The Gender Investment Gap is Real — and Growing

There’s a lot to celebrate when it comes to women-owned businesses. In fact, in a recent article, we highlighted several of the remarkable achievements made by women business owners and entrepreneurs.

Like the fact that in the US there are now 12.3 million businesses owned by women, which represents 40% of all firms in the country. (And that number is particularly impressive compared to the 402,000 women-owned businesses there were back in 1972.)

Or the fact that as of last year, businesses owned by women brought in $1.8 trillion in revenue.

So it’s a bit of a head-scratcher that a recent study found that the average size loan for women-owned businesses is 31% less than what male-owned companies receive. On top of that, the number of businesses owned by women that applied for funding actually increased by 13% last year.

And, evidently, this isn’t a trend that’s exclusive to any particular industry.

The findings are part of the annual study of women-owned companies by Biz2Credit, which included 30,000 businesses across the country in more than 20 industries, including retail, health care, hospitality, construction, and professional services, among others.

According to the study, the average loan amount last year for women-owned companies was $48,341 compared to the average of $70,239 for men-owned businesses. The most common type of funding was working capital for business expansion.

Evidently, the gender investment gap is real, and, from what research shows, growing.

Investment Inequality

This isn’t the first research to point out that a gender gap exists for accessing business capital.

Recently, MassChallenge (a US-based global network of accelerators) and the Boston Consulting Group collaborated to study how companies founded by women differ from those established by men. What their research found was a “clear gender gap in new-business funding.”

Of the 350 companies that the research looked at, investments in those founded or co-founded by women averaged $935,000. Now, that probably doesn’t sound too bad. But compare that to the $2.1 million invested in male-founded startups. So the average investment in firms with female founders is less than half of what their male counterparts typically receive.

But here’s where it gets interesting. Despite the funding gap, the study determined that startups founded and co-founded by women actually performed better over time. In fact, companies with female leadership generated 10% more in cumulative revenue over five years.

What’s more, for every dollar of funding received, startups founded or co-founded by women produced a return on investment of 78 cents. That’s a significant difference from the 31 cents generated by male-only companies.

That’s a pretty clear indication that investing in startups led by women is just good business sense.

Why is There a Funding Gap?

So if research is proving that companies founded by women perform just as well as those started by men, why the disparity when it comes to loans and investments?

According to the Biz2Credit study, one factor is that women business owners have lower credit scores than their male counterparts. The study found that the average credit score for women-owned businesses was 588 in 2018, down from 598 in 2017 and well behind the average credit score of 613 for male business owners.

“When we take a macro look, women are increasingly becoming entrepreneurial and are applying for loans at earlier stages of their companies’ life cycles,” said Biz2Credit CEO Rohit Arora in a press release. “Their credit scores often are lower because of both the wage gap and the higher amounts of student loans that they are paying off.”

If you’re wondering about the reference to student loans — a 2018 report from the American Association of University Women revealed that women hold nearly two-thirds of outstanding student debt in the US.

The MassChallenge and Boston Consulting Group found that when it comes to obtaining investment backing, women are often at a disadvantage from the get-go. As the research report explains, “more than men, women founders and their presentations are subject to challenges and pushback. For example, more women report being asked during their presentations to establish that they understand basic technical knowledge.”

That same report also noted that many male investors have little familiarity with various products and services that women-founded businesses market to other women. But interestingly enough, this lack of understanding can also be a factor in the social class sense — when entrepreneurs pitch products or services for people at socioeconomic levels that are lower than that of the average investor.

If you’re a woman business owner or entrepreneur, do these findings make you want to do something to fix the situation? Great! Use that as motivation to push for long-term change and make investors think about the exciting opportunities they might be passing up by overlooking female entrepreneurs.

By working to dismantle the current gender disparity with business investment, women entrepreneurs and business owners can secure not only their own futures, but also help pave the way for many generations to come.

Are things going to change overnight? Nope. But we still need to start somewhere.