Is Equity Crowdfunding the El Dorado for Female Entrepreneurship?
Can the crowd help women find their land of promise?
Entrepreneurship is fantastic for the economy.
Its positive impact on financial growth and job creation has long been universally acknowledged — so much so that cultivation and motivation of entrepreneurial spirit is repeatedly highlighted as a national priority. The added benefits of innovation, community development and improvement to social change make it an obvious first choice for conscientious venture capitalists and private investors to focus on in all shapes and forms.
So why is it that the nation’s largest resource of untapped entrepreneurial potential — female entrepreneurs — has been mostly neglected?
Securing Traditional Funding
Women have had a notoriously difficult time securing venture capital. A 2016 Bloomberg study analyzing 890 U.S. based startups revealed that only 7% of the founders were women. Companies founded by women were also allocated significantly less money than their male-led counterparts. An alarming recent report by Venture Capital Journal disclosed even more discouraging information: only $1.5 billion of the total of $51 billion (or approximately 3%) that are invested in startups went to companies founded by women. This represents a historic low in the funding available to women and confirms the widely recognized accusations of patriarchal societal issues and perceptual bias towards female-dominated startups.
Women have had a notoriously difficult time securing venture capital.
Research widely attributes said lack of funding to females generally falling outside of the already established networks: systems of connections that impart entrepreneurial knowledge and provide access to funding opportunities. Congruent with the basic social principle of homophily (or love of the same) — similarity breeds connection — members of such networks benefit from favorable investment possibilities and knowledgeable mentors due to the well-documented human inclination to seek out people like themselves. The absence of female entrepreneurial role models has also been blamed for fewer women around the globe considering entrepreneurship as a career path.
Despite making up half of the workforce, women have been reported to only own 36% of companies in the United States and merely 10% of startups in the technological sector according to a new Harvard research paper.
Lacking access to traditional venture capital in order to fund their projects, female entrepreneurs had to find their answer elsewhere. Enter crowdfunding.
Traditional Crowdfunding: Women Outperform Men
Crowdfunding, the practice of using small amounts of capital from a large number of individuals to finance a new business venture, is a FinTech innovation that revolutionized finance raising and has been said to trigger a large surge of female involvement in entrepreneurship.
A recent research report by PwC and The Crowdfunding Center highlighted an interesting gender dynamic that has been reported numerous times over several years: where seed (or reward-based) crowdfunding is concerned, campaigns led by women consistently and significantly outperform those led by men. A global analysis of 450,000 campaigns revealed that female-led campaigns were 32% more successful at meeting their fundraising goals and averaged greater pledge amounts, despite men utterly dominating the industry. Traditionally male-dominated sectors, such as the technological sector, were no exemption from such discrepancies.
Seed crowdfunding campaigns led by women consistently and significantly outperform those led by men.
A possible explanation for female crowdfunding success is that crowdfunding offers the possibility of investing to a much more diverse group than venture capitalists. In addition, women have been reported to use more emotional and inclusive language in their videos and pitch descriptions that crowdfunding backers find more appealing.
On the whole, male-led projects still raise more funds due to the sheer fact that seed crowdfunding campaigns founded by men grossly outnumber those founded by women. Men have also been reported to set more ambitious crowdfunding goals, which can likely be linked to the so-called ‘confidence gap’ — comprehensive research findings concerning women of all backgrounds not having the same levels of as their corresponding male peers on a global scale. Additionally, the female aversion to risk, which makes women better equity investors over the long term, has been noted and proposed as an alternative argument for a lack of female entrepreneurs on a global scale.
Equity Crowdfunding: Crowdfunding of the Future?
Yet what of equity crowdfunding, the practice of raising funds in return for equity? Do the female success rates in seed crowdfunding campaigns translate to their equity counterparts? As a result of Regulation Crowdfunding — legislation permitting companies to crowdfund up to $1 million from non-accredited investors — only having come into effect in May 2016, very little research currently exists on the topic.
However, female entrepreneurs in the UK, the equity crowdfunding market leader where favorable government policies have allowed for a great expansion of the practice, seem to think equity crowdfunding holds a lot of potential and highlight its ability to raise large sums of money in short periods of time. The added benefit of offering investment to the general public amidst favorable publicity is also a valuable asset. Bearing in mind the uphill battle that women often face when raising funds through traditional channels, these advantages take on all the more significance.
The intricate challenges female entrepreneurs commonly face recently came to light at a round-the-table discussion hosted by StartEngine in May. ‘The Women in the Crowd: A Forum for Entrepreneurs Who Flip the Odds’ featured a crowd of female business leaders including Angela Lee and Hope Horner, and focused on how the implementation of the JOBS Act empowered female entrepreneurs by allowing them to side-step traditional systems in favor of alternative finance. Facilitating such discussion, exchanging knowledge and networking are vital steps in levelling the playing field for female entrepreneurs. Although reaching entrepreneurial equality would require a significant amount of time, as well as $7.7 billion in angel and early venture capital markets and an estimated $50 billion in all venture capital markets, such pursuits of parity are not to be discouraged.
At StartEngine, pursuing our mission of funding the future has taught us a thing or two about the odds of success: they favor those who defy them.