Investing in women entrepreneurs to drive post-COVID recovery
- Women and diverse individuals often face systemic challenges and resource scarcity when pursuing entrepreneurship and small business ownership.
- What female and diverse entrepreneurs want is not favoritism but a fair starting line.
- The greater presence of women and the diversity of fund founders should attenuate certain demographic and cultural biases in the distribution of funding.
The COVID-19 pandemic has spared no part of society, taking a heavy toll on people around the world, health systems, and financial and labor markets. From a business perspective, its impact has been disproportionate on women and ethnically diverse entrepreneurs and small business owners. A recent study by Global Entrepreneurship Monitor, for example, found that women were 20% more likely than men to report business closures due to the pandemic (Figure 1) and nearly half of all female business owners in high-income countries have reported closures.
Non-white business owners have faced several additional challenges, such as a concentration in industries likely to be disrupted, including but not limited to retail, hospitality and catering, personal care and laundry services (Figure 2). Since the financial health of these business owners entering the pandemic was already lower than that of their white counterparts, the disruption exacerbated negative outcomes and closures (Figure 3).
Access to capital
According to a 2019 study, 61% of women founders chose to self-finance their business. A closer look at female entrepreneurship in technology supports the notion of limited access to capital. A recent TechCrunch study of all venture funding found that women-backed businesses only received 10% of overall funding, with the remaining 90% going to men-backed businesses.
Limited capital is compounded for black entrepreneurs due to their systemic exclusion from venture banking and traditional banking. They are more likely to have their bank loan applications rejected; when accepted, their applications are more likely to be subject to increased requirements. Unequal participation in financing systems prevents women and black entrepreneurs from operationalizing and growing their businesses.
Launching a new business requires developing a variety of new skills and functions. Mentoring can not only help start-ups access new markets, navigate financing options, implement the latest technologies, and learn management skills, but also provide the ecosystem and metrics essential support for starting a business.
Despite the need for mentorship in the entrepreneurial space, a recent study found that women and diverse entrepreneurs were significantly less likely to have access to mentoring networks.
Implicit consumer biases
WE to research suggests that the businesses of diverse entrepreneurs, especially those who identify as black or African American, are vastly underutilized. While black-owned businesses make up 2.2% of employer-run businesses in the United States, they generate just 0.33% of total revenue.
Several factors can contribute to low utilization of Black and women-owned businesses, including insufficient resources to market goods and services to key target demographics. Yet research suggests a more detrimental force at play: the negative biases associated with diversity of business ownership and their subsequent influence on consumer buying decisions.
What female and diverse entrepreneurs want is not favoritism but a fair starting line. To better understand why investing in diverse entrepreneurs is crucial in the post-pandemic world, we interviewed over 20 diverse founders and investors. These conversations revealed benefits that go beyond financial returns.
Efficient capital generation, despite limited access to finance
Our research suggests that women and diverse entrepreneurs are turning to non-traditional funding sources due to reduced access to capital. Shirley Billot, founder of Kadalys, the first Franco-Caribbean brand of natural cosmetics based on antioxidants from the banana tree, underlined the challenge of fundraising for companies established in the Caribbean. Investors often see this region as a tourist destination and not as a hub for entrepreneurship. To bridge this funding gap, she enlisted local banana growers as shareholders in the business to raise funds while giving back. Alternative sources such as the Women’s Funding Network and the Black Opportunity Fund are also expanding access to capital.
Commitment to building socio-economic impact businesses is a key marker noted by LEAP by McKinsey podcast panelists. In healthcare, Carla Robinson founded Canary Tech to improve access to care for underserved populations through remote medical support. This passion was sparked by her desire to support seniors in black communities who need regular help managing chronic conditions such as diabetes. Filling the gaps within these populations helps create solutions that have impact beyond the initially identified targets.
Whether funding comes from private, corporate, or venture capital sources, familiarity or similar ethnic and gender demographics appear to help determine who gets funding, regardless of portfolio performance. Women and diverse leaders are poorly represented in the VC space, so in recent years these entrepreneurs have taken it upon themselves to launch their own funds. A Deutsche VC study found that from 2017 to 2020, women created 140 new funds, representing a 104% increase from 2010 to 2016 (Figure 4). During the same period, 16 new Black and Latino-led funds were launched, a jump of 41% (Figure 5).
The greater presence of women and founders of diverse funds should alleviate some of the demographic and cultural biases in the distribution of funding while providing women and diverse entrepreneurs with invaluable networking opportunities when navigating the early stages of new operations. commercial.
Additionally, women and diverse people provide a unique perspective on underserved consumer segments. Recent studies suggest that these demographics would be poised to alter brand loyalty if companies focused more on creating goods and services tailored to their specific needs and made a concerted effort to serve communities that have historically been excluded. traditional outlets.
Investing in female and diverse ethnic minorities is an essential step both to take restorative action to mitigate the impact suffered by maligned communities and to support the recovery of these communities in a post-pandemic world. Investors should take note of this.