The devastating economic impact of the coronavirus pandemic is amplifying existing inequalities, which may be felt for years to come. Entrepreneurship is no exception. Even before the pandemic, there was a stark gap between access to capital for female-led entrepreneurs and their male counterparts.
It’s only gotten worse in the past year. A recent analysis from Pitchbook found that in Q3 of 2020, venture funding for female founders hit its lowest quarterly total in three years, and figures demonstrate that female-led companies have been hit disproportionately hard compared to their male-led counterparts.
Can start-up accelerators – organizations that are set up to help entrepreneurs grow and raise funding – help close this gap? Recent research shows that, in fact, they seem to be playing an unintended role in growing it. There’s an urgent opportunity for accelerators to not only be aware of this impact, but to be more intentional about how they support female founders and reverse this trend.
The gender financing gap is one of the most high-profile and persistent problems in entrepreneurship. Female-led start-ups, or those with at least one female founder, receive a disproportionately small percentage of the flow of global venture capital. In 2019, only 11% of seed-funding capital in emerging markets went to companies with a woman on their founding team, as well as only 5% of all later-stage funding. This is the case despite overwhelming evidence that investing in gender-diverse teams leads to stronger business outcomes.
Last year, a group of researchers, led by the International Finance Corporation, Women’s Entrepreneurship Finance Initiative and World Bank Africa Gender Innovation Lab, in partnership with Village Capital, evaluated the role that accelerators play in the gender financing gap.
The researchers studied a global data set of more than 2,000 companies, to find out what the financing gap looked like for start-ups before and after participating in accelerators. They expected to find that accelerators help female founders raise more money, thus reducing the gender financing gap. The results surprised them.
Also read: India’s women entrepreneurs look to survive the pandemic by remodeling their business
Here’s what they found:
Accelerators help women raise more debt – but not more equity
The most surprising finding was that accelerators seem to play a role in widening the gap between male- and female-led start-ups. The researchers found that male-led ones, on average, increase the amount of equity they raise post-acceleration by 2.6 times as much as female-led start-ups. Put another way, accelerators are very good at helping men raise more equity, but don’t really help women raise equity – thereby increasing the gap.
On a more positive note for female founders, the researchers found that acceleration seems to reduce the disadvantage female-led start-ups face in raising debt. Female-led start-ups who graduate from an accelerator raise nearly 2.5 times as much debt as those that don’t, while male-led start-ups see much less of a debt boost from the same accelerator programmes.
It’s not about the quality – instead, investor bias may play a role
The researchers tried to understand what might be driving the gender financing gap in the first place. Is there something about female-led start-ups that inhibits them from being able to raise capital?
Their analysis revealed that the gap can’t be easily explained away by a difference in quality or potential between male-led and female-led start-ups (like sector, geography or amount of intellectual property owned). It also can’t be explained away by a difference in the start-up founders themselves (for instance, education level or entrepreneurial experience). Male-led and female-led companies are quite similar on paper.
Instead, building on a growing body of research, the analysis suggested that the gender make-up of the founding team is strongly influencing the disparity in capital raised, indicating a potential bias in investor decision-making – or a higher perceived risk of investing in female-led startups.
Also read: How millions of defaults threaten the future of microfinance in India
So what’s the solution? Beyond better accelerator design
The researchers studied the effect of different programme design elements that could help reduce the gender financing gap – tools or process changes that accelerator leaders could use to mitigate investor bias. But they found that the solutions you might expect – like adding more women to the committee that decides which start-ups join the programme – have little effect on reducing the gap.
Instead, they suggest that accelerator leaders will need to go deeper and address the fundamental issue: investor bias and the perception of risk that seems to hang heavy over female-led start-ups. They recommend that accelerators consider and test new ways of influencing investor behaviour, providing investors with tools and strategies to make better, rational decisions, not unlike the service they provide to start-ups. They suggest some initial ideas:
• Prime investors with information to reduce possible bias, for example through implicit bias training
• Encourage investors to consider the use of alternative financing products, like debt or revenue-share, in order to reduce the perception of risk for female-led start-ups.
• Familiarize investors with objective, non-gendered criteria for considering the merits of start-ups
• Rethink how investors make investment decisions (for instance through peer-selected investment) or who is at the decision-making table.
This is a new way to think about addressing the gender financing gap. Most of the research on the gap recommends strategies that focus on altering entrepreneur behaviour – for example, encouraging female-led start-ups to employ stereotypically “male” behaviours or answering questions differently than how they are posed when pitching their business. But that’s only one approach.
“Accelerators are in an ideal position to improve the fundraising gap and unleash the potential of female-led companies to bring entrepreneurial solutions to today’s most pressing development needs,” says Shruti Chandrasekhar, Head of Startup Catalyst and SME Ventures, International Finance Corporation. “It’s an important wake-up call that accelerators can – and must – do more to support female-led companies.”
Allie Burns CEO, Village Capital
This article was first published in the World Economic Forum