Women led startups could have a harder time bouncing back post-pandemic — here's why
Why It Matters
Women-owned businesses are twice as likely as their male-owned counterparts to be considered social enterprises in Canada — and less likely to receive venture capital funding. Without meaningful access to the same kind of funding support, women-owned social enterprises may have a harder time recovering from the economic impacts of the pandemic.
When Taran Ghatrora began looking for investors as CEO of Blume, the Vancouver-based company she co-founded with her sister Bunny, she knew it would be an uphill battle. As a company run by two women of colour, focused on beauty and menstruation products and providing educational resources to teens about puberty and sexual health, the statistics are stacked against her. “In 2019, only 2.7 percent of all [American] venture capital dollars went to female founders, and much less to women of colour, yet startups founded by women have been shown to deliver twice as much per dollar invested,” says Ghatrora.
Before COVID-19, women entrepreneurs already faced tremendous obstacles. Now, as businesses navigate this trying time, women-led social enterprises in Canada may have a harder time bouncing back than their male-led counterparts due to consistently disproportionate funding.
A 2017 Statistics Canada survey highlights some of these discrepancies under normal conditions. “Majority women-owned enterprises are more likely to be social enterprises — 11 percent vs. 5.3 percent for men — and more likely to be a not-for-profit or charity,” says Dr. Wendy Cukier, Professor, Entrepreneurship and Strategy and Founder of the Diversity Institute at Ryerson University. “Social enterprises do not fit easily into the traditional models of financing. While many companies pay lip service to the importance of social impact they are less comfortable assessing it or the risk associated with social investing.”
The survey also showed only 11.2 percent of majority women-owned social enterprises received large gifts or donations of $100,000 or more, compared to 12.7 percent of their male-owned counterparts. “In Canada, innovation and entrepreneurship tend to be synonymous with tech, and therefore with men,” says Dr. Cukier. “We have to grapple with fundamental bias in the system which prevents us from harnessing the power of social innovation and social enterprises which address “the world’s to-do list.”
In 2019, only 2.7 percent of all [American] venture capital dollars went to female founders, and much less to women of colour, yet startups founded by women have been shown to deliver twice as much per dollar invested.
The inequality in funding stems from another imbalance: the small number of women making decisions about who receives capital. Investor accelerator Female Funders’ Women In Venture Report 2019 found that in Canada women made up only 15.2 percent of partners at venture firms and 16.7 percent of angel group members. While the former is up an entire percent from last year, the numbers are still bleak for female entrepreneurs seeking funding in Canada. A study out of Babson College showed that businesses with a female executive are more than twice as likely to receive investment in their company when the venture capital firm has a female partner. On top of that, those firms are three times as likely to invest in companies with a woman is the CEO — a remarkable difference of 58 percent to 15 percent.
“Research has shown when men and women present identical pitches women get different questions and are less likely to receive funding from men,” says Dr. Cukier. It’s no wonder then that she explains women often feel discouraged to even pursue venture capital funding.
The study also found that, on average, companies with women entrepreneurs on the executive team have a 64 percent higher valuation at the first funding round and 49 percent higher at the last round of financing than companies with no female executives.
When it comes to socially-minded investment firms the case remains the same. “Although we have seen with COVID-19 the cost of ignoring social issues like health care, social financing is still in its infancy and most investors lack the tools or mindset to engage effectively,” says Dr. Cukier. “And when they do engage they are more likely to replicate the patterns of behaviour we see in traditional investing and therefore to undervalue women and their ideas.” This leaves female social enterprise founders struggling with where to turn for funds and investors missing out, albeit due to their own mistake, on working with successful businesses.
“Enormous untapped investment opportunity exists for venture capitalists smart enough to look at the numbers and fund women entrepreneurs,” Candida G. Brush Babson the author of the report, and Diana Project, a program researching obstacles women face to finance and grow their businesses, co-founder said in a release on the study. “Only a small portion of early-stage investment is going to women entrepreneurs, yet our data suggest that venture capital–funded businesses with women on the executive team perform better on multiple dimensions. The venture capital community, therefore, may be missing good investment opportunities by not investing in women entrepreneurs.”
Joy Elena, founder of Toronto-based Sleepenvie, a mattress company that supports creative opportunities for marginalized youth, has not sought investors due, in part, to this inequality. “The mattress and associated accessories in the sleep space has traditionally been a male-dominated industry and is saturated with new bed in a box brands popping up daily,” she says. “The lack of VC funding could be a result of competition coupled with a risk/reward ratio. This is why it’s important to think outside the box and continuously come up with innovative complementary products and promotions.”
Before they had investors, the Ghatrora sisters dipped into their student loans and maxed out their credit cards to keep Blume afloat. Due to this lack of outside investment, female business owners are often forced to rely on credit cards and savings to get their business going. “As someone who has to purchase $50,000 inventory at a time, and soon will have to spend twice as much for Christmas it has been very eye-opening how funding and loans have been harder to come by,” says Tiffany DaSilva, founder of Flowjo, a themed card deck company which donates a proceed of sales to charities around the world. “I’ve had to use lines of credit cards, hold all credit card interest payments, and ask for as much credit as possible in order to be able to keep my business moving [during the pandemic]. All the while, it seems, male funded ecommerce companies have managed to increase their advertising budget two-fold right now.”
Bouncing back after the pandemic
While Ghatora is grateful to have maintained Blume’s sales, thanks in part to self-care products being sought out in droves, the company is still concerned about being reliant on investment once things have calmed down. The company has already seen how the pandemic has impacted the investment process: The company signed a term sheet with a lead investor in early March, which the investor then pulled about 30 days into the crisis. Now they’re doubling down on creating financial models for different scenarios the pandemic may leave permanently. “It’s important to us to own our destiny for the foreseeable future,” says Ghatrora.
For the time being, Blume is using undiluted funding, meaning they don’t lose any equity in the company, as a source of capital, as well as wage subsidies from the government of Canada.
Ones included, such as the BDC Capital Women in Technology (WIT) Venture Fund, also highlight the need for mentorship for women in business. “Having extra communication with advisors and mentors at this time is incredibly helpful, especially operators that have run businesses through tough times,” says Ghatrora. A 2017 report from the U.S. Senate Committee on Small Business & Entrepreneurship found that women across North America with access to a mentor are five times as likely to be interested in starting their own business than those who don’t. BDC refers to it as ecosystem investment, a way to ensure the world of business and investment continues to fill with women.
“Being an entrepreneur during this time is an amazing opportunity to learn — there’s no sugarcoating it though, it’s also very challenging,” says Ghatrora. “Our team is taking things day by day… We’re now more cash flow efficient than ever before, and we‘re hyper-focused on our community and product.”
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