Women are smarter and more educated. Their brains are better equipped for multitasking and creating solutions that work for a group and, according to a study by Jack Zenger and Joseph Folkman, they are also better leaders than men. All key qualities for successful entrepreneurs. Why then are men twice as likely to run their own business? Why are only 30% of firms owned by women? And, why do these businesses only account for 11% of sales and 13% of employment among private-held companies, as the Department of Labor reports (PDF)?
These are important questions because they deal with the most critical demographic in our economy: entrepreneurs. What do they matter? Entrepreneurial firms have accounted for 90% of new job creation (PDF) in the US during the last 15 years. We know women have the tools to be superb entrepreneurs; so, why the disconnect between potential and reality? Recent research into the success and failures of female entrepreneurs sheds light on these questions.
Successful Female Entrepreneurs Are Nearly Identical to Successful Male Entrepreneurs
A study by funded by the Kauffman Foundation (PDF) focused its research on successful entrepreneurs and used a sampling methodology where men and women were matched in the same industries. The study found that when comparing apples with apples, successful female entrepreneurs and their male counterparts are similar in nearly every aspect. They had the same levels of education, an early interest in starting their own business, a strong desire to build wealth, and access to financing. Men and women even agreed on the top challenges and issues entrepreneurs have to face. Still, what’s the difference?
Experience and Encouragement Are More Important to Women
Despite the marked similarities between successful male and female entrepreneurs in the Kauffman Foundation study, there were some telling differences in what factors they considered to be more important for success. Although men also considered prior work experience in the industry as important (they rated it a 4.34 out 5), women were particularly adamant on how crucial experience is to success (4.73 out 5). The other major difference between men and women, which may provide an important clue on how to increase the number of female entrepreneurs in the economy, was what motivated them to start their own business.
While 56% of women were encouraged to become a partner by the their company’s co-founder, only 31% men were motivated by a partner. Similarly, 55% of women were encouraged by an entrepreneurial friend or family member who acted as a role model as opposed to 40% of men. In less words–women are encouraged to excel more than men are.
Women Start With Less Capital and Are More Likely To Obtain Funding from Business Partners
According to Women-Owned Businesses in the 21st Century, a 2010 report prepared by the U.S. Department of Commerce for the White House Council for Women and Girls, women start with less capital than men. They are also more likely to say they don’t need any financing to start their business. The Kauffman study also found that although most entrepreneurs funded their startups with their personal savings (68% of women and 61% of men), women were nearly twice as likely to receive financing from business partners (29% of women and 16% of men).
Other researchers (Kepler and Shane, 2007; and Croson and Gneezy, 2009) have also found that female business owners are less likely to engage in risky business ventures, minimize risk in their own business operations and are less likely to borrow aggressively.
Female Entrepreneurs Are Better At Obtaining Angel Funding, and They Rock At Crowdfunding
A 2013 study by JMG Consulting for the Small Business Administration reported that only 6% of venture capital goes to startups owned by women. But when it comes to the angel investor market and crowdfunding, women are on top. Although women only accounted for 16% of the entrepreneurs looking for angel capital, in 2012, 25% of the women that applied for angel capital were successful, which represents a 4% lead on male entrepreneurs. (Source)
Crowdfunding, the financing of businesses by large numbers of non-accredited investors, is becoming a growing source of capital, particularly among smaller startups. According to a report by researchers at Berkeley that studied the success rate of men and women at leading crowdfunding platform Kickstarter.com, women had both lower capital goals and higher rates of success (69.5% vs 61.4%) when trying to obtain the funding they need to start their business.
The More Female Executives A Company Has, The Better Its Odds For Success
Women at the Wheel, an influential 2012 report published by Dow Jones, reported that the proportion of female executives in successful businesses is 7.1%, while it’s only 3.1% in unsuccessful businesses. The study also indicated that a company’s chances of success increase with the number of female executives at the vice-president and director levels. For instance, 61% of startups that had five or more women were successful and companies with an executive team composed of 5% to 25% female executives were successful.
Let’s Make a Few Conclusions About Female Entrepreneurs (and Women In General)
The issues surrounding the differences between male and female entrepreneurs are obviously complex. After all, many say that women are naturally better with money and investing than men–that it’s a talent men simply do not have (Today, Financial Post, MSN Money). From the data we’ve collected on entrepreneurship studies, though, there are four conclusions we can reach:
First, women have all the right tools to become great entrepreneurs. If anything, they have a biological advantage over men. Although they are still behind male entrepreneurs, the number of women-owned businesses grew by 44% between 1997 and 2007, twice as fast as businesses owned by men. (Department of Labor)
Second, whatever source of capital you look at, women are raising a heck of a lot less of it. Women require less money to start a business, prefer to obtain funding from business partners, and are less prone to take risky loans. This may explain why businesses founded by women are smaller and generate less sales.
Less capital may certainly constrain female entrepreneurs’ ability to build companies that can scale. It also reduces their liquidity and stunts their potential for long-term growth. However, as the recent recession showed, a healthy aversion to high risk ventures is not necessarily a bad thing.
Third, successful female entrepreneurs put a lot of value in experience and are particularly responsive to encouragement from role models and business partners.
Finally, companies that are owned, co-owned or who have women in positions of leadership do better than companies that don’t. These conclusions suggest an obvious win-win strategy for women and businesses, venture capitalists and angel investors. Hire, encourage and invest in female entrepreneurs; they offer a killer return on your investment.