Venture Capital, Social Capital and the Funding of Women-led Businesses

MG Consulting, LLC & Wyckoff Consulting, LLC, April 2013

Purpose

Entrepreneurs need access to financial resources to fund their ventures, and those with marketable products may seek financing from venture capitalists (VCs). This study focuses on women entrepreneurs’ access to equity funding and the influence of social networks on venture capital investment decisions.

Background

Women-owned businesses accounted for 28.7 percent of all businesses nationwide, and women were partners in 45.7 percent of businesses (2007 Survey of Business Owners). Women-led businesses (WLBs)—defined in this study as companies with a woman on the management team—are one of the fastest growing groups of entrepreneurial firms, yet few of these firms receive private equity funding. One consistent finding in researching VC firms is that WLBs receive less outside funding than businesses led by men. Some reasons given for this disparity include women’s lack of education in high technology, their underrepresentation among investors, or a lack of experience required by venture investors. Other research sources show that VCs typically invest in high-growth companies in growing markets, and that WLBs tend not to be in these markets. Earlier studies addressed the equity funding gap from the demand perspective, but this study investigates WLB funding from the supply side, with a focus on social capital and performance.

Overall Findings

The analysis finds that VC firms’ social capital influences their investments in WLBs, but in different and sometimes conflicting ways. Generally, VC firms are risk averse and tend to invest within familiar social networks. VC firms with long-term relationships that regularly invest together as a group (syndicated deals) with the same VC firms tend to invest in a higher percentage of WLBs, since they are able to share the risk. The more autonomous VC firms, which co-invest with other VC firms that do not regularly co-invest with one another, tend to invest less in women-led businesses. This finding is similar to other research which finds that these less embedded VC firms choose investments that are perceived to be “safer.”

The study finds that VC firms that did invest in WLBs saw an improvement in their VC firm’s performance, which means that investments in WLBs are successful, leading to a positive return on the VC firm investments.