New Study Finds 5 Key Differences in How Male and Female Founders Raise CapitalWomen tend to bootstrap to avoid raising debt. Men tend to raise money however they can and bootstrap to make it go further.
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Men and women run their businesses in very different ways. The differences in their styles of starting and growing their businesses show up right from the word "go," according toWomen Business Owners' Access To Capital Literature Review, a new study by the Federal Research Division, Library of Congress under an Interagency Agreement with the National Women's Business Council.
According to research conducted by economist Alicia Robb, founder and CEO of Next Wave Ventures, and University of Hartford finance professor Susan Coleman, men and women differ in the forms they adopt to raise capital, how much capital they seek, how much of that capital they procure, how much of it they spend and the ways they choose to spend it.
Here are the major findings of the report:
1. Women raise smaller amounts of capital.
Robb and Coleman reported findings from a 2014 survey that women founders prefer to rely on personal sources of financing and are three times less likely to approach angel investors or venture capitalists for equity financing. Women are also less likely to tap personal networks of close friends and business acquaintances for financing, though men and women seemed equally likely to approach banks for financing.
Related:6 Disadvantages Confronting Female Entrepreneurs Seeking Venture Capital
2. Men and women use bootstrap funds differently.
Women tended to be more reliant on owner equity and insider financing than men, all other parameters like education, experience, credit scores and firm characteristics being the same. Women were also found to be consistently using a lower percentage of external debt compared to men. As far as bootstrapping was concerned, a key difference from the report was that "women choose bootstrapping instead of overdrafts and men choose bootstrap finance to supplement overdrafts."
Related:4 Things Women Entrepreneurs Need to Know Before Approaching Angel Investors and VCs
3. Women like more control in their firms.
Research has identified that women exhibit higher levels of risk aversion and like to have greater control over their ventures. This was seen to be a highly likely explanation for why women business owners like to keep their firms small and manageable while avoiding external sources of financing.
While tracking a cohort of 5,000 firms founded in 2004 from the Kauffman Firm Survey in order to examine the financing behavior of firms owned and run by women, Robb and Coleman also found that women owners also tended to inject significantly lower amounts of financial capital into their ventures over multiple years.
Related:Challenges Women Face When Raising Venture Capital
4. Women have higher unmet credit needs.
While studying bank loans, Robb and Coleman's findings indicated that the application rates for bank loans were similar for men and women. However, unmet credit needs were greater among women business owners because women were less likely to apply for loans when they needed credit. Studies on actual loan approval rates indicated that women had a lower approval rate, mainly because of negative drivers like suboptimal personal credit scores (due to the tendency to rely on personal financing) and the fact that many businesses run by women tend to be home-run businesses.
"Women need to postpone various parts of the business, putting off their ability to make decisions to promote their (business') growth," said Dolores Rowen, Associate Director of Policy and Research at National Women's Business Council, in an interview about the report's findings.
Related:Why Women Entrepreneurs Have a Harder Time Finding Funding
5. Women find greater success with crowdfunding.
Women have found more success with raising funds via crowdfunding, typically facilitated by the internet after the crowdfunding provisions came into effect in May 2016. A growing body of research reveals that women are more successful with raising small amounts of capital from many people, perhaps due to thegreater emotional appealinherent in women, enabling them to beat the obstacles with traditional financing options, predominantly relating to gender inequality. The report also confirms that though a higher number of men apply for financing through crowdfunding, women are more successful because they tend to ask for lower amounts and meet their targets more readily.
"Women set realistic goals; they are ambitious but realistic," said Rowen, when asked if the higher success rates of women in crowdfunding were due to lower funding targets.
