When we voluntarily shut down the economy to contain the spread of a highly contagious virus, our economic gears grind to a halt. And as a result, many structurally-sound, viable startups have suffered.
In fact, a full 20 percent of startups have had term sheets cancelled as a result of COVID-19. And only a quarter of startups that were currently raising funds before the pandemic have either had the fundraising processes continue or actually received funds.
Now strapped for cash, almost half of startups are teetering on the edge. The situation is particularly acute for female-led startups because they receive disproportionately less funding than male-led startups. Yet, it’s precisely these startups that help keep our economic engine running. If we want to recover faster and stronger from this economic crisis, we need to make sure female-led startups receive adequate access to capital—now.
Female-led startups: a smart way to invest
The economic stimulus bills that allocated $660 billion for small business loans certainly helped our economy. However, it didn’t account for entrenched gender inequities. In other words, the funds could have been allocated more efficiently.
For instance, early indicators suggested that the loan program for payroll protection would cover contractors. The final rules, however, excluded them. That was not welcome news to the growing number of women-led businesses who are more likely to make use of contractors. (When I say “growing number of female-owned businesses,” I’m referring to the 58 percent growth in the number of women-owned businesses between 2007 and 2018.)
It also wasn’t welcome news that the $660 billion rescue program favored companies that had pre-existing relationships with certain banks. Those who received aid “weren’t always the ones with the greatest needs or the best chances to survive the coronavirus pandemic.”
By failing to invest equitably in female-founded startups—whether by way of venture capital or fiscal stimulus, we are missing out on massive opportunities to expand the economic pie for all. Let’s take a look at some of these value-generating opportunities.
The economic imperative of ensuring female-led startups survive COVID-19
First, we know that startup teams with at least one female founder reap 63 percent better investment returns than all-male teams. We also know that female-founded startups generate 78 cents for every dollar invested in their companies while male-founded startups generate 31 cents for every dollar invested. Further, over a five-year period, companies founded or co-founded by women generate 10 percent more in cumulative revenue than companies founded by men.
Finally, consider this striking number: $4.4 trillion. That’s the amount venture capitalists could increase their projected returns to limited partners if they commit to gender equity. At a time when our economy seems to be in a historic contraction, the opportunity of gender equity in the startup community is even more essential.
And for the female-led companies facing the effects of a frozen economy, the opportunity of gender equity is becoming all the more existential. How can we ensure these companies receive access to capital so that they can survive COVID-19? After all, it’s in everyone’s economic best interest for them to do so.
Solutions to support female-led business
Germany, France, and the UK have already taken steps to support their startups. The U.S. should too and apply the gender lens to better allocate funds. Here are a few ways the U.S. can mitigate systemic gender inequities and support female-led business:
Create a Female Founders Equity Fund through the SBA. This fund would provide capital specifically for female-founded startups. Congress should immediately allocate $11 billion to the fund, a sum that would swiftly close the gender funding gap. (Teams with a female founder raised 11.8 percent, or $19.1 billion, in venture capital investment in 2019 yet make up 20 percent of all startups.)
Award capital in the form of grants, not loans, which has the added benefit of closing the gender cap table “equity” gap. The gender cap table “equity” gap refers to the fact that female founders own 48 cents in equity for every dollar male founders own. So not only do women receive less capital than men, they also receive lower valuations. As a result, women entrepreneurs give up more of their companies and receive limited returns at a liquidity event (e.g. IPO or acquisition).
Cancel female founders’ student loan debt. As Sen. Elizabeth Warren of Massachusetts reminds us, the burden of student loan debt holds entrepreneurs back, leading to fewer people starting businesses. And who holds the majority burden of such debt? Women. Despite accounting for 57 percent of undergraduates nationwide, women hold 67 percent of all student loan debt.
Catalyzing the economic potential of female-founded companies is good for our economy, and, as a corollary, fuels the social missions underlying many of their business models. In fact, female-led companies are more likely than male-led companies to prioritize social good and hold high levels of ethical standards. This “triple bottom line” (profit, people, and planet) is not a bad combination at a time when 87 percent of consumers are willing to support a brand that advocates for a social cause. Or at a time when a global pandemic is rewriting our society’s institutional expectations.
It’s time to leave behind the tired narrative that pits people against the market economy. This narrative is harmful and misguided in general. It’s exceptionally misguided as we work to rebuild our society post-COVID-19. We can choose both if we choose to create an economy that’s inclusive at its core. In the coming weeks and months, our leaders will make some of the most critical and historic decisions of their careers. Let’s remind them that an equitable economy is a strong economy. That an investment in women is an investment in a quicker and more secure recovery.
Katica Roy is a gender economist and the CEO and founder of Denver-based Pipeline, an award-winning SaaS company that leverages artificial intelligence to identify and drive economic gains through gender equity. Pipeline launched the first gender equity app on Salesforce's AppExchange. The Pipeline platform was named one of TIME Magazine’s Best Inventions of 2019 and Fast Company’s 2020 World’s Most Innovative Companies.