Bridging the Finance Gap for Women Entrepreneurs

5. Leveraging angel investors and networks for equity investments

Abstract

Angel investors have the potential to play a significant role in supporting women entrepreneurs by making equity investments in early-stage firms that are not attracting venture capital investment. This chapter discusses the role of angel investors in supporting women entrepreneurs, including the benefits of supporting the creation of angel networks.

The need to expand angel investment

The vast majority of entrepreneurs launch their start-ups using their own funds and a significant proportion receive loans or investment from family and friends. Bank financing, private investment (including angel investments and venture capital) and government financing are used by fewer than one-third of entrepreneurs in most countries (OECD/EU, 2022[1]). Entrepreneurs using these external funding sources are more likely to be seeking to grow their business quickly, and the different types of investors each have a different role in the market.

What are angel investors?

Angel investors are typically high net worth individuals who make equity investments in early-stage start-ups that would be considered too new or too risky for traditional funding from banks or venture capitalists. While these investments provide financial support so that entrepreneurs can develop their products and businesses, the goal of angel investors is nonetheless to make a profit in the medium term (Ewens, 2022[2]). Business angels typically invest between EUR 25 000 and EUR 500 000, but it is not uncommon for angels to scale up investments by pooling funds through networks, clubs and syndicates.

The size of the angel investment market appears to be significant; however, industry estimates vary greatly. Conservative estimates suggest that there are more than 300 000 angel investors active globally (ACA, 2024[3]), while others estimate that there are between 1 million and 1.5 million active angel investors (Christian Rangen, 2024[4]). Similarly, estimates of the value of the market also vary, ranging from about USD 30 billion in the United States (Cumming and Zhang, 2019[5]) to more than USD 50 billion globally (World Business Angels Investment Forum, 2024[6]). This volume of funding is estimated to account for about 90% of all early-stage financing (Christian Rangen, 2024[4]).

In addition to making financial investments, angel investors can support entrepreneurs through mentorship and by creating strategic networking opportunities for the entrepreneur. Angel investors are invested in the growth of the start-up. Other benefits often associated with angel investors relative to other sources of funding include greater flexibility in investment terms and signalling effects that provide credibility for the entrepreneur.

Benefit for women entrepreneurs

Angel investment is particularly pertinent for women entrepreneurs because they are more likely than male entrepreneurs to access funding through their personal networks of family and friends (Amatucci and Sohl, 2004[7]). This use of trust-based relationships to identify funders is consistent with the approach taken in the business angel sector where investors build close relationships with the entrepreneurs that they invest in. Nonetheless, this also means that women entrepreneurs, particularly younger women, will be at a disadvantage relative to male entrepreneurs who, on average, have more extensive networks (OECD/EU, 2015[8]).

Recent research confirms that angel investments are important for women entrepreneurs. Women entrepreneurs have a greater chance of getting angel investment than venture capital investment (Aernoudt and De San José, 2020[9]). Slightly older research in the United States found that women were not more likely than men to be rejected by angel investors (Becker-Blease and Sohl, 2007[10]) and similar results were found more recently in a study of 40 angel investors in the United Kingdom. This study found that gender did not appear to affect investment decisions, but women angels were more likely to invest in women-owned businesses than male angels (Färber and Klein, 2021[11]). Nonetheless, the bulk of angel investment goes to male entrepreneurs. The main reasons are investor homophily (i.e. investors tend to invest in entrepreneurs that have a similar background and profile) (OECD/EU, 2022[1]), relatively lower demand for angel investment since women are less likely to have growth ambitions for their business (OECD/European Commission, 2023[12]), and sector effects because women entrepreneurs are, on average, less likely to be operating in growth oriented sectors (OECD/European Commission, 2023[12]).

The role for public policy

Governments are active in supporting business angel investment in women entrepreneurs in a number of ways (OECD/EU, 2022[1]). First, governments can support the creation of business angel networks by subsiding selected operational costs. The two main benefits of creating networks of angel investors are to potentially increase the scale of funding available to high potential start-ups and to increase the pool of knowledge and network connections that can be made available to entrepreneurs. In principle, these types of networks can operate anywhere but are most commonly found in dense ecosystems where there is a constant flow of investment opportunities.

Second, networks typically organise workshops and networking events that benefit entrepreneurs receiving investment as well as other potential entrepreneurs. For example, many ad-hoc programmes operated by angel networks, particularly those that primarily invest in a specific group such as women entrepreneurs, seek to boost the investment readiness of entrepreneurs who are pitching their ideas and plans. Research in the United Kingdom has shown that business angels typically reject funding opportunities for three reasons: the entrepreneur or management team is perceived as having a major weakness; differences in perceived market opportunities; and, flawed financial projections (Mason and Kwok, 2010[13]). Government support for workshops and training for women entrepreneurs seeking funding could increase the chances of success for potential entrepreneurs.

Third, governments can offer incentives for investors to enter the angel market. One approach is to offer tax breaks for investing in start-ups that meet certain criteria such as women-owned businesses. Alternatively, governments could co-invest in business angel networks to encourage investment in women entrepreneurs (or other target groups). In this model, public actors typically leave investment decisions to experienced investors who are better placed to evaluate business ideas and management teams.

Fourth, governments can facilitate matchmaking between investors and women entrepreneurs. This could be done by organising pitching events or using online platforms.

Finally, women are under-represented among angel investors so governments can use various tools to encourage and support women who are interested in becoming angel investors. In the United States, women represent nearly 40% of the top wealth holders in the United States yet only account for less than 20% of angel investors (Sohl, 2017[14]). Similarly, studies in Europe suggest that women account for less than 10% of angel investors and many are less experienced as fewer than 10% of women angel investors had made more than 11 investments (Aernoudt and De San José, 2020[9]). Post COVID-19 pandemic evidence suggests that women are increasingly active as angel investors (Sohl, 2024[15]). This would be expected to direct more funding to women entrepreneurs because women angel investors are more likely than men investors to invest in women entrepreneurs (Aernoudt and De San José, 2020[9]; Becker-Blease and Sohl, 2007[10]). Government actions include offering training and mentoring to increase the number and professionalism of women as angel investors. This implication is that increasing the number of women angel investors will increase the flow of investments going to women entrepreneurs.

Lessons from the policy cases

The policy insight notes covering Poland and Wales (United Kingdom) underline the role that angel investors can play and illustrate different approaches to scaling up their impact. The note covering Poland illustrates the links between the Black Swan Fund, a venture capital fund that co-invested with business angels in start-ups led by women entrepreneurs. This private sector-led initiative boosted the supply of equity investment available to women entrepreneurs and has further evolved into a “Prestige Club” of women leaders in the corporate sector, women entrepreneurs and investors that collectively work to support women entrepreneurs. The note on Wales (United Kingdom) illustrates a similar example of a women’s angel network amplifying their impact with co-investment. However, in this case the co-investment comes from the public sector. In addition, the angel network offers training and workshops for women investors to encourage more women to get involved in the supply-side of the market. Together, the two notes highlight some lessons for government:

1. Encourage more women, including successful women entrepreneurs, to become angel investors to increase the supply of equity financing available to women entrepreneurs. This can be accomplished by promoting role models of investors more widely and offering workshops for women to inform them about becoming angel investors.

2. Support the creation of women’s angel networks through training and financial support to facilitate the joining up of individual investors and/or small investors groups so that the volume of investments can be scaled up for greater impact.

3. Use public and private funding mechanisms to co-invest with women’s angel networks. Not only will this increase the scaling of equity investment available for women entrepreneurs, but it can also help to educate public and private investors about the benefits of investing in women entrepreneurs.

References

[3] ACA (2024), Angel Investing, Angel Capital Association, https://angelcapitalassociation.org/faqs/ (accessed on 24 September 2024).

[9] Aernoudt, R. and A. De San José (2020), “A gender financing gap: fake news or evidence?”, Venture Capital, Vol. 22/2, pp. 127-134, https://doi.org/10.1080/13691066.2020.1747692.

[7] Amatucci, F. and J. Sohl (2004), “Women entrepreneurs securing business angel financing: tales from the field”, Venture Capital, Vol. 6/2-3, pp. 181-196.

[10] Becker-Blease, J. and J. Sohl (2007), “Do women-owned businesses have equal access to angel capital?”, Journal of Business Venturing, Vol. 22/4, pp. 503-521, https://doi.org/10.1016/j.jbusvent.2006.06.003.

[4] Christian Rangen (2024), Understanding the business angel universe, https://www.linkedin.com/pulse/eight-angel-investor-types-which-one-you-christian-rangen-so9pf/ (accessed on 24 September 2024).

[5] Cumming, D. and M. Zhang (2019), “Angel investors around the world”, Journal of International Business Studies, Vol. 50/5, pp. 692-719, https://doi.org/10.1057/s41267-018-0178-0.

[2] Ewens, M. (2022), “Gender and Race in Entrepreneurial Finance”, No. 30444, National Bureau of Economic Research, https://www.nber.org/papers/w30444 (accessed on 28 August 2024).

[11] Färber, M. and A. Klein (2021), “Are Investors Biased Against Women? Analyzing How Gender Affects Startup Funding in Europe”.

[13] Mason, C. and J. Kwok (2010), “Investment Readiness Programmes and Access to Finance: A Critical Review of Design Issues”, Local Economy, Vol. 25/4, pp. 269-292.

[1] OECD/EU (2022), Policy brief on access to finance for inclusive and social entrepreneurship: What role can fintech and financial literacy play?, OECD Publishing, Paris.

[8] OECD/EU (2015), Policy Brief on Expanding Networks for Inclusive Entrepreneurship, OECD, Paris.

[12] OECD/European Commission (2023), The Missing Entrepreneurs 2023: Policies for Inclusive Entrepreneurship and Self-Employment, OECD Publishing, Paris, https://doi.org/10.1787/230efc78-en.

[15] Sohl, J. (2024), The Angel Market in 2023: An Inflection Point for Women Angels?, Center for Venture Research, https://paulcollege.unh.edu/sites/default/files/media/2024-07/2023-full-year-analysis-report-final.pdf (accessed on 7 October 2024).

[14] Sohl, J. (2017), “The Angel Market in 2017: Angels Remain Bullish for Seed and Start-Up Investing”, Center for Venture Research, Vol. 16, https://scholars.unh.edu/cgi/viewcontent.cgi?article=1015&context=cvr (accessed on 14 October 2024).

[6] World Business Angels Investment Forum (2024), What Is Angel Investment?, https://wbaforum.org/Angels/What-Is-Angel-Investment/1 (accessed on 24 September 2024).