Access to money from women-owned businesses is key to saving our economy
When we voluntarily shut down the economy to contain the spread of a highly contagious virus, our economic downturn comes to a halt. And as a result, many structurally healthy and viable startups have suffered.
In fact, a full 20% of startups have had term sheets canceled due to COVID-19. And only a quarter of startups that were currently raising funds before the pandemic either continued with fundraising processes or actually received funds.
Now running out of money almost half startups falter. The situation is particularly serious for startups led by women as they receive disproportionately less funding than male-led startups. Yet it is precisely these startups that help maintain our economic engine running. If we are to recover faster and stronger from this economic crisis, we need to ensure that women-led startups have adequate access to capital, now.
Women-led startups: a smart way to invest
The economic stimulus bills that allocated $ 660 billion for small business loans has definitely helped our economy. However, this ignored entrenched gender inequalities. In other words, the funds could have been allocated more efficiently.
For example, early indicators suggested that the wage protection loan program would cover entrepreneurs. The final rules, however, excluded them. This was not good news for the growing number of women-led businesses that are more likely to hire entrepreneurs. (When I say “increasing number of women-owned businesses” I am referring to the 58 percentage growth in number of women-owned businesses between 2007 and 2018.)
It was also not good news that the $ 660 billion bailout program privileged companies which had pre-existing relationships with certain banks. Those who received help “were not always the ones who had the greatest needs or the best chance of surviving the coronavirus pandemic.”
By not investing equitably in startups founded by women, whether through venture capital or fiscal stimulus, we are missing out on huge opportunities to expand the economic pie for all. Let’s take a look at some of these value-creating opportunities.
The economic imperative to ensure that female-led startups survive COVID-19
First, we know that startup teams with at least one female founder reap 63 percentage of better ROIs than all-male teams. We also know that startups founded by women generate 78 cents for every dollar invested in their businesses while startups founded by men generate 31 cents for every dollar invested. In addition, over a period of five years, businesses founded or co-founded by women generate ten percent more in cumulative income than companies founded by men.
Finally, consider this striking number: $ 4.4 trillion. This is the amount that venture capitalists could increase their projected returns to limited partners if they commit to gender equity. At a time when our economy appears to be in a historic contraction, the opportunity for gender equity in the startup community is even more essential.
And for women-led businesses grappling with the effects of a frozen economy, the opportunity for gender equality becomes increasingly existential. How to ensure that these companies have access to capital so that they can survive COVID-19? After all, it is in everyone’s economic interest to do so.
Solutions to support women-led businesses
Germany, France and the United Kingdom have already took action to support their startups. The United States should also apply a gender lens to better allocate funds. Here are some ways the United States can reduce systemic gender inequalities and support women-led businesses:
Create a founders’ equity fund through the SBA. This fund would provide capital specifically to startups founded by women. Congress should immediately allocate $ 11 billion to the fund, an amount that would quickly close the gender funding gap. (Teams with a founder raised 11.8 percent, or $ 19.1 billion, of venture capital investments in 2019 but represent 20% of all startups.)
Allocate capital in the form of grants, not loans, which has the added benefit of closing the “equity” gap in the gender capping table. The “Equity” gap in the table of gender ceilings refers to the fact that female founders own 48 cents in equity for every dollar that male founders have. Thus, not only do women receive less capital than men, but they also receive lower valuations. As a result, women entrepreneurs divest more of their businesses and receive limited returns during a liquidity event (e.g. IPO or acquisition).
Write off the founders’ student loan debt. As Senator Elizabeth Warren of Massachusetts reminds us, the burden of student debt is holding back entrepreneurs, leading to fewer people starting businesses. And who bears the majority of the burden of this debt? Women. Although they represent 57 percent of undergraduate students nationwide, women hold 67 percent of all student loan debt.
Catalyzing the economic potential of women-founded businesses is good for our economy and, as a corollary, fuels the social missions that underpin many of their business models. In fact, businesses run by women are more likely than businesses run by men to prioritize social good and hold high levels of ethical standards. This “triple bottom line” (benefit, people and planet) is not a bad combination at a time when 87 percent of consumers are willing to support a brand that defends a social cause. Or at a time when a global pandemic is rewriting the institutional expectations.
It is time to leave behind the tired narrative that pits people against the free market. This account is harmful and generally misguided. This is exceptionally misguided as we work to rebuild our society after COVID-19. We can choose both if we choose to create an inclusive economy at the grassroots. Over the coming weeks and months, our leaders will be making some of the most critical and historic decisions of their careers. Let us remind them that a fair economy is a strong economy. That an investment in women is an investment in a faster and safer recovery.
Katica Roy is Gender Economist and CEO and Founder of Denver Pipeline, an award-winning SaaS company that harnesses artificial intelligence to identify and drive economic gains through gender equality. Pipeline launched the first gender equity app on Salesforce’s AppExchange. The Pipeline platform has been named one of the TIME magazine’s best inventions 2019 and Fast Company’s World’s Most Innovative Companies in 2020.