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Crowdfunding is in Favor of Women Entrepreneurs

Startups are rising and funding options for most entrepreneurs are growing. It is no longer just a banker who can approve a business loan with a high interest rate to decide the fate of a person with a brilliant idea.

 

 

 

There are plenty of funding options for startups.

 

There is a plethora of options for funding a new venture, and they need to be considered carefully. The new business owners can think of credit cards as an option, and based on statistics more than 65 percent of adventurous people are using them frequently (Murray, 2014). We also can’t deny the potential attractive benefit of asking friends and family who can lend a thousand or two to repay later without interest. There are venture capitalists and angel investors who tend to fund entrepreneurs who stick closer to the larger metropolitan markets, where the latest and greatest talent of their choice tries to launch businesses (Rowley, 2017). They would be willing to invest a small portion of their enormous wealth in exchange for equity and maybe a portion of decision-making power. The newcomers have access to crowdfunding platforms such as Kickstarter, GoFundMe, Indiegogo, or Rocket Hub, that allow financing by an individual, business or another entity to invest money so an entrepreneur can raise funds in return for equity or an offer to take advantage of being the first tester of a popular video game (Abate, 2018).

 

Whatever the chosen approach might be, anyone who is thinking of starting a new business or investing in one needs to do their research carefully in order to determine what option is right for them. One misstep can lead an ambitious person to give up on the idea of perhaps curing a deadly illness or stopping global warming. Even after careful consideration, not every gender has the same chances to be funded. If you are a new entrepreneur, an investor, a banker, or a government policy decision maker, you want to tune in and pay close attention to discover the meaning behind the cacophony of many pained and frustrated voices of women entrepreneurs.

 

Why is it important now more than ever?

 

Despite having access to all the available options, women-owned startups in the U.S. are more successful with getting funds through crowdfunding versus business loans through banks, because of gender bias and lack of education.

 

In recent years, more women are starting businesses. That is truly great news that can become a norm in our democratic society! There were 11.6 million women-owned companies in the U.S. in 2017, which is 3 percent higher than in 2016 (Arora, 2018). Women have every right to choose any and all funding options, and they seem to try. But, what exactly do they favor based on their experience or, better yet, what favors them in getting funding? Women-owned businesses in the U.S. turn to crowdfunding but not at the same rate as male-owned businesses (Abate, 2018). According to Abate’s report titled "One Year of Equity Crowdfunding: Initial Market Developments and Trends", it is known that although crowdfunding firms raised over $30 million dollars, close to 83 percent of crowdfunding businesses had a male who was an Executive signer and only 17 percent were females. To make matters more complicated, lending through banks has a large disparity between male and female-owned businesses, which is $57,097, down from more than $99,000 in 2016 (Arora, 2018).

 

So, why are women-owned startups in the U.S. are more successful with getting funds through crowdfunding versus business loans through banks?

 

Women-owned companies are starting their own revolution and challenging the norms. They have struggled to get funding from banks, and they are looking to enhance their chances in getting capital on crowdfunding platforms. According to Pesce (2018), Kelley School of Business analyzed 416 projects and determined that women were more successful than men in getting funding from Kickstarter crowdfunding platform. Women are receiving the most funding launching capital raising campaigns, according to the university’s research (Pesce, 2018). A few women-owned projects were the fastest funded through Indiegogo and Kickstarter as well. Kelley School of Business discovered that, although the previous findings suggested that the reason why banks loaned mainly to men was based on the perception of competency, in crowdfunding women were seen as more trustworthy.

 

The discoveries on trustworthiness as a factor for crowdfunding success for women outlined by Kelly School of business are backed up by a scientific research conducted by Johnson, Stevenson, & Letwin (2018). Additionally, they indicated that various investor stereotypes and gender bias played part in making crowdfunding and banking loans decisions. What is interesting is that the researchers found no results for competence judgments in crowdfunding, and it is indeed trustworthiness judgments that foster a funders' support of women entrepreneurs.

 

We see the rise in women-owned startups turning to crowdfunding, and more women than men raise funds in donation and rewards, but women are still in the minority, representing 24 percent in business lending ecologies and 22 percent in equity crowdfunding (Langley & Leyshon, 2017).

 

What makes women turn to crowdfunding versus banks?

 

Maybe it is the fact that women-owned businesses only receive 4.4 percent of available dollars in conventional small business loans (Wood, 2018). Not only they are having difficulties in getting funding, but even when they receive a loan approval, women receive smaller amounts compared to men. The portion that is awarded to female entrepreneurs is 16% of the distributed conventional loans. A report issued by the Senate Small Business & Entrepreneurship Committee confirms that even in 2018, the day and age when women continue putting up a fight to be compensated and treated equally, business owners are still struggling with having the same opportunities as males, when it comes to credit and business loans (Wood, 2018).

 

In order to look further about the experiences and the overall perceptions on how female business owners feel about crowdfunding vs. banking experiences, we’ve conducted two interviews with successful women entrepreneurs. During a conversation with Christina A., the owner of skin care products firm, she revealed that when starting her business, she only knew and considered a bank loan as a funding option but wished she was aware of crowdfunding first. Her experience with the bank loan application process sounded quite confusing and upsetting. She said, “It felt like they found every excuse possible to not give me money that I would be paying them back!”. When trying to probe her further in order to learn if she received any coaching from the bank to help with obtaining a loan, she stated that there was no offer for coaching. She felt frustrated and ended up getting some help from GoFundMe. She launched a successful campaign asking for donations with the promise of sending her products to the investors for free. Christina expressed that she hadn’t experienced any obstacles with raising initial funds using crowdfunding platform and raised several thousands of dollars to get her started.

 

Christina noted that she would try out an iFund for Women crowdfunding platform to grow her business further. Overall, she felt like crowdfunding worked best for her, and she wouldn’t consider going with the bank loans again in the future while continuing to expand her firm. She pointed out, I also think having a program for women would lend me some support.” Christina added that the crowdfunding platform offered a coaching service. She also felt that banks and government could do a better job to make the process of getting funds less complicated. Finally, it was intriguing to learn that her entrepreneurial husband got his business loan from a bank without any complications.

It appeared that in this woman’s experience, banks made the process complicated and confusing. Education for women business owners could be improved or the application process simplified. To look into the dynamics of crowdfunding versus bank loans further, another interview was conducted with Annmarie G. She is a serial entrepreneur and a financial specialist.

 

In the conversation with Annmarie, she brought to light an important point that was best described by her saying, The key for me was to prepare my business plan, and it had to be solid.” Annmarie shared her experience with loaning money from banks and her plans about raising funds using a Kickstarter and other platforms for the new film project. When she started her first business, she used a credit card and some personal savings, but later she took out small loans from banks, as she wasn’t aware then about the existence of crowdfunding or other options. Annmarie received several rejections from the banks during initial stages of looking to raise money. She shared that some of her clients raised funds using Kickstarter. In the case of a male owner, he wasn’t successful with crowdfunding but got a bank loan with Annmarie’s help and advice. Her female client raised a few thousand dollars to start her business using a crowdfunding platform called Women You Should Fund.

 

When asked about the obstacles in the application process that Annmarie’s female client experienced to get the bank loans, she stated, “Frankly, I don’t think she was fully prepared to show the banks how she can pay them back.” Annmarie felt that the reason she didn’t have issues with the banks, after initial failed attempts, was because she sought education from a friend and built a plan before asking for money. Interestingly enough, she didn’t get too much education from the bank itself. When asked about her thoughts on accessibility and ease of getting funding from crowdfunding sources compared to bank loans, Annmarie suggested that banks could do a better job at providing financial education to new business owners. Based on her client’s experience, she thinks it is possible to launch a crowdfunding campaign or get a bank loan when an idea is communicated clearly to investors. She encourages entrepreneurs to take advantage of the available resources and prepare, regardless of whether they choose using crowdfunding or banks.

 

Unequal Opportunities in Funding Women-Owned Businesses.

 

The issues of unequal opportunities in funding for women could be due to gender bias or lack of education, but what can be done to make these options equal for all genders?

 

Raising money through a bank loan is an option, but it has its challenges. An entrepreneur has to have a good credit score, business plan attractive to a banking institution, valuations and performance reports, etc. for an existing business (Profitbooks, n.d.). A lot of the dependencies are within the banking lender’s stipulations on whether a person gets a loan or not. Other options could be considered as better alternatives, and perhaps this is why women turn to crowdfunding, where they feel trusted and get an adequate education in launching prosperous campaigns.

 

Extensive scientific research conducted by Alon-Beck (2018) allows us to view what the entrepreneurs and policymakers could implement as innovative ideas to change set funding practices in banking to promote lending options and entrepreneurial ventures. The innovative entrepreneurial ventures declined from 14 percent in 2015 to 12 percent in 2016, and this was due to financing and information gap (Alon-Beck, 2018). Additionally, Alon-Beck (2018) indicates that the financial barriers of startup firms are the product of uncertainty, high risk, and information asymmetry. Policymakers and investors continue to hold strong views on how funds should be distributed. In his research, he addressed the importance and inefficiencies in helping new innovative enterprises to start their businesses through a proactive financing by the Federal government.

 

The new models in lending practices are necessary and the U.S. Government can contribute. One of the solutions to increase funding for entrepreneurs, which can help women business owners too, is to build a proactive coalition model and cooperation between public-private partnership initiatives. Similar approach existed in 1982 where the federal agencies with $100 million in research budgets were mandated to allocate a certain portion of the money to small business owners with capabilities to build tech products. In 2010, under the Obama Administration, the Small Business Act was signed into law to promote lending to small businesses. The coalition model puts the U.S. Government as a catalyst and a powerful player in increasing growth, entrepreneurship, and innovation (Alon-Beck, 2018). It can equalize opportunities for both women and men to have access to crowdfunding and other forms of funding, such as bank loans.

 

In the article titled "Capitalizing on the crowd: The monetary and financial ecologies of crowdfunding", Langley & Leyshon (2017) delve into the crowdfunding as a method of raising finance and capitalize on various projects that can draw and appeal to diverse audiences. They note that the capabilities of using the network - the internet and software platforms can draw various crowds to ask or look for investments. Additionally, they point out that although the practitioners, advocates, and policymakers tend to look at the crowdfunding as an alternative and disruptive method of funding, it has the capacity to challenge common practices in banking and other capital networks. There is a clear need for further research in the inequalities of fund distribution, including in crowdfunding and funding availability for all segments of population and genders.

 

U.S. Small Business Administration’s report "One Year of Equity Crowdfunding: Initial Market Developments and Trends developed" (2018), acknowledges a few concerns, and one of them was a low 17 percent participation rate of women in crowdfunding campaigns. The author suggested that further research and enhanced education from the government would be needed to encourage them to get more involved in this new phenomenon.

 

More women are taking charge of their destiny.

 

We are seeing that women are starting to take matters in their own hands and help each other. Since one of the biggest challenges to grow a business is raising capital, the market is seeing more crowdfunding platforms designed specifically for women entrepreneurs, such as iFundWomen and Women You Should Fund (Hannon, 2018). Crowdfunding is seeing an increase in women tech entrepreneurs’ success in raising money. In fact, researcher Ethan Mollick, an associate professor of management at the University of Pennsylvania's Wharton School, stated that on a crowdfunding site a woman is 13 percent likely to raise funds for a tech project than a male counterpart (Stych, 2018). A part of the reasons for this success is because women are more supported by female donors. One of the solutions to improve chances for women to get funding from other sources beyond crowdfunding is by educating male venture capitalists and bankers about gender bias and building strong support structures for females.

 

Conclusion

 

By looking at various data and speaking to women entrepreneurs, a conclusion could be drawn that women-owned start-ups in the U.S. are more successful with getting funds through crowdfunding versus business loans through banks, because of gender bias and lack of education. In the upcoming years, both financial institutions and government policymakers need to invest in not only educating women but men as well on the benefits of supporting women-entrepreneurs. After all, new businesses enhance our economy by providing more jobs, bringing more money into the society, and developing innovative ideas for solving tough economic and societal challenges.

 

Women have to be proactive and act to educate themselves on all the available options and prepare for bank loan application process as well as launching more crowdfunding campaigns. The future of the alternative methods of raising money looks promising, but females can’t be passive in allowing old norms and biases to exclude them from innovation and entrepreneurship.

 

If you are launching a business and need assistance with identifying the best startup strategies, contact us at info@xcalibercoaching.com.

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