Bridging the Finance Gap for Women Entrepreneurs

37. United States: Policy insights on growth capital

Professor Emerita Susan Coleman
University of Hartford

Background

Women entrepreneurs were more likely to have borne the burden of home and family care during mandated shutdowns during the COVID-19 pandemic (Global Entrepreneurship Monitor (GEM), 2022[1]). Similarly, women-owned firms were more heavily concentrated in service-oriented businesses that were the most vulnerable to these types of restrictions (OECD, 2021[2]). Despite the challenges, however, women-owned firms, including growth-oriented firms, made a strong comeback in 2021-22, aided by sources of financial capital that included crowdfunding and a growing number of women-focused and women-friendly angel investor and venture capital funds. It looked like women entrepreneurs were “out of the woods” (Sohl, n.d.[3]). By 2023, however, the cumulative effects of inflation and rising interest rates began to take their toll in the form of banking sector distress and higher levels of risk aversion combined with a dramatic decline in angel and venture capital investing (PitchBook/NVCA, 2024[4]).

Policy issue: Access to growth capital

Given that many women-focused and women-friendly angel and venture capital funds are both newer and smaller, women entrepreneurs seeking financial capital from these sources may experience greater challenges during uncertain times. Consistent with this, findings from a 2022 report published by the Angel Capital Association (ACA) found that “the path to greater diversity in angel investing is proving uneven, with women CEO’s making gains in the level of investment, but declining in overall number of CEOs landing deals” (Angel Capital Association, 2022[5]). Similarly, the ACA’s 2023 year-end report stated that “[t]here is still significant progress needed to bridge the gender funding gap” (Angel Capital Association, 2023[6]). To highlight these points, women CEOs accounted for only 25% of all angel capital deals in 2022, a decline of 31% from 2020. Simultaneously, the average seed investment for men CEOs in 2022 was 30% higher than was the case for the average women CEO, illustrating that women entrepreneurs were less likely to be funded and those who were funded were more likely to receive smaller allocations of financial capital.

Chair Emeritus of the Angel Capital Association, Marcia Dawood1, provided some insights as to why women represent a smaller piece of the funding pie and why those who are funded receive smaller levels of funding (Dawood, 2024[7]). First, Ms. Dawood contends that “we need more women writing checks!” She noted that women are less likely to grow up in an investing environment than men. Thus, they are less familiar, less comfortable, and less confident in their own investing abilities, all of which leads them to invest smaller amounts or not to invest at all. Second, women investors do not necessarily have the “generational networks” that men have (i.e. professional groups, clubs, sports, and other activities that contribute to the formation of men’s networks which act as an important source of information and connections). Third, the majority of fund General Partners (GPs) do not have the time or money to provide women Limited Partners (LPs) with educational support and training. This is particularly true of newer firms and smaller firms – a growing number of which are being launched by women.

Consistent with Ms. Dawood’s observations, Harrison et al. (2020[8]) drew upon the stereotype threat theory to help increase our understanding of women’s performance in different angel investor environments. According to the stereotype threat theory, individuals who are stigmatised have a fear of being judged or treated stereotypically. This, in turn, can lead to suboptimal performance in the activity being judged (Spencer, Logel and Davies, 2016[9]). As an example, some women angel investors who represent a minority in male-dominated angel funds may be less confident, less willing to ask questions or put forth their ideas, and more reluctant to invest. Similarly, survey data from the United Kingdom revealed that women investors who were part of women-only funds made significantly more investments than women in mixed-gender funds, even though both had similar levels of experience. Similarly, women in women-only angel groups relied more extensively on gatekeepers and other group members for advice and support than was the case with members of mixed-gender groups. These findings led Harrison et al. to conclude that “there is a case for women-only angel networks and training programmes to mitigate the performance and participation consequences of stereotype threat” (2020[8]). Simultaneously, however, Harrison et al. came to the conclusion that not all women investors are alike (2020[8]). Thus, some may benefit from and prefer a women-only angel group while others may prefer being part of a mixed-gender group.

On the venture capital front, the National Venture Capital Association (NVCA) together with PitchBook found that investment in women founders fell sharply from 2021 to 2022 (PitchBook/NVCA, 2024[4]). Further, investment in women fell again between 2022 and 2023 causing women founder deals to drop from 4 987 in 2021 to 3 266 in 2023, a decline of roughly 35%. Overall, women founders represented 24% of all deals in 2023, again a slight decline from 25% in 2022. All-women-founder firms fared even worse, with women-only founders representing less than 7% of total deal count in 2023 and receiving only USD 3.1 billion, or less than 2%, out of USD 170.6 billion in total deal value.

These findings point to a continued need for policies targeted toward women investors and women who are considering becoming investors. Specifically, women investors need networks and education, both of which can be targeted to their needs and both of which can build knowledge, experience and self-confidence. These measures could be developed and administered by organisations such as the Angel Capital Association and the National Venture Capital Association as both already have experienced investors including experienced women investors to draw upon. As an example, the ACA is already building out its educational capabilities to incorporate classes (in person and online), webinars and guest speakers. Within the context of networks and education, the role of government is to articulate policies and desired outcomes for these categories and to provide funding for critical programmes and supporting infrastructure, thereby paving the way for private industry to build networks, drive education, and train the next generation of investors and entrepreneurs.

In addition to creating a strong foundation for women angel and venture capital investors, it is also essential to create an ecosystem that supports both women investors and the funds that they invest in. Recently, concerns for protecting investors have led to policy recommendations for stronger regulatory measures that could be overly burdensome for smaller funds (Securities and Exchange Commission, 2023[10]). Specifically, the Securities and Exchange Commission put forth new rules and amendments to “enhance the regulation of private fund advisors and update the existing compliance rule that applies to all investors” (Securities and Exchange Commission, 2023[10]). Included as a part of this rule is a requirement for quarterly statements requiring information on private fund performance, fees, expenses, an annual audit, and a fairness or valuation opinion in connection with adviser-led secondary transactions (Securities and Exchange Commission, 2023[11]). Each of these new requirements would add additional time and costs that could be particularly difficult for smaller and newer firms to provide.

In response, a coalition of asset management associations, including the National Venture Capital Association, announced their intent to file suit against the SEC in order to prevent the new rule from being adopted. The United States Court of Appeals for the Fifth Circuit Court ultimately decided the case in favour of the asset manager associations (United States Court of Appeals for the Fifth Circuit, 2024[12]). Lawsuits between regulators and financial capital providers do not make for a healthy or supportive entrepreneurial environment. Among other considerations, litigation such as this leads to uncertainty in the financial capital market, such that those who might launch a fund and those who might invest in it decide that the risks are too high. Thus, quandaries such as these have the potential to reduce sources of financial capital at a time when the United States is poised for significant innovation and growth in areas such as computer chips, artificial intelligence and machine learning, and life sciences and health care.

Conclusions

Women entrepreneurs are less likely to launch growth-oriented firms, and those who do so have greater difficulties than men entrepreneurs in securing sufficient financial capital to launch and grow their firms. This is particularly evident in traditional sources of growth capital such as venture capital and angel investing, where research points to fewer deals and smaller investments for women. These discrepancies are at least partially due to the fact that there are fewer women investors and decision-makers. Conversely, funds where decisions are typically made by men tend to gravitate toward men entrepreneurs and industries that are familiar to them. Therefore, more women investors are needed. The number of women investors has increased in recent years. Nevertheless, nascent women investors could benefit from forms of support that include networks, education, and a supportive regulatory environment.

References

[6] Angel Capital Association (2023), Angel Funders Report 2023, http://www.angelcapitalassociation.org/angel-funders-report-2023/ (accessed on 25 September 2024).

[5] Angel Capital Association (2022), Angel Funders Report 2022, http://www.angelcapitalassociation.org/angel-funders-report-2022 (accessed on 25 September 2024).

[7] Dawood, M. (2024), Interview on the topic of women’s access to growth capital conducted via Zoom between Susan Coleman and Marcia Dawood, Chair Emeritus, Angel Capital Association, and Venture Partner of Mindshift Capital.

[1] Global Entrepreneurship Monitor (GEM) (2022), Global Entrepreneurship Monitor 2021/22 Women’s Entrepreneurship Report: From Crisis to Opportunity.

[8] Harrison, R., T. Botelho and C. Mason (2020), “Women on the edge of a breakthrough? A stereotype threat theory of women’s angel investing”, International Small Business Journal: Researching Entrepreneurship, Vol. 38/8, https://doi.org/10.1177/0266242620927312.

[2] OECD (2021), Entrepreneurship Policies through a Gender Lens, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris, https://doi.org/10.1787/71c8f9c9-en.

[4] PitchBook/NVCA (2024), “PitchBook-NVCA Venture Monitor: Q4 2023”, https://pitchbook.com/news/reports/q4-2023-pitchbook-nvca-venture-monitor (accessed on 25 September 2024).

[11] Securities and Exchange Commission (2023), Private Fund Advisor Reforms: Final Rules, https://www.sec.gov/files/ia-6383-fact-sheet.pdf (sec.gov) (accessed on 25 September 2024).

[10] Securities and Exchange Commission (2023), SEC Enhances the Regulation of Private Fund Advisers, https://www.sec.gov/news/press-release/2023-155 (accessed on 25 September 2024).

[3] Sohl, J. (n.d.), ), The Angel Market in 2022: The Rising Impact of Women Angels, Center for Venture Research, Peter T. Paul College of Business and Economics, University of New Hampshire, http://paulcollege.unh.edu/center-venture-research (accessed on 25 September 2024).

[9] Spencer, S., C. Logel and P. Davies (2016), “Stereotype Threat”, Annual Review of Psychology, Vol. 67, pp. 415-437.

[12] United States Court of Appeals for the Fifth Circuit (2024), Docket 23-60471, NA of Private Fund Managers v. SEC, Lyle W. Cayce, https://www.ca5.uscourts.gov/opinions/pub/23/23-60471CV0.pdf (accessed on 25 September 2024).

Note

← 1.  Marcia Dawood was the chair of the Angel Capital Association, a national and international organisation, from July 2021 to July 2023. The ACA is comprised of 250 angel groups and 16 000 members. Ms. Dawood was selected to serve on the Securities and Exchange Commission’s Small Business Capital Formation Advisory Committee in 2023 and will serve until June 2027. She became chair of the Board in 2025. In addition, she holds investments in more than 50 early-stage companies and funds.