TomorrowMakers

Start-ups with women in leadership positions are proving to be a winning proposition and are witnessing growing interest from the investor community. Know what makes this a smart move.

Why women-led start-ups are a better investment?

Why are women-led start-ups a better investment?

The risk-return trade-off motivates most investing decisions. Investing in start-ups is no different. A global trend emerging is that while female entrepreneurs receive lower funding by way of seed capital from investors, the returns generated from growth-stage business enterprises are almost more than double when compared to men-dominated start-ups. 

According to the statistics revealed by a BCG survey conducted in 2018

  1. With 350 start-ups, there remains a huge funding gap between businesses founded by men and those founded by women.
  2. Men-founded businesses received $2.12 million as funds and generated $ 662000 as revenue. On the other hand, women-led enterprises received funding of $935000 and outperformed their male counterparts with revenues of $730000.
  3. These findings have the potential to challenge the existing funding status quo and encourage investors, venture capitalists and start-up accelerators to consider increased investments in women-led start-ups.

The message is loud and clear - investors need to enhance funding to women entrepreneurs if they need to win at investing in start-ups. 

Reasons to back up women-led enterprises 

Several reasons make women-run enterprises a promising investment opportunity. Women are innately low-risk takers. Thus, they conduct in-depth due diligence before venturing into a business line and approaching potential investors. This often reduces the homework that the financial backers need to do. Further, women tend to gravitate towards businesses that provide tangible solutions to real problems. Therefore, women are able to hit the ground running with such business ventures that become successful due to the practicality surrounding the business idea.  

Also, studies have indicated that women pursue business lines that they are familiar with. A business-backed by sound knowledge and experience of the promoter in the related field is bound to achieve better revenues. This is evident from statistics that reveal that a high percentage of women entrepreneurs enter business lines like childcare, personal and beauty products or financial investment avenues often as consumers. This makes women entrepreneurs well aware of the pain points and inadequacies in such products. They are in a better position to eliminate the shortcomings, leading the way to business growth and higher revenue realisations. 

Challenges

The flip side is that many venture capitalists tend to prefer technology start-ups that historically have a lower per cent of female participation. Investors need to change this mindset and adopt a sector-agnostic approach to investing in start-ups. The investment gap with gender bias is for real. VCs need to shed these structural biases that are inherently built into their investment decisions. Investors need to evaluate a business model standalone on its growth prospects, business plans and realistic projections, irrespective of the sector. Already in 2019 YTD, 10 female-founded start-ups have achieved unicorn status, as per Crunchbase data. 

Gender diversity is another important factor that is gaining traction. Globally, management boards with female members tend to take more balanced decisions after weighing in all the risk options in the medium to long term horizon. This winning trait is being capitalised by women entrepreneurs while running their own businesses. The cautious, emotion-driven approach with moderate risk-taking ability can generate sustained returns in the long run. 

Women are effective in economising. This makes their business decisions resource-efficient, i.e. do more with less. This also stems from the fact that women derive lesser funding compared to men, making the frugal approach more of a necessity, rather than a choice. The hallmark of a successful business lies in multiplying returns from a given amount of capital. Thus, women are able to scale their business with limited capital, proving their entrepreneurial mettle. 

Last words

In conclusion, its high time investors seriously rethink their investing strategy and include a higher segment of female-driven start-ups in their portfolio. This would allow them to reap rich rewards in the long run from higher business returns and capital efficiency. Perceptions are slowly changing in the investor community. Looks like the future is female in the world of start-ups! Have a look at the 5 Challenges faced by women entrepreneurs to holistically understand the obstacles women-led start-ups have to overcome.ccv

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