S. and that they generate nearly $1.9 trillion in revenues annually. Furthermore, between 2014 and 2019, the number of women-owned businesses increased by 21%.
But hiding below those rosy numbers are some prickly thorns. According to a Small Business Administration (SBA) Office of Advocacy report, Spotlight on Women-Owned Employer Businesses, women-owned businesses account for only 12% of sales and 16% of employment.
One reason often cited for the disparity is that women tend to start businesses in fields such as administrative services that don’t foster the growth of big companies. But there’s another characteristic of women-owned businesses that may be more telling. According to the U.S. Census data, women start with less capital than men and are less likely to take on additional debt to expand their businesses. They’re also more likely than men to indicate that they don’t need any financing to start their business.
Janet: You started Golden Seeds in 2004 and it’s now one of the largest angel groups in the country. Can you tell us why you started it?
Stephanie: We wanted to have more companies owned and run by women. When women are in a position of power and influence, they create cultures in their companies that enable women to get to the top and have sustainable careers at the top. We care a lot about culture and values. We want to see more companies with cultures that are great for women and companies that are led by values.
Janet: How does the percentage of women seeking and finding investors compare to men?
Stephanie: A study that was published in 2010 by the University of New Hampshire Center for Venture Research reported that 21% of entrepreneurs seeking capital were women and 13% received an investment. The data indicates that when women do seek capital, they lag behind the market yield rate by about 5%.
Janet: Those numbers are surprising when you compare them to the rate at which women are starting businesses. Why don’t more women seek investors?
Stephanie: One issue is the SBA categorization of women-owned businesses. We have an issue with the SBA , because what their lawyers have told us is that the entrepreneur has to own 51% of every class of shares for them to qualify as a woman-owned business under those rules. That makes it impossible for women-owned businesses to take in equity capital because both angels and VCs are going to require their equity to be in preferred stock, and that preferred stock is going to be 100% made up of investors’ capital. In some odd way it prevents women from growing their business and keeps them in the mentality of, “If I need capital it’s going to be debt.”
If you’re going to fund innovation — particularly a technology company — you can’t use debt because the company won’t have a financial track record. They’ve only been in business for a short period of time. They need capital to develop the technology, and usually it takes one or two years before you’ve gotten the software to where it can be commercialized. So it’s really impossible to fund innovation with debt.
I think this is stifling innovation for the country and America’s competitiveness. It’s really essential to have others around who are willing to put equity capital into companies, and right now that’s restricted to angel investors and venture capitalists.
If you look at how much capital is being put into the seed and early-stage companies, it’s a very, very small percentage of even the private equity markets. And then when the government talks about growth capital they’re always referring to the banks and credit and debt. So it’s really not helping.
Janet: I can see that. Are there any other reasons, you think, that fewer women seek funding?
Stephanie: Well, I think that one of the issues is the mindset that “I’ve got to have control.” You need to be able to give up equity in your company in order to take in capital, so you can’t be a control freak and you have to be willing to trust your investors. It means you’ve got to find good investors, but then you have to be able to trust them — you’ve got to be willing to put a board of directors in place and some people are just not willing to give up enough control that they would have a board of directors. Women who want to grow their companies quickly need to know that this is all going to help them in the end, because you get an extra set of eyes, too, on everything that you do and really, really good strategic advice.
Continue to Part 2 – Finding Investors and Valuing Companies.