Why Are Women Struggling to Secure Venture Capital Funding?

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By any measure, women founders have been making tremendous progress securing venture capital in the recent years leading up to the pandemic. According to information from financial data provider PitchBook, in 2016, female entrepreneurs generated $300 million to $400 million in value from 100 to 125 rounds of equity crowdfunding every quarter. Last year, that volume was between $700 million to $950 million over 150 to 200 rounds per quarter.

A group of four women in business attire pose around a desk.
Source: Shutterstock

But then, the novel coronavirus hit the country hard and with it, the growing pool of venture capital for women CEOs. In the third quarter of 2020, female founders generated only $434 million across 136 rounds of crowdfunding. Basically, businesswomen have returned to levels from roughly four to five years ago. Considering how painstaking those gains were, the coronavirus has been an awful crisis for women founders.

At the same time, it may not be entirely fair to blame the drought on the novel coronavirus pandemic. Though venture capital dried up for all businesses, TechCrunch notes that women CEOs fared worse than their male counterparts. Why then are female entrepreneurs struggling to find financing for their businesses?

Is Venture Capital Stymied by Sexism?

Although we like to think of ourselves as a socially progressive nation that sees neither race nor gender in our everyday interactions, this notion is a fantasy. No, most of us don’t overtly act on whatever prejudices we have. But differences always have the potential to breed tension or competition. It’s really just human nature.

Therefore, I don’t think you can take the sexism angle completely out of the picture when discussing why female founders have encountered challenges in securing venture capital this year. Yes, the coronavirus has hit us all and as well, we’re all in this together. But that doesn’t necessarily mean that everyone has been impacted the same way.

This segues into a discussion about the gender equity gap. As you’re aware, a similar concept, the gender pay gap, has been a much-discussed topic. Often, critics will dismiss the idea that women are paid 83 cents for every dollar paid to men by stating that women are overrepresented in lower-paying industries.

However, the Economic Policy Institute points out that women earn less at every wage level. Thus, it’s not just that women gravitate toward less-lucrative industries. Those women in high-paying sectors are still compensated less than their male counterparts. Logically, this suggests that with the gender equity gap, sexism is at least partially responsible for the negative impact.

For instance, Carta notes that while 13% of business founders are women, this only accounts for 6% of equity value of all businesses. This indicates that women entrepreneurs, well before the pandemic, have struggled to attract venture capital on a per-capita basis than their male counterparts. Further, the steep gender equity gap suggests that at least some discrimination is at play here.

Don’t Exclude the Covid Factor

Although female founders may have taken a step back in securing venture capital, it’s fair to point out that sexism cannot be the entire answer to this plight. Due to the terrible coronavirus pandemic, every segment of the labor force has suffered.

At the peak of the economic damage during this crisis, women had a staggeringly high unemployment rate at 16.2% in April. On the other hand, men had “only” 13.5% unemployment. From this data, it’s tempting to point out that women have been discriminated against in the workforce.

However, that’s a surprisingly difficult case to make. While women have been historically excluded from much of the labor, they’ve been making significant strides. For instance, in December 2007, right before we entered a recessionary phase, women had a 4.9% unemployment rate, slightly more favorable to men at 5.1%.

Further, during peak unemployment of the Great Recession, women suffered an 8.7% unemployment rate. However, this was far superior to their male counterparts, who saw their jobless rate skyrocket to 11.1%. Therefore, while sexism does exist – and will probably continue to exist so long as there are humans – American society has worked hard to implement social equity.

So, why have women suffered disproportionately in terms of securing venture capital, which would then likely impact the gender equity gap? Unfortunately, the coronavirus has “penalized” women and communities of color relative to white males. Still, another factor must be considered in explaining the setback in female entrepreneurship.

Women CEOs Preside Over Hard-Hit Industries

If you’ve watched the news recently, one of the saddest stories of this year has been the plight of the airliners. Of course, I don’t really care about the overpaid executives that receive much compensation for forwarding very little value. Instead, it’s the tens of thousands of hard-working Americans — through no fault of their own — that have been given the pink slip.

In addition, you may have seen flight attendants graciously say their farewells to their passengers. These are real people who have been thrust into a very uncertain future. If you don’t feel at least some compassion for these workers, you’re probably not human.

But one of the interesting statistics here is that among flight attendants, 86% of them are female. Logically, during massive crewmember layoffs, a disproportionate number (excluding the flight crew) will be women. In other words, you can’t just say that women are being discriminated against or that they take low-paying jobs; they also happened to be in industries that were badly affected.

And this may also help explain why female entrepreneurs have struggled to secure venture capital and why the gender equity gap is so big (and likely expanding as you read this). According to a report on female business ownership by American Express, half of all women-owned companies were concentrated in these three industries:

  • Other services – examples include hair and nail salons and pet-care services
  • Healthcare and social assistance – includes child day care and at-home healthcare services
  • Professional/scientific/technical services – includes lawyers, bookkeepers, architects, public relations firms, and consultants

With the strong emphasis on social distancing and contactless services, it’s patently obvious why the first two industries suffered badly during the pandemic, particularly the lockdown phase. As for professional services, this too received a negative relevancy impact.

Yes, we need lawyers and accountants, but such services took a backseat when the coronavirus hit us. I mean, the traditionally inflexible IRS was willing to work with the American people, extending tax filing and payment from the traditional April to July. That means most folks had other concerns besides getting their paperwork in order.

Further, since these industries were deemed temporarily irrelevant, it’s possible that venture capital shied away from these potential liabilities. Thus, a reason why the gender equity gap likely increased is due to being at the wrong place at the wrong time.

Brighter Future Ahead

When it comes to women’s struggles with venture capital this year, you can’t take away the age-old sin of discrimination. I’m not sure if we as humans will ever live in a truly discrimination-free society.

That said, sexism isn’t the only factor. Primarily, the pandemic and the industries in which women CEOs happened to be situated made for a perfect storm. Nevertheless, once the coronavirus fades away — or we learn how to manage this crisis — I’m confident that better days are ahead for female startup founders.

How am I so sure? As I noted with long-term unemployment rates, women had made such significant strides that up to this crisis, they enjoyed superior employability than men. When this crisis is over, women will rebound in the labor force. After all, Covid-19 didn’t make them suddenly unemployable.

As well, consider that millennials and Generation Z are aligned on multiple social issues. Thus, we have at least multiple decades of social progress ahead of us, boding well for female entrepreneurialism.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/why-women-ceos-struggling-secure-venture-capital/.

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